Kieran Goodwin - Imagination, Volatility, and the Pursuit of Alpha

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best.
This show is an open-ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts and you can access all our podcasts, including edited transcripts, show notes and other resources to keep learning at joincolossus.com.

**SPEAKER_2** (1:48)
Patrick O'Shaughnessy is the CEO and founding partner of PositiveSum and the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of PositiveSum or O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of PositiveSum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (2:20)
My guest today is Kieran Goodwin. Kieran spent over two decades at the frontier of credit investing. During the global financial crisis, he was a partner and head of trading at King Street Capital, which grew from 4 billion to 20 billion while he was there.
He then left to start his own credit hedge fund, Panning Capital Management. In our discussion, we cover the state of private credit today, which forms of alpha he's most skeptical of, and the blend of EQ and IQ necessary for success in investing. Please enjoy my conversation with Kieran Goodwin.
So, maybe a fun place to begin is with the world of private credit. We talked a lot about it already today at lunch, but I think your take on it is especially interesting. Can you just give what you view as the state of the union of private credit today in capital markets and why you find it interesting as just a category to consider?

**Kieran Goodwin** (3:10)
The growth of private credit, you kind of have to start the conversation there. I mean, you had this asset class that was somewhat of a cottage industry around the time of the great financial crisis. And confluence events happened.
Probably the most important is that rates went to zero. So there was a search for yield that benefited spread product wherever.
But then also you had the Fed OCC rules where banks could not lend to companies greater than six times EBITDA.
So with private equity looking for debt to finance capital structures, private credit was a solution in a sense. And then as private credit equity had more and more dry powder, the results were doing well, there was more demand for private credit. So you just had an explosion of growth and this contraption set up of more private equity, more private credit, but still with 0% as so for a live or live at the time now so for and spreads being 550 to 600, getting 6%, the funds needed to lever themselves to get to 8, 9%. If you're an alternative asset manager and you're coming to an LP and saying, I can give you 5, 6%, no one cares. It's got to be like at least high single digits.
And what the allocators loved was there's no volatility. Jason Zweig at Wall Street Journal wrote a great article talking about how Cliffwater, who's not only consulted, but also in private credit, put out on a fund a 10 Sharpe ratio. He interviewed Professor Sharpe. I can't remember his first name. And Professor Sharpe was like, that's ridiculous, obviously, and they pulled it from it. But that's the world we're living in where there's this ultimate Sharpe ratios and everyone's like, there's no vol. And of course, there's vol to anything. Your car leaves the lot and it's down 30%. There's vol. It's just you're not marking it to market. So the difference between vol of what an asset's worth and actually marking it is different. So you've had this explosion and now we have rates much higher. So you have these loans that are five to seven year loans, loans made in 2019, 2021