Scott Goodwin - Know the Names

Sharp investor, always looking for incremental edge. Enjoyed his takes.

Key Takeaways

1. Transition from Private Equity to Inflation-Driven Environment: The 2010s saw a focus on private equity, shareholder returns, dividends, and 0% interest rates. However, the 2020s are anticipated to be shaped by inflation and higher rates, shifting the return of capital towards lenders, pensioners, and savers. As a tangible example, pensioners who previously pursued equities might now lean towards 30-year investment-grade corporate debt yielding between 5.5% to 7%.
2. Micro-Credit Cycles Shape Investment Opportunities: Credit cycles are not just major downturns; they can be a series of micro-cycles in different sectors. For instance, the energy and commodity bust of 2015-2017 was sector-specific, driven by changes in oil prices. During such cycles, credit sell-offs initially show high correlation, presenting opportunities to buy undervalued assets. An example is the decline in Permian credits from par to $0.70 on the dollar during the energy downturn, which contrasted with other credits falling to half. Alpha in longing the underpriced and shorting overpriced.
3. The Importance of Speed and Familiarity in Credit: Scott emphasizes that in the realm of credit investing, speed, and deep familiarity with names are pivotal. For instance, during the COVID-19 outbreak, when the levered loan market exhibited opacity, being prepared and having prior knowledge allowed them to rapidly respond to a bank's call, buying $500 million of loans within just 5 minutes. A bank needed to move $1 billion in loans due to outflows, and Scott's firm managed to secure $500 million of these within minutes, with $350 million concentrated in software loans, all at prices around 10% less than the previous day.
4. Evolution of Alpha in Credit Investment: From Liability Structure to Speed: Initially, understanding the intricacies of distressed markets and documentation provided the alpha in credit investment. However, as the markets evolved and the banks' role shifted from risk-takers to intermediaries, speed combined with a deep understanding of credits became the new source of alpha.
5. Building and Maintaining a Strong Investment Team: Scott underscores the value of constructing a well-aligned team with both depth and breadth in their expertise. He acknowledges early mistakes in hiring for depth only, which led them to adjust their recruitment process. Now, they test for three capabilities: depth of knowledge, networking abilities, and speed of decision-making. This helps ensure they have analysts capable of covering broad sectors while also being able to dive deep into specific areas when needed.
6. Rigorous Partnership and Communication: Scott emphasizes the significance of his partnership with Jon, highlighting their weekly meetings as an essential tool for consistent portfolio management. These meetings, held every Sunday for 7-9 a.m., offer both a chance to review their investments from a fresh perspective. This rigorous routine has ensured alignment in risk management and clear communication with their team.
7. Adaptability and Awareness: Scott notes that the shift from equity to yield has misled some into valuing illiquidity over liquidity. He suggests that asset classes with artificial sharps or low dispersion will be exposed, leading to a recalibration of fees based on manager performance, not just the product. Scott also stresses the importance of not falling in love with positions and the ability to avoid losses by selling assets quickly when necessary.
8. AI's Potential Disruption and Investment Dynamics: AI is viewed as a significant disruptor, potentially accelerating or decimating businesses. In the short term, it might enhance operations from cost and process standpoints, but some low-margin businesses might face severe disruption in the longer term. In the credit market, AI can change the dynamics of risk, bringing the "credit put" closer to the "equity put" if AI's disruption proves terminal for certain businesses.

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