The transcript from this week’s, MiB: David Snyderman, Magnetar Capital, is below.
You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.
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This is not an official transcript.
00:00:02 [Speaker Changed] Bloomberg Audio Studios, podcasts, radio News.
00:00:09 [Speaker Changed] This is Masters in business with Barry Ritholtz on Bloomberg Radio.
00:00:15 [Barry Ritholtz] This week on the podcast, I have a fascinating and extra special guest. David
Snyderman has put together an incredible career in fixed income, alternative credit, and really just an
amazing way of looking at risk and trade structure and how to figure out probabilistic potential
outcomes rather than playing the usual forecasting and macro tourist game. He is global head of alt
credit and fixed income and managing partner at magnetar. They have an incredible track record.
They’ve put together a string of huge, huge returns. They are not like any other fund that you’ll hear me
talk about. They’re pretty unique and specific in the world. I found this conversation to be fascinating,
and even though we kinda wander off into the weeds of private credit, it’s so informative and so
interesting. I think you’ll, you’ll really enjoy it. With no further ado, my discussion with Magnetar. David
Snyderman.
00:01:19 [David Snyderman] Thank you very much for having me, Barry. I really appreciate it. I’m
looking forward to our conversation. I
00:01:24 [Barry Ritholtz] Am also, I’m very familiar with Magnetar and, and its history. It’s really a
fascinating firm in so many ways. Let’s start though, talking a little bit about your background. You, you
grow up in suburban New Jersey and then you head to St. Louis for college. Tell us a little bit about
where you went and what you studied.
00:01:44 [David Snyderman] Sure. I grew up in Freehold, New Jersey, so most people know home of
Bruce Springsteen. You know, my focus coming out of high school was playing football. I wanted to play
football really at the highest level I could.
00:01:54 [Barry Ritholtz] You are not much bigger than me. What made you think you could play on the
grid iron?
00:01:59 [David Snyderman] I don’t know why I thought I could, but I definitely thought I could at the
time and so I wanted to play at the highest level possible. My parents were much more focused on an
academic institution and so WashU sort of met both criteria.
00:02:11 [Barry Ritholtz] Did you play Ballroom college?
00:02:12 [David Snyderman] I did. All four years. It was a lot of fun.
00:02:14 [Barry Ritholtz] What position did you play?
00:02:16 [David Snyderman] I played strong safety and yeah, division three is the highest level I could
play up at, but I loved it.
00:02:20 [Barry Ritholtz] Right. So safety, you have to be pretty fast and
00:02:23 [David Snyderman] That was the issue.
00:02:26 [Speaker Changed] So, but for that you would’ve gone pro. There you go. What did you study
at WashU?
00:02:32 [Speaker Changed] WashU back then was, it was a great, they had a great medical school and
they still do today and in my family, being a doctor was the highest level of achievement. So I had a, I
had an older sister starting medical school and I had a relative who’s actually the dean of Duke Medical
School. So I had this nice glide path to be a doctor. Right. So I started off pre-Med, but I didn’t end pre-
Med. I found out quickly that’s not what I wanted to do. The hardest part is telling my parents and
especially my grandparents, you know, no more pre-med. So I switched to be an economics major. I
graduated economics with, with a lot of coursework in accounting and finance. Huh,
00:03:07 [Speaker Changed] Interesting. So you come outta college, you go to Pricewaterhouse Cooper
and then Koch Industries where you’re focusing on convertible securities, merger, arb, and, and special
situations. How do you get from medical school to that? What, what was the career plan?
00:03:22 [Speaker Changed] Yeah, my path was certainly non-traditional. I didn’t go to one of the East
Coast Ivy League schools knowing I wanted to go to Wall Street. I didn’t even know what Wall Street
working on Wall Street meant at the time. So for me it was much more around, you know, being around
fantastic people and really taking advantage of opportunities. It’s like you said, I started at
Pricewaterhouse and I went through a one year rotation there, so it started with audit. So I saw many
companies then taxed and financial services. So it was a great training ground to understand how, you
know, theoretics went, went into the practical business. From there, I went to Koch Industries and I had
a great experience at Koch. I was there five years. I worked in three different places for ’em. So I started
in Houston, Texas, and I worked on their natural gas business.
00:04:07 Then this opportunity came up in Switzerland, so it’s a 13,000 person company and there were
gonna be five people in Switzerland to manage about several hundred million dollars more in cash
optimization. So I had the opportunity to be a junior person there. I’d never left the US before, so I was
sat in the middle of Switzerland and sat there for two years and, and worked in that business and then
went to Wichita, Kansas. Wichita, Kansas was the home office and there were sort of a dozen of us very
simply situated, you know, all young and hungry, but they had great management at Koch. They really
encouraged us to, to start businesses. So I remember writing the merger, our business plan there. Right.
And then implementing the business. So a quick fun fact about, about Koch at Magnetar today we have
three of my prior bosses that, you know, from Koch. So, so it’s pretty neat. But to answer your question,
like I had a lot of broad experiences by the time I was in my mid twenties, but no real direction on what
my career was gonna be. Where
00:05:06 [Speaker Changed] In Switzerland? Was it Geneva or somewhere else? It was,
00:05:08 [Speaker Changed] It was Freeburg. So a town 20 minutes from Burn, it was a tax free Canton.
So I was in a town that spoke, you know, half French and half German and, and I spoke English. So there
you
00:05:18 [Speaker Changed] Go. But no taxes, no income taxes.
00:05:21 [Speaker Changed] No income taxes for the company and, and
00:05:23 [Speaker Changed] Then Koch Industries, I I, I don’t think a lot of people realize one of the
largest private companies in the United States and maybe even the largest, they’re, they’re giant energy
powerhouse. What, what else does Koch do?
