Invest Like the Best with Patrick O'Shaughnessy
00:07:13 · Patrick O'Shaughnessy, Vlad Barbalat
[00:07:13] S0: So coming back to this unique combo, so you you were providing the value through insurance, hedging people's risk, one way to think about it, that creates this pool of capital, a $120,000,000,000 that you can then, at least some portion of it will get into that, invest and support the growth of the economy, etcetera, creation of jobs. Break down the 120. How much of that is tightly controlled and has to be a certain way because it's heavily regulated? How much of that is more open? And then for the open portion, how do you think about how to allocate it? It's a lot of money. It's one of the bigger investment platforms in The US. It's a challenge, that's a lot of money to put out. Something that's gonna move the needle for you needs to be pretty big, I'm curious how you think about that. Break down the one twenty for us. [00:07:53] S2: One twenty is a snapshot, I think that number will be bigger next time we talk a couple of years from now. [00:07:57] S0: It was bigger than last time we talked.
00:07:58 · Vlad Barbalat
[00:07:58] S2: Yes, exactly. So let's talk about the 120. You could probably think of it as roughly 70 to 75,000,000,000 of that is reserves. That could be described as tightly managed, again going back to this notion, of course you want to make sure that whatever happens in the investment portfolio, you will always be in position to fulfill that sacred promise of writing an insurance policy to your policyholder. Even there, we have quite a unique approach. We are not just buying investment grade bonds, putting them in the drawer and waiting for that coupon to come once a quarter, and then ultimately maturity. That can be a sleepy boring way frankly the way this type of capital pool was managed historically. We're quite innovative, we do lots of different things that allow us to be a liquidity provider into that marketplace, but that's about $75,000,000,000 You could think about the rest as broken out between what we describe as growth credit and growth equity. Those two pools of capital are growing as a function of our surplus, they are a way we can be a full service invest capital provider into all parts of the economy. What we've done with our credit business is taken an approach not of public private, which currently of course gets lots of headlines, but really what is our levered corporate credit business? And we've put those parts together. So our public credit, high yield leveraged loans business sits with our capital solutions business, sits with our direct lending business, and with our partnership structure that's focused on credit. All of them sit together, have one platform, one reporting structure, because we believe the expertise frankly is what's important here.
00:09:45 · Patrick O'Shaughnessy
[00:09:45] S0: And you'll do direct deals, you'll do manager allocations, you'll do big partnerships, whatever.
00:09:49 · Vlad Barbalat
[00:09:49] S2: A 100%. The way I like to describe that is, people very often start with a product, direct lending, or high yield public, or whatever else you wanna take. We asked the question was, what exposure do we want in the totality of our business? When you ask that question, the next question is, assuming you could figure it out and have the ability to build that portfolio of risks, portfolio of exposures, the next thing you would do is you'd say, What's the best way for me to get those risks? And the options are many. The challenge is, most organizations don't have options. You can take an organization that really has one way, which is to be an LP. So then you are going out meeting managers and ultimately allocating capital. You have people who are direct originators of that risk and pursue that. Perhaps that's a GP and many more. Our toolkit is vast. Once we determine what exposure we want, we've got lots of different ways of getting that exposure. And this is critical because I think as an investor that sits in our platform, you have the choice set that very few investors have, which is again to figure out, do I want that in direct form? Do I want that as a co invest? Do I want that in some club format with other sophisticated investors? Do I want to be an LP because the particular risk is so difficult to access, so specialized that I have no aspiration or ambition of trying to replicate that. I view that as an extension of my workforce, and that's the way I'm gonna get that exposure. Same applies in our growth equity portfolio. Multiple businesses housed there. One is private equity, second is real estate, third is energy and infrastructure, and fourth, what we describe as alternative credit. I just talked about the corporate credit business. Alternative credit tends to be all forms of asset backed finance, where you're lending not against corporate balance sheets, but against ultimately some pool of collateral. Same concept applies, we've got many different ways we can go to market, get that exposure, and that totality of the toolkit has led to a very very broad and interesting ecosystem in itself. You mentioned the nexus of where we sit. You get to talk to lots of different people with very interesting approaches to the marketplace.
00:12:02 · Vlad Barbalat, Patrick O'Shaughnessy
And our job is to be competent across all those choices because if we are, we naturally become a hub of interesting transactions that come our way and opportunities to participate in really unique off market things. [00:12:16] S0: So especially as you think about the risk portion of this total pie, you start with where you want exposures and then you fill the exposures. How do you do that? Because one way to think about this is that you're just a giant, giant asset manager, and you've got all these different ways you can express yourselves, but it starts with like a, I don't know what's called a house view or something like How does the house view get developed, and how often does it change?
00:12:39 · Vlad Barbalat
[00:12:39] S2: Let me first tell you what it's not. It is not a attempt in any way shape or form to predict the future. In fact, one of the sayings we have at Liberty Mutual Investments is to say, we're not in the business of predicting the future, we're in the business of being prepared for all its eventualities. A house view that tries to predict Overweight Europe or Yeah, any of that stuff. I've been a macro trader, that game hardly works, and certainly doesn't work for an institution like ours. God bless those that keep playing it and those that are successful at it. Our house view is much more about what long term businesses and franchises do we want to be in. The notion of being in a business like private equity, that's not a one or two or three or five year business, It has very little relevance of what our feelings may be on the environment in the next two years or three years. What I want to always be is in position to be valuable to our partners, be in position to deploy capital into interesting opportunities, structure our risks in a way that is always cognizant of our obligations to Liberty Mutual Group, not only through the lens of making sure we meet those policies, that's sacrosanct. But Liberty Mutual Group is a large enterprise that can decide to, for example, add businesses to its structure. It can acquire, and we need to be in position to always have the right balance of liquidity versus long term investments that we make that allow us to do all that. So I'd say liquidity management is actually an incredibly important component of how that broader portfolio gets constructed. We know that credit is going to be a large component of our business and we want to make sure anything we enter, we have the right level of expertise. So for example, things we have not really done. We have not expanded much into the European market largely because we don't think we have the right relationships in place there, the right expertise. And even though that particular region is more interesting than it has been in the past given all the geopolitical dynamics, it is not a place where we are spending our time. Despite the size of the book, despite the growth, we continue to identify opportunities in The US that we feel a lot more comfortable with. That's one way to think about it. Largely US focused asset classes, different parts of the capital structure.