· Kurt MacAlpine
[00:00:00] S1: It is a pretty meaningful departure. Now, if you think about the underlying benefits, you're effectively creating diversification. You're diversifying from asset management to wealth management, from more mass affluent to ultra-high-net-worth, from a single country to multiple different geographies. So, the merits of doing it make sense, but kind of call it the journey from the starting position around the conviction of the idea and how public markets ultimately respond take different turns and different courses. The second thing is, when you're looking at public markets, a lot of it ties into the underlying composition of your shareholder base, right? And I'll tell you what I mean by that. So, we had a series of strategic investors, let's just say somewhere, 15, 16, 17% of the entire float. We had a very small index inclusion, just given the company that we had, the market that we traded in. So let's just say 25% of our float was, call it, locked up by strategic investors that didn't have intentions of selling, and then indexes that effectively had to hold the stock. And that creates 75% of your float that's active. That is an unusually high active share. So you say, "Well, so who comprises the active share?" It's hedge funds, and it's mutual funds. So, hedge funds obviously are looking to optimize performance, so a lot of the volatility comes... The reason 2021 was such a good year from a share price appreciation standpoint is obviously had a lot of hedge funds piling in. 2022, a lot of the hedge funds ultimately leaving, and that creates a tremendous amount of volatility in the stock. And then on the mutual fund side, so the mutual fund holders of the public company tended to be value-oriented mutual funds that have been in net redemptions from a, call it a category, for a number of years. So think of it as every single morning, people wake up having to sell your shares to fund redemptions in their underlying mutual fund.
· David Senra, Kurt MacAlpine
[00:00:00] S0: Because there's headwinds in that industry. [00:00:00] S1: Inside of the underlying mutual fund. [00:00:00] S0: Okay. [00:00:00] S1: So again- There's a lot of different factors you can attribute to it, but the reality is, you have a series of things happening at once. Building a brand new business, creating a massive transformation story inside of a public company, and then calling it, having a composition of your shareholder base that doesn't... It's not like you have 85% of your shares locked up in a small float that dampens volatility. You kind of have the opposite. But look, you have to stay true to the convictions that you ultimately have. And the part that gave me a lot of confidence was I had a tremendous conviction in the opportunity. I was able to see the business and the strategy taking off relatively quickly. So, once you start to launch the story- [00:00:00] S0: What do you mean you were able to see it taking off relatively quickly?
· David Senra, Kurt MacAlpine
[00:00:00] S0: What do you mean you were able to see it taking off relatively quickly? [00:00:00] S1: So, just kind of to walk back from it. So, I launched Corient in approximately April of 2020. Fast-forward six years, north of $500 billion of assets. We have 3,000 employees. We're operating in 15 different jurisdictions. And so, the underlying strategy resonated really well early on. It was not tracking with the share price appreciation. So, if you kind of think about it, you're seeing all of this progress in the underlying business, right? The partnership structure that we put in place starts to resonate. People want to join. You're starting to build momentum. So, you're seeing the business itself start to form in a way that you had hoped that it would, but the share price ultimately isn't tracking. And then at that point, you just have- [00:00:00] S0: And so, you're just focusing on the internal metrics. [00:00:00] S1: On the business, because you can see the business evolving. [00:00:00] S0: So, but this is what happened with Bezos, because I forgot the number. It was like his stock in the early days of Amazon went something from like $180 to like six or something like that. And he talks about in his shareholder letters, he's like, "Yeah, the stock is dropping, but all the internal metrics of the business- [00:00:00] S1: Yeah [00:00:00] S0: ... are fine." And then he would quote Ben Graham. [00:00:00] S1: Yeah. [00:00:00] S0: And he was just like, "I'm just focused on this. Eventually, the stock will be where it needs to be." [00:00:00] S1: Correct.
· Kurt MacAlpine, David Senra
[00:00:00] S1: Correct. [00:00:00] S0: "But I can't worry about this short-term drop." [00:00:00] S1: Yeah. And then you get confidence again in just seeing the business evolve. And obviously, as your business continues to evolve, your expectations on success ultimately change, and you constantly continue to push yourself. [00:00:00] S0: Okay. But are you strangling the earnings of the company? [00:00:00] S1: I was using the cash flow and leverage that the business generated to build Corient. [00:00:00] S0: So, the market did not like how much debt you were doing? What was going on?
· David Senra, Kurt MacAlpine
[00:00:00] S0: So, the market did not like how much debt you were doing? What was going on? [00:00:00] S1: Yeah. Look, the part that I think people didn't understand is, in my opinion, the business needed to change and transform, right? And a business that was entirely focused economically on Canadian mutual funds was an incredibly vulnerable business. Given the historical success of the company in building a Canadian mutual fund franchise, it was very meaningful earnings, right? So, in order to make a dent in those earnings and drive diversification, it required a pretty meaningful pivot. There was a period of time at CI Financial where a lot of strategic investments ultimately weren't made. So, in my opinion, there was an incredible run of the company. There was a challenging period of time. I was coming in during that challenging period of time with ambitions to ultimately transform it. So, in order to achieve the objectives that we saw, in order to capitalize on the momentum that we were building, we were doing two things, using the free cash flow that was generated from the Canadian business and putting debt on the business. [00:00:00] S0: How much debt on the business? [00:00:00] S1: We ranged probably three to three and a half turns of debt. [00:00:00] S0: Okay.
· David Senra, Kurt MacAlpine
[00:00:00] S0: Okay. [00:00:00] S1: Look, so depending upon how you think about it, our industry, from a public market comp perspective, so we would be comped as an asset manager. Most asset managers, kind of the rule of thumb for debt is about two turns of debt. Wealth managers tend to have more debt than asset managers. It's less about the debt that you have on the business, and it's more about the composition of the underlying debt. And this is the part that I would have conversations with investors on. It's not like we were having floating rate debt with covenants. We were having fixed rate debt without covenants, right? And typically long duration. We had debt extending out to 30 years. Thirty years fixed coupon, no covenant debt. So, how you think about debt composition, in my opinion, was we weren't creating a lot of vulnerability from a business perspective. Yes, we were locking up the leverage, but that was very deliberate to capitalize on the opportunity that we saw in terms of building Corient. So, I was comfortable. At all times, I was comfortable with where we were, both from a capital allocation policy perspective and where we were from a debt capacity. [00:00:00] S0: But when you read about this part, that's where you hear, it's almost like you're being hated, but you're right, where your comfort level seemed to not change. [00:00:00] S1: Correct. [00:00:00] S0: Right? Were you surprised at the blowback that you got, or did you go into this like, "I know they're going to be pissed off"?