00:05:36 [Speaker Changed] Yeah, so when I was there, they had 13,000 people and that was before
they bought Georgia Pacific. I think now it’s probably 35,000 people. Immense. It’s immense. And so
they, they have many, many different business lines there. For me, I sat mostly in their internal, really an
internal hedge fund. So it was their excess cash. They borrowed money at live bid at the time. So they
borrowed money very cheaply and our job was to make money on that money.
00:06:01 [Speaker Changed] So you end up as head of global credit and senior managing director at
Citadel Investment Group, was that right? From Koch Industries? That
00:06:09 [Speaker Changed] Was
00:06:09 [Speaker Changed] Seven years at Citadel. That’s supposed to be a tough shop to work at.
What was your experience like there?
00:06:15 [Speaker Changed] It was the perfect job for me at the time. So I always thought I worked at a
high level of intensity. Right, right. But when I got there, I realized I was one of many, right. But I had the
opportunity to work for a gentleman, Dave Bunning. He was one of the original few handful of people
that, that started at, at Citadel. And Dave was fantastic in so many different ways. A great leader, a great
investor, but really a great person. And he took me under his wing there. It was a lot of work, but a lot of
formidable lessons came out of my time there. Right. So the, the first one that I think about is the
investing business itself is an operating business. So we really have to understand what we’re gonna
invest in, value everything in the universe, rank order ’em, and then only can we put together portfolios.
And the second, and this is very credit specific, was when you own a credit portfolio, your short
volatility. So what that simply means is if you have a dislocation, you’re gonna lose a lot of money. And
so to put together credit portfolios, we have to find hedges that offset that short volatility. So really
learning the value of options right, was, was probably the biggest lesson coming out of Citadel. So
00:07:24 [Speaker Changed] I wanna rephrase that for, for some of the less option and, and vol savvy
members of the audience. When we buy fixed income, we just want it to be steady and pay a dividend
and not swing up and down. And if it does swing up and down, the odds are it’s not in your favor. That
volatility you can look at as an insurance product. If, if the volatility goes up, hey, we can make a bet that
will offset the drawdown in the bonds.
00:07:51 [Speaker Changed] That, that’s exactly right.
00:07:53 [Speaker Changed] Alright. And, and you’ve, you at Citadel, you were running a convertible
bond and credit trading desk. Is that that what you eventually ended up as head of global credit? That’s
00:08:04 [Speaker Changed] Correct. I started there on the convertible bond arbitrage desk, and then
we started capital structure arbitrage, which meant we were, you know, buying or selling credit and, and
against that buying and selling equities. And finally we consolidated that together and, and I ran that
business for, for Ken and Citadel and,
00:08:20 [Speaker Changed] And some of the folks, Ken being Ken Griffin, when people say Citadel is a
lot of work, you don’t realize there’s a whole nother gear you have to move into and it’s next level. Wa
was that your experience?
00:08:35 [Speaker Changed] It was, and, and for me, I actually loved that part of Citadel. It was 16 hour
days and it was six or seven days a week, but you really got to learn the financial markets there.
00:08:45 [Speaker Changed] Huh, interesting. So Magnetar launches in 2005 with some capital, and you
joined you, you weren’t one of the original founders, but you joined not long afterwards.
00:08:56 [Speaker Changed] That’s correct. So Alec Lilitz and Ross Lazar founded the firm and, you know,
I did join the day we launched our, our main fund. Now for me, Alec was a known quantity. He ran
equities at Citadel with Dave Bunning, my, my my prior boss there. And then when I moved up into
Dave’s spot, Alec moved out and, and they started and he spent I think two years on a non-compete.
And then started, started Magnetar. Him and Ross Lazar co-founded the firm and they had a vision to
co-found the firm, and I bought into the vision immediately and Alec always did a great job of, of laying
it out, right. And first was, we’re gonna have a culture of collaboration. So back then you, you probably
remember in 2005, you know, there were a lot of what they called pod shops. So they’d give individual
asset allocation to people and they’d go invest their money. This was gonna be a multi-strategy vehicle.
So we’d have credit, we’d have equities, we’d have hedge fund strategies, but with no silos. So we’re
gonna work together and put best opportunities into the portfolio.
00:10:00 [Speaker Changed] So you have people from Koch Industries with you, you have people from
Citadel. Did those prior employees have a piece of you guys? Did they seed you, did they invest you? Or
was it just a clean break and we’re off on our own?
00:10:12 [Speaker Changed] It was a clean break and, and Ross Lazar came from the fund of funds
world, and he was the primary money raiser and business builder there. And so he did a fantastic job, I
think we’re the largest launch of 2005 with about $2.3 billion.
00:10:27 [Speaker Changed] How long did it take you to get up and running where you felt, oh, this is
really all the pieces are in place?
00:10:33 [Speaker Changed] Yeah, it’s a good question. And funny, funny you asked that question
because we talk about it often around Magnetar. You know, I started and I, I hired three or four people
that I started with, and Ross Lazar, right? And again, he’s a, he’s a my partner, my close friend, right?
And a and a great business builder. Two weeks into it, he came to me and said, what’s the first
investment like? When are you gonna start investing? And I said to Ross, look, we we’re gonna build a
systems and infrastructure to prepare to invest first, and I need
00:11:05 [Speaker Changed] A computer and an internet net line and maybe a trader to, to help us out.
00:11:09 [Speaker Changed] That’s exactly what what Ross was saying. And he, he very politely said to
me, you know, you’re here to invest not to build software. And so he, I think he stopped by my, my desk
for the next nine months, every single day and ask the same question. But it truly took us nine months
to build the systems and infrastructure just to be investment ready.
00:11:30 [Speaker Changed] Wow, that’s amazing. Nine months. And I have to ask why Evanston in
Illinois? I mean, I like Lou Malnati’s and superD dog as much as the next guy, but why the middle of the
Illinois suburbs? The Chicago suburbs? Yeah,
00:11:46 [Speaker Changed] So it was just north of the city and it’s across the street from Northwestern.
So that would be the draw, you know, the train lines end there so you can recruit people from, from the
city, but it, it was probably a little more selfish. Like we all lived on the north shore of Chicago, and so it
was an easy commute for us to work. And so that, that’s where we started the firm. And, and
00:12:06 [Speaker Changed] That is really a lovely part of the world on the lake. It’s such a manageable,
easy city to operate within. I mean, the winters are a little cold, but still it’s a lovely place.
00:12:19 [Speaker Changed] It’s a great quality of life in Chicago and, and outside of Chicago.
00:12:24 [Speaker Changed] So only a few years later we’re right in the teeth of the great financial crisis.
How did you guys navigate that?
00:12:32 [Speaker Changed] We were very fortunate and, and we performed quite well in our credit
strategies, which, which certainly we can talk about. We had both long and short credit products and we
had, we had a long volatility position, meaning, meaning we protected the balance sheet very well if
there was a dislocation. And I think that went back to some, some of the prior lessons from, from prior
firms. Like we really need to have portfolios that we protect the balance sheet and make sure that, that
we’re able to stand up in, in difficult environments. I
00:13:02 [Speaker Changed] Have noticed that a lot of firms that describe themselves as hedge funds
really aren’t very hedged. You guys operated pretty fully hedged at most of the time, right?
00:13:13 [Speaker Changed] We really did. And, and the systems and infrastructure we built were not
only to measure risk, but to manage that risk. And so we find good investments both on the long and
short side.
00:13:27 [Speaker Changed] So even if you have a position that that’s long, you have an offsetting or
matching position, or do you just hedge out that long position with a a short bet?
00:13:36 [Speaker Changed] So there’s a quality of earnings question embedded in, and I think what you
said, and that’s, we’re trying not to take macro level bets. Those for us are low quality bets. And so what
we’re trying to take is idiosyncratic bets, meaning we’re focused on one factor and we’re betting on that
factor, then we’re gonna hedge out all of the macro risks around the portfolio.
00:13:58 [Speaker Changed] Huh, really interesting. So we were talking about, you guys launched a few
years right before the financial crisis. I wanted to talk about a couple of trades from that era. Perhaps
most famously you guys put on a CO bet, a collateralized debt obligation bet that was designed to do
well if housing made some extreme moves and it was non-directional, it was hedged. Tell us a little bit
about the magnetar CDO bet from the financial crisis.
00:14:30 [Speaker Changed] I talked about setting up the infrastructure to prepare to invest, and we
looked at every asset class. So we looked at, at corporates, we looked at mortgages, we looked at credit
cards. And what we found in the mortgage market is something you don’t read about in textbooks, we
found that we could invest on the long side in what they call the equity piece or the most risky piece of,
of A CDO, right? And we could short the next level up. So the mezzanine piece, and we could short two
or three times the amount, but what was super interesting was we were getting paid to hold an option
that that never happens. Right.
00:15:08 [Speaker Changed] Options cost you money. And that’s the old joke option. Traders never die,
they just expire worthless.
00:15:13 [Speaker Changed] That’s exactly right. In this case, we were gonna hold an option that we
were going to get paid 15 to 20% a year to hold. Oh,
00:15:21 [Speaker Changed] Really? That’s real money.
00:15:22 [Speaker Changed] So, so you never see that and you never read about that, but that’s the way
the market’s set up. It was just too fragmented. You had people that were willing to buy pieces of, of
these structured products because of the ratings and on things that weren’t rated, no one was willing to
buy. So we took the other side of that, of that trade.
00:15:40 [Speaker Changed] So you bought the unrated portions and you shorted the rated portions?
00:15:44 [Speaker Changed] That’s correct.
00:15:45 [Speaker Changed] Huh. That’s very contrarian. That’s very interesting. How did you identify
that opportunity? That’s such a talk about idiosyncratic niche trades. H how did you figure that out?
00:15:57 [Speaker Changed] The firm was built on finding white spaces. And so I remember back, back in
2005 when we first started, you know, we think about the banks. The banks would have an equity
trading desk and they’d have a debt desk, right? And they both value the same companies and both
sides of the firm would value ’em completely differently. And so for us, those were exactly the
opportunities we were looking for, but we didn’t find it in the corporate markets. We found it in the
mortgage market. It was so fragmented that the machine that sold rated products hit all the right
buyers, but no one could sell the unrated piece. The unrated piece yielded 2020 5% where the rated
piece would yield three to 5%. And so that difference was, was the arbitrage that we saw. So
00:16:40 [Speaker Changed] Heading into oh 5, 0 6, we saw real estate peak in, I wanna say in in volume
in oh five and price in oh six. So if you are getting paid 15, 20% to hold the unrated piece, isn’t there a lot
of downside risk that hey, if some of these mortgages go south, you could see, you know, you get cut in
half or worse.
00:17:01 [Speaker Changed] That’s exactly right. And so what our, what the modeling actually said
though is if nothing happens in the world, we make this 20% return. But if, if anything happened, not
only would our equity piece suffer, but the short side or our mezzanine pieces would make the money
back, and that’s the ratio. And then, so that’s the ratio we had to be on. So what they call that is delta
neutral in the options world, right? So
00:17:26 [Speaker Changed] We
00:17:26 [Speaker Changed] Had a, we were hedging an option and that hedge made us a lot of money
in downside, in downside scenarios. But that was never the focus. We didn’t know the housing market
would crash. We had no idea what we had was a trade or an investment that we’d make 20% a year on.
And if anything happened in the world, we’ve really protected the balance sheet. It just happened quite
quickly.
00:17:48 [Speaker Changed] So let’s talk a little bit about what’s going on today, especially in, in some of
the private alternative spaces. You’ve talked about pensions are now facing illiquidity issues because
private equity and venture capital have gates up a lot, a lot of long-term tie up. How has this affected
your business?
00:18:09 [Speaker Changed] Yeah, that’s been the most challenging part of the business really. So it, it
really has and, and pension funds, they’re on hold today. They’re, they’re not investing and it’s been not
just a headwind for us, but for the entire industry. So I’ll step back and I’ll, I’ll give you my view on it. So
pensions have this, this mandate, they have a diversified portfolio they invest in, they receive cash flow
from the portfolio and that supports their retiree benefits. So they’re always making this judgment, will I
produce enough cash to, to manage those liabilities? What happened over the last year and a half or so
is rates went up and valuations went down. Now the handshake agreement with, with the venture firms
and the private equity firms was give them a dollar today and in five years they’ll give you back two or
$3. Right? Right. Depending on how, how the fund did, they’ve stopped giving back that capital today.
Oh, really? And so the pension funds are faced with this illiquidity problem. And so they’re borrowing
money against their portfolios, they’re selling positions in their portfolios, but what they’re not doing
isn’t taking on new investments. Hmm. Now there’s a flip side to this. Whenever we, we have trouble
raising capital, the investment opportunities are usually very good. Right. So our pipeline is extremely
robust today.
00:19:22 [Speaker Changed] Huh. That, that’s really intriguing. Do you see this across the board or is it
really just more generalized that when you have the dislocation of 500 plus basis points in 18 months,
what does that do to the landscape?
00:19:37 [Speaker Changed] It always changes the landscape. And so no one’s ever prepared for moves
of that size, even though everyone says, says they are. And so it’s opportunities that, that have come out
of this mainly are around the banks today. Right. And so, so we can talk a little bit more about that.
Well,
00:19:53 [Speaker Changed] Let’s, let’s talk a bit about, Magnetar has more of a specialty finance focus
than other credit managers. Tell us about that, and how has the shift in rates impacted specialty
finance?
00:20:06 [Speaker Changed] Yeah, so after the, after the GFC, these private credit markets really
developed and they went in two different directions. They went in direct lending, right. And so 90% of
the market went direct lending. So that’s going to middle market companies and disintegrating the
banks and lending directly to them. For us, we went in a different direction. We went in specialty finance
and specialty finance is, is a bit smaller, but it’s been around for ages and it touches our lives every day.
00:20:33 [Speaker Changed] Define it if you would.
00:20:34 [Speaker Changed] Yeah, so it’s, it’s the cars we drive. So auto loans, it’s the houses we buy or
rent. So it’s mortgages, it’s the podcasts that we stream, right? So it’s all, it’s all the music royalties and
streaming royalties. So it’s, it’s assets like that. Hmm. And the interesting part about these assets is
there’s a very strong investment thesis around them because they have three attributes when combined
together that most other asset classes don’t have. And certainly I don’t think direct lending has. So the
first is you can find very stable payoff profiles. Second, you can find assets or these payoff profiles that
don’t correlate to the overall market. So you’re not worried about them moving with the s and p or the
high yield index. Right. And third, and most importantly, they don’t correlate to one another. And so I’ll
give you an example of a three asset portfolio. So in our music royalty portfolio returns could be driven
by an artist’s song downloads like Taylor Swift downloads. And in our solar finance portfolio, it’s by how
much sunlight there is in a particular region. Or lately we’ve been lending a lot against Nvidia GPUs for
cloud usage, and that’s driven by AI and machine learning growth. If I think about just those three
assets, they shouldn’t correlate to, to the s and p, but they certainly shouldn’t correlate to one another.
Huh. That’s how we can really produce a high quality of earnings for our investors. Huh.
00:21:58 [Speaker Changed] Really interesting. You mentioned banks earlier, I know that Magnetar has
had opportunities to partner with banks via what some people call reg cap transactions. Tell us a little
bit about those.
00:22:11 [Speaker Changed] So reg cap, or some people call ’em significant risk transfer transactions,
that is a massive opportunity for credit funds today. And so a lot of people would think that the banks
are selling assets, right. But in our experience, we’re seeing them efficiently transfer the credit risk of
assets, but keeping the customer relationship, it’s a very important distinction. How do
00:22:33 [Speaker Changed] You do that? Either you have the asset and the credit risk, I would imagine.
Or if you don’t, if it’s a mortgage, you sell the mortgage and you’re out, how do you have, how are you a
little bit pregnant?
00:22:43 [Speaker Changed] E exactly. So the solution to that are these regulatory capital solutions. And
so you’re taking a portfolio of credit risk and you’re transferring that credit risk to a private credit fund
like us, but maintaining the customer relationship. And what what banks, I think eminently realize is the
customer relationship is, is how they drive revenues. So traditional banking, FX advisory services, you
know, high net worth. And so without that, they start to lose their franchise. This is the product that,
that allows them to transfer credit risk. And for private credit firms, we all of a sudden have access to
some of their highest quality lending. Right. It’s, it’s, it’s been the fastest growing part of our portfolio.
00:23:27 [Speaker Changed] So I’m trying to figure out if they’re transferring the credit risk to you. I’m
assuming you’re taking some sort of contract with the bank that you’re gonna assume the liability if X
happens and then you with your expertise are hedging out that risk through your options or credit desk.
00:23:48 [Speaker Changed] Yeah, and that’s exactly right. But importantly, the first thing we’re doing is
we’re using data to really understand what the credit risk is. And with that data then we can start
thinking about what the, what the likely hedges are for the macro risk of the portfolio.
00:24:03 [Speaker Changed] So, so let’s talk about that. What is your approach to data? How do you
institutionalize data management and, and how do you leverage the idea of, hey, we know a lot about
this, here’s how we monetize it. People
00:24:17 [Speaker Changed] Talk a lot about the importance of data, but it’s usually in a different
context. It’s usually for these quantitative strategies or quantitative hedge funds, right? For us, data is
the lifeblood of, of specialty finance. So for us, we use data to solidify our assumptions. What we do
with the data is we forecast the performance of assets by matching statistically significant
characteristics. So back to the, the red cap examples, we’ve looked at hundreds and hundreds of these
types of, of investments and we’ve taken all the data from those transactions. Now, when we look at a
new transaction, a bank comes to us and says, I need to produce more regulatory capital on this
hundred to 10,000 loans. We can take the characteristics of their portfolio today and out of sample,
price them through history that helps us price the credit right. And understand what risk we’re taking
on.
00:25:11 [Speaker Changed] So this is really fairly sophisticated financial engineering that is, it sounds
like it’s a way for the banks to meet the SEC requirements, the increased post-financial crisis, financial
reserves that they’re required to have, but not have to sell off big parts of the business and not have to
sell off the relationships you described.
00:25:33 [Speaker Changed] I think that’s exactly right. And, and even when you get to what happened
earlier in 2023 with Credit Suisse, that again put pressure on the banks to really, to really think about
how they’re gonna hedge their credit risk. This is their hedge to credit risk.
00:25:48 [Speaker Changed] And then related to the way you guys work with data management, tell us a
little bit about Magnetar Labs.
00:25:54 [Speaker Changed] Yeah, Magnetar Labs has been a great initiative for us. It’s really the
institutionalization of our data. So we’re trying to produce infrastructure where we can ingest large data
sets very quickly and not only use them in specific business lines, but use it across business lines. So I’ll
give you a few examples. In our merger arbitrage business, we’ve tracked every detail and every
characteristic of every merger and acquisition for the last 20 plus years. Wow. And even our recent
restaurant finance business, we have itemized bills of every customer. Right. This is really useful data. So
here, here’s an example from just a couple of months ago, we were looking at an auto loan transaction
and the servicer tried to overload information. So they gave us eight 80 million line items of information
00:26:43 [Speaker Changed] On purpose, or
00:26:45 [Speaker Changed] I don’t know if it’s on purpose or not, but 80 million line items, a hundred
different files, you know, 40 gigabytes of memory. So that’s far too much for like Excel to handle or any
local Python, right? Right. Or overload or any one machine. But our Magnetar Labs team was able to
take that in, in just minutes. Right now we can analyze the data and then look at, look at the attributes
to that investment and see if it fits in our portfolio. We, we actually made the, made the investment.
00:27:14 [Speaker Changed] So, so what sort of hardware are you using? Is this all cloud-based? Is this a
I I think of like, oh, sounds like a mainframe. I don’t even know if mainframes still exist anymore.
00:27:22 [Speaker Changed] Yeah, everything’s gone to the cloud now, right. I mean, it, it, it is pretty
amazing. And
00:27:26 [Speaker Changed] That sort of distributed computer has no ceiling in the real, essentially no
capacity. Correct. Infinite capacity. Correct. Huh. Really, really interesting. So let’s talk a little bit about
the status quo. I, I read something where you said it was important to not maintain the status quo.
Explain what that means.
00:27:46 [Speaker Changed] We’re not efficient market theorists, but we certainly believe that in the
medium to long term, the markets are efficient,
00:27:53 [Speaker Changed] Kind of mostly eventually efficient.
00:27:55 [Speaker Changed] Eventually efficient, right? So we know that what works today may not
work several years forward. Right. And so I’ll give you the converts example. Like, like you mentioned,
I’ve been in the convert market for 30 years now, and sometimes converts are very cheap, you know,
convertible bond arbitrage. And when they are, we have a lot of our portfolio in it. But today we have
less than 1% of our portfolio in the asset class. And it’s just because it, it’s not cheap or not cheap
enough versus what we can invest in.
00:28:25 [Speaker Changed] And is the expectation is that whatever inefficiencies were there, the
market’s figured it out, it’s arbitraged away and the odds are against that ever becoming really cheap. Or
might it, you know, become a trade again.
00:28:38 [Speaker Changed] Yeah. Some of it’s supply demand, right. And driven. But I think the most
important part is we’re not hiring desks of people to stay in an asset class. That’s the status quo. That’s
not what we’re looking for. We’re looking to aggressively rotate our capital to get to the optimal
portfolio to get to the best risk adjusted return.
00:28:58 [Speaker Changed] So does this mean you’re exploring new business areas and strategies? Or is
it just that you are rolling through the various other opportunities that, that you’ve fished in before?
Yeah,
00:29:09 [Speaker Changed] It’s a good question. We maintain our diligence on other strategies, but we
always have a strong research and development pipeline.
00:29:16 [Speaker Changed] Huh. Real, really interesting. So let’s talk about some of the things that, that
are going on today. Artificial intelligence, AI dominated the the 2023 narrative. You made investments in
Core Weave, a specialized cloud provider. Tell us a little bit about what you’re doing in that space. Is that
related at all to what we talked about earlier with Magnetar Labs?
00:29:40 [Speaker Changed] Yeah. Core Weave is, is such an exciting story for magnetar. I can’t say
enough good things about it. Sometimes the stars just align. You have the right time, the right product,
the right team. And for the listeners that don’t know who Core Weave is, core is the largest owner of
GPUs outside of the hyperscalers, like Google or Amazon Web services. They sell as high performance
compute, which is sort of the picks and shovels to enable ai. So if you are a new, you know, AI lab, you
need somebody like Core Weave to host that specialized cloud for you. Now we were the first
institutional investor, so all the way back in, in 2020. And at that point, Corey, we’ve had just $26 million
of top line revenue. And I think we were the first firm to really get comfortable lending against that asset
called high performance compute, right? So they’ve had explosive growth, but what we haven’t been is
just a capital provider. We’ve really been a partner to them within the business.
00:30:41 [Speaker Changed] Are you guys also a customer of theirs?
00:30:43 [Speaker Changed] We’re a customer of theirs in Magnetar Labs. Just like, just like you, you
intimated before. And so we use them for Magnetar Labs, but we have Ernie Rogers, our COO sits on
their board. We have daily interaction between our management teams. This company is growing so
quickly, right? They need all, all the help they can get around them. And what we try to help with is
mostly balance sheet management.
00:31:06 [Speaker Changed] So for a firm that specializes in, in credit, this almost sounds like a venture
investment.
00:31:12 [Speaker Changed] There are parts of this that, that are ish. But what’s interesting is the
underlying asset, this high performance compute is something that we can really scale with. And so I
think that’s been the innovation in the marketplace. So you mentioned in 2023 on the venture side, we
actually led around for them a $400 million series B round, but we also led a $2.3 billion financing on
their high performance compute assets.
00:31:38 [Speaker Changed] So it’s capital and credit, it’s equity and credit.
00:31:41 [Speaker Changed] It’s equity and credit. And it’s a true partnership between the firms. You
know, towards the end of last year, you know, in December the firm got valued at $7 billion. Wow. And
to me, it’s just a start. This company, just the you, you’re just gonna see it continue to grow over time.
Well, let
00:31:59 [Speaker Changed] Me know about the C round when that comes up for sure. What, what do
you guys, in all seriousness, what are you guys looking for? What sort of characteristics are you looking
for when a company like this comes along? You mentioned idiosyncratic types of investment. This
sounds very specific and not all that usual.
00:32:17 [Speaker Changed] It is, it’s very specific, but we always start with the assets. So it’s assets, it’s
data, and it’s structure, right? So first on the assets, we’re usually focused on specialty finance because
the assets drive the performance of the company, right? The next thing we need is data. We can’t
predict the future. So what we’re trying to do is use historical data to predict how an asset reacts in
different states of the economy. And finally we use structure around that to protect the downside of the
investment itself.
00:32:47 [Speaker Changed] Huh. Sound sounds really intriguing. So, so as long as we’re talking about
2023, we saw a lot of bank failures last year. We saw, you know, the response to a, a rapid increase in
rates. You had a front row seat to what transpired, share what that was like, and and what did you guys
see in, in the space? Tell us about the opportunities that came up from those events.
00:33:10 [Speaker Changed] Those were stressful events for the entire community. You know, for Silicon
Valley Bank in particular, I remember it was Friday night and the question of moral hazard appeared,
appeared immediately, right? So it’s California based, right? It was a lot of venture funds that had
accounts there. And the question started coming out, a is there cash safe? Will they be able to access it?
If so, when, you know, will they be able to make payroll? A lot of these smaller companies were very
worried about payroll. And in California specifically, will the board of directors be liable if they couldn’t
make payroll? And then they started rolling it out to, what about all the similar situated banks? So we all
know that by Monday morning the contagion risk was too high and, and the government did step in, but
the opportunities really arose from that. And so the first opportunity, which is very similar to doing
regulatory capital investments with large banks is being a risk capital provider to the small and regional
banks. And I think we’re gonna see more and more of this over time. It’s credit firms partnering with
banks where we have access to all the diligence around their customers. And together we can jointly
underwrite and make loans.
00:34:20 [Speaker Changed] You, you mentioned moral hazard. Where was the moral hazard with
Silicon Valley Bank? Was it the equity investors in the bank or was it the customers with, you know, way
over the FDIC limits and if there isn’t a quarter million or half a million dollar ceiling, did, did the Federal
Reserve essentially say, okay, FDIC insurance is now unlimited? Is that the moral hazard? We
00:34:45 [Speaker Changed] Found that to be the moral hazard. Who’s the governor of how much risk a
bank can take? So the federal government came out and they said, you have a $250,000 limit, but
people were putting in a hundred million dollars into the account, right? Because they got 25 basis
points more of interest, right? So how do, how do you actually control that? That’s the moral hazard we
saw. Now, I think at the end of the day, it was just too big of a risk to the economy. The
00:35:08 [Speaker Changed] The contagion risk was cont hey, there’s a moral hazard question to the
depositors, but rather than stand on ceremony, let’s stop this before it spreads.
00:35:18 [Speaker Changed] That’s exactly right.
00:35:19 [Speaker Changed] Huh? That, that’s really, that’s really kind of intriguing. What else has been
the result of this rapid spike in interest rates? What do you see in the private credit world that hey,
blame the fed, but here, here’s what’s gone off the rails.
00:35:34 [Speaker Changed] Yeah. For credit investors, everyone thinks about fixed rate risk, right? But
that’s easily hedgeable and that’s a choice that that credit investors make. So for people like magnetar,
we swap everything back to floating rate. We don’t have any edge on, on a macro risk like that. But the
second order effect is much, much more difficult. And that’s the business impact of rates changing. So
when you, when we think about businesses, we think about do profit margins change as rates go up or
down? Do originations change? What about the refinancing of their debt? I think those are the things
that are gonna keep lawyers and restructuring advisors very busy for the foreseeable future. So,
00:36:13 [Speaker Changed] So given this current environment where first rates went up further and
faster than it seemed like the consensus amongst analysts was they stayed higher longer than people
expected. There’s no recession. People have been talking about that for two years. And the expected
rate cuts, I guess, tied to that recession haven’t showed up yet. We were talking about March now we’re
talking about May even June of 2024. How does this affect how you think about putting portfolios
together, constructing portfolios? And I am very aware that you guys aren’t macro tourists, you don’t
play that game. But given the volatility and the various probabilistic outcomes, how, how does that
impact your thinking?
00:36:59 [Speaker Changed] Yeah, it’s a very good question. And, and for us, we think a lot about the
affordability factor. So I’ll give, I’ll give you two examples at both extremes. So we have a partial
ownership in an auto loan business in Ireland. And so when rates are at zero, we’re loaning to
consumers, it’s somewhere between five and a five and 6%, and we’re gaining market share rapidly. All
of a sudden risk-free rate goes to 5%. That equivalent loan, we’re gonna have to charge consumers 11%.
It’s just, it’s simply unaffordable, right?
00:37:30 [Speaker Changed] Different calculus for
00:37:30 [Speaker Changed] Sure. Different calculus. And so we have a decision to make, we can stay at
11%, keep the same margin, but reduce our origination, or we can take our margin down and try to keep
market share. Either way, the business is worth a lot less, right? That has a lot of affordability factor
effect to it. On the other end of the stream is our music royalties business. So in music royalties, you
know, the simplification is you get some small part of worldwide streaming revenue, right? So take
Spotify, Spotify raised rates recently and they had no customer churn. So some percentage of that rate
went directly to the royalty holder. There was very little affordability factor. So we’re veering away from
things that the business impact on affordability is high and we’re investing in things where, where it’s
lower private
00:38:20 [Speaker Changed] Credit seems to be getting a lot of attention these days. Why? Why is that?
00:38:24 [Speaker Changed] If you would’ve asked me going into the global financial crisis, I know we
keep going back 15 years now, I would’ve said the banks had it all right. They controlled origination of all
of the different asset classes, especially finance and lending. So whether it was credit cards or
mortgages or loans to, to their customers. But after the finance, after, as the financial crisis happened,
there was a spotlight flashed on their balance sheet. They just had too much risk. And so the regulators
came into reduce that risk. So the simple question is that private credit came in and stepped in the
shoes of banks and really took market share. But this scale was much larger than anyone could have
anticipated. But for me, what what I think about a lot is the, the more profound effect is the talent
transfer, the talent transfer from the banks that went to the credit providers, the private credit
providers that set the stage for, for this mass, you know, growth in private credit.
00:39:21 [Speaker Changed] So let’s talk about talent a little bit. One of the things I know your firm is
proud of is more than half of your workforce has been with the firm for five years or longer. So first I’m
assuming that’s not typical in your space. And second, I have to ask, what contributed to that sort of
retention?
00:39:41 [Speaker Changed] Yeah, I’m very proud and I think what we’re very proud of that fact, and I
think it is very atypical, but the credit really goes to so many people at, at Magnetar. You know, we’re a
global firm, but I think we’re the Midwestern ethos. So it’s work hard, stay humble, be a good
teammate, be a good person. And I think if we can consistently demonstrate those qualities, we’ll
attract people who value them. And it’s, it’s a virtuous circle. And what’s incredible about the firm is
when we get, when we’re focused, how much we can get done. So I’ll give you a simple example. We
started a summer internship program several years ago, and we started with two interns and we built a
program around them. And this last summer we had 60 interns for a 200 person organization. You know,
it, it’s pretty humbling when you think about all the exceptional people around Magor and how much
we can get done.
00:40:34 [Speaker Changed] So one of the things we’ve been hearing a lot about as big companies try
and get their staff back in the office five days a week is corporate culture. Tell us a little bit about what is
differentiating magnetar from a cultural perspective. You know, starting with Evanston, Illinois, not a lot
of private credit shops in the neighborhood.
00:41:00 [Speaker Changed] That’s true. You know, first principles, it’s always about integrity, but I think
for most tenured firms, integrity is, is, is high. But for us, the North star is always creating the best
portfolios to deliver to our clients. And we really have two foundational points there. One is we run a
very flat organization and secondly we thought a lot about alignment. So on the flat organization, it
doesn’t matter who has the right answer, we know we’re trying to reach the right answer. So I’ll, I’ll take
our investment committees as an example. We, we have biweekly investment committees and it’s not
the top two or three people that sit on the investment committee. We have 120 people in that meeting,
you know, every two weeks. Wow. And we really want people to voice opinions, right? And that’s how
we’re gonna get to the best answer. You know, we talk about it internally a lot.
00:41:51 We’re trying to manage investments by consensus. And so especially in private credit, if
someone doesn’t like something, we can change it. We can change, you know, what a structure looks
like. And so we’ll get to something that where we actually get consensus, you know, on the alignment
point, it really goes back to not giving individual capital allocations, but incentivizing people to create the
best portfolio. So you asked about retention before. I think the reason why people stay at Magnetar
long term is because they believe in these philosophies and they believe if we get to the right portfolio
that everyone wins in the long term.
00:42:28 [Speaker Changed] Huh, really very interesting. So we only have you for, for a limited amount
of time. Let me jump to my favorite questions that I ask all of my guests. Starting with tell us what
you’ve been streaming these days. What’s been keeping you entertained either video or audio, Netflix
or, or podcasts? What, what’s keeping you entertained?
00:42:47 [Speaker Changed] Yeah, I think this will be different than, than most of the people that sit on
this show, but for me it’s been flow sports
00:42:53 [Speaker Changed] Flow sports
00:42:54 [Speaker Changed] Flow sports. So I have, my older son is in between high school and college
right now, and he’s playing hockey and juniors for a year. And so all of his games are on flow sports. So
Christie and my son, Jake and I sit around and, and watch every game together. What, what
00:43:10 [Speaker Changed] Does he, what position does he play?
00:43:12 [Speaker Changed] He plays defense, huh? It’s been a lot of fun.
00:43:14 [Speaker Changed] Flow sports. Is that an like a YouTube channel? An internet channel? How
do you find that? Yeah,
00:43:19 [Speaker Changed] It, we pull it up on Apple TV or on our phone and, and yeah, it’s, it’s been
great for, for a lot of youth sports.
00:43:25 [Speaker Changed] Huh, interesting. And then
00:43:27 [Speaker Changed] On the podcast side, this podcast aside, obviously
00:43:30 [Speaker Changed] You never have to bring this podcast up of course.
00:43:32 [Speaker Changed] So I listened to one by Larry Bernstein, what happens next? And he’s been
doing it since, since COVID and it’s sort of six minutes of, you know, really relevant topics that come out
every weekend.
00:43:45 [Speaker Changed] What happens next? I’m going to check that out. I love the idea of these
having done long form for a decade. I love the idea of 5, 10, 12 minutes and you’re done. Yeah. And
there’s something very appealing about that. Let’s talk about your mentors who helped to shape your
career.
00:44:02 [Speaker Changed] You know, it always starts with your parents and then, you know, football
coaches like, like Larry Kimba, but I mentioned Dave Bunning before. I think most people would say, you
know, I’m a product of, of his teachings over time.
00:44:13 [Speaker Changed] Huh. Interesting. How about books? What are some of your favorites?
What are you reading right now?
00:44:18 [Speaker Changed] You know, I always like Michael Lewis books. We, we had him at, at one of
our, our offsites a few years ago. You remember, remember this book is one of my favorites, you know,
memos from the Chairman by Alan Greenberg. Sure. That that was a great book.
00:44:30 [Speaker Changed] Ace Greenberg right? A Greenberg from Bear Stearns Greenberg.
00:44:32 [Speaker Changed] Correct. And what was so interesting about his book is, you know, he’s
running the firm, but he’s really in the minutia of every detail. It, it was very interesting in
00:44:40 [Speaker Changed] Including the paperclips, recycling, the paper clips,
00:44:44 [Speaker Changed] Including every
00:44:44 [Speaker Changed] Expense. So let me interrupt you one second. Say I was at a lunch just with,
you know, three, three people at a table and he came in and sat like a table or two over and the whole
meal, I mean, this was later in his life, the whole meal was a parade of people coming in to genuflect in
front of him and just pay their respects. It was like the pope was having lunch. IIII don’t know how well
you know of him and Yeah, and the book certainly is, is kinda, you know, you don’t get a sense of how
other people perceived him, but fascinating guy. I,
00:45:21 [Speaker Changed] I met him when he was at Bear Stearns and I felt the same way. It, he is a,
he was a special person.
00:45:27 [Speaker Changed] What other books are you reading? Anything else you wanna mention?
00:45:30 [Speaker Changed] So my, my colleague and the head of our London office, Alan Shaffrin,
recommended the book, the Missing Billionaires and the reason I just started, but the reason it’s
interesting is it’s, it’s very focused on it asset allocation and mistakes in asset allocation and how much
that can cost a portfolio over time. So it has a lot of parallels to the way we think about asset allocation
at Magnetar. Huh,
00:45:53 [Speaker Changed] Really interesting. Our final two questions. What sort of advice would you
give a recent college grad interest in the career in either private credit, alts, fixed income, any of the
areas you specialize in?
00:46:06 [Speaker Changed] It’s, it’s what we think about for the firm. And I know what I, what I tell my
kids would be it’s people and platform. You need to be around good integris people that are great
mentors and the platform needs to be growing over time. So each seat should be more, more than the
person in it.
00:46:23 [Speaker Changed] Huh, interesting. And our final question, what do you know about the world
of investing of credit, of risk management today that you wish you knew when you were first getting
started 30 years or so ago?
00:46:35 [Speaker Changed] Yeah, this may be an atypical answer, but I think about luck versus skill a lot
more than I ever did before. If you make a decision today and don’t have an outcome for 10 years, you
don’t really know if you were good at it or not. Right? Whether you won or lost. If you’re able to have a
much faster feedback loop now you can really hone your skills and understand whether you’re, whether
you’re making, you know, good decisions or bad decisions. And so I think for me, and as we look at
people’s track records, we really try to think about how often do they get to make a, make the same
decision and what’s the process around that decision and how different is it over time? Very,
00:47:13 [Speaker Changed] Very interesting. I have a book for you, but I’m gonna bet you’ve already
read it, Michael Mob’s book,
00:47:19 [Speaker Changed] I have Not. Please
00:47:20 [Speaker Changed] Separating Skill From Luck in Investing Business and Sports Like that is right
up your alley.
00:47:26 [Speaker Changed] That is, thank you. You,
00:47:27 [Speaker Changed] You’ll, and Anna, he’s a fascinating author and really a fascinating book. I
would bet you you would appreciate it. Excellent. Thank you David for being so generous with your time.
We have been speaking with David Snyderman. He is the global head of alternative Credit and fixed
income and managing partner at magnetar, a $15 billion multi-strategy, multi-product, alternative
investment management firm. If you enjoy this conversation, well check out any of the previous 500 or
so we’ve had. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your
favorite podcasts. Be sure and check out my new podcast at the Money 10 minutes each week with an
expert discussing a topic that’s relevant to you and your money. I would be remiss if I did not thank the
crack team that helps me put these conversations together each week. Sarah Livesey is my audio
engineer. Atika Verun is my project manager. Anna Luke is my producer. Sean Russo is my head of
research. Sage Bauman is our head of podcasts. I am Barry Ritholtz. You’ve been listening to Masters in
Business on Bloomberg Radio.
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