FULL TRANSCRIPT
Slava Rubin (00:00)
In this episode of Smart Humans, we talk with Paul Horvath, who's the CEO of Orchard Global, the massive institution doing alternative lending with over $9 billion of AUM. With his incredible view, we talk about the state of the market. Will the U.S. economy go into recession? What will happen with rates? Is today a good day to be investing into yield-oriented products? And what are the best opportunities to find in today's market? We hear all about that and more in this episode.
Slava Rubin (01:00)
Hello and welcome to the latest episode of Smart Humans. I am super excited here physically in Miami at the Alt Global event with iConnections. We have these fast episodes here and we have with us an amazing manager. So Paul Horvath, who's founder and CEO of Orchard Global. Thank you very much for joining. So we always start with where did you come from? How did you get into the world of alternative investments? Was it something in your childhood, your first job, something from your parents? How did you get into it?
Paul Horvath (01:17)
Thanks for
Well, I'm glad you asked, because everything we do as a manager is quite unique, I think, to other managers. And it has to do with who we are, our unique experience, where we came from. So where did I come from? I actually came from Albuquerque, New Mexico. My name was, everybody referred to me as Pablo. You know, the banks are Rio Grande. My mother was a teacher.
teacher of the year, my father, he'd been at NIH, he was at Presbyterian Healthcare Systems, you know, taking care of people for 50 years. But, ⁓ you know, I tell my daughters this, coming from a flyover state where people have their feet on the ground, where people have much more economic challenges than on the coast, it really keeps us with a clear head.
when we go out into the big bad world of investing. My partner, our CIO, Texas, our kind of third partner, Colorado. So we're a bunch of New Mexico, Texas, Colorado people who lived in London for a long time and ⁓ worked for government agencies. And that mix really informs our investing decisions and our observations on the geopolitical landscape.
Slava Rubin (02:41)
Amazing and then how did you actually get into it? How did you you know decide one day? You know I'm gonna get into the world of alts or start or to global
Paul Horvath (02:49)
Yeah, so that too is very specific. I actually started after going to undergrad at Georgetown University. I started out at the Federal Reserve in the late 80s during the savings and loan crisis. And I was very junior at the time, so wasn't setting interest rates or anything like that. But I had a front row seat to an amazing investment idea that ultimately, 15 years later, 20 years later, I put into practice when we created Orchard. And it was this. I learned that he or she or they who bring capital
⁓ from the private markets to help the banks and regulators recapitalize the banking system during and after times of financial crisis can get paid ⁓ supernormal returns. And I said to myself and I said to my father, who's still alive in New Mexico, if I ever see an opportunity this good again, I want to be involved, but not as a regulator and not as an agent. I was at JP Morgan and Merrill Lynch for 15 years or so, but as a principal.
So when I went to JP Morgan over in Europe, really my bosses, geniuses, ⁓ they came up with a way for a bank to recapitalize without having to issue equity. They created the credit derivatives market and the portfolio credit derivatives market. Now it's commonly referred to as the bank regulatory capital or SRT market. And so we did a lot of that. ⁓ There was, you know, the regulations changed. There was the...
Basel 1 was the first one. we got to, it's 2007, and we were advising on a big takeover. We came up with a Basel 2, Basel 3 solution to the bank in 2007. We came up with a recapitalization solution to the banking crisis that the banking system didn't yet realize it had on its hands. There was one problem. I was working at a bank.
So what did I do? I started returning the calls from Abu Dhabi and Singapore. We were saying, get out of banking, team up with us, come to Singapore, let's do an asset manager together. And that's exactly what we did. So Orchard Global, truly global, ⁓ is, well, let's name that because for those of you who don't know, Orchard Road in Singapore is like the Madison Avenue of Singapore.
So I wanted a Singapore friendly name, Orchard, but a global name, because we're not an Asian manager, we're just a global manager that started ⁓ with significant operations in Singapore. Our biggest office still is in London, and our headquarters is in Houston.
And that's the final piece of the puzzle on our differentiation. You know, I got to know a little bit when I was at Harvard Business School, Warren Buffett, and he always pointed out that, you know, by sitting there in Omaha, Nebraska, he could think clearly about markets and not get distracted by the New York, San Francisco, London group think. All the hype. All the hype. Well, we kind of put that principle in place as well. We have a small New York office, but our headquarters is in Houston, Texas.
and very much in that New Mexico, Texas, Colorado, Western, libertarian, grounded, feet on the ground. ⁓ That's our secret weapon. And as I said earlier to my daughters, I'm like, when you go out in the big bad world, your New Mexiconess is gonna be your secret weapon. And we find that in investing as well.
Slava Rubin (06:09)
So
one of the unique things about this podcast is our guests actually opened up about how they actually invest their own net worth. So the typical allocation, the vanilla allocation is 60 % public markets, 40 % bonds. I'm guessing that's not your personal allocation. So what is your public markets, bonds, alternative investments allocation? What are those three percentages in 100 %?
Paul Horvath (06:32)
Yeah, that's an easy and short one. We do fixed income alternative assets. And because it's giving a coupon, I don't need the liquidity. So I'm 100 % in our stuff. And it's not only because, you know, our...
Slava Rubin (06:45)
Meaning
0 % in public equity.
Paul Horvath (06:47)
0 % in public equities, 0 % in public debt for a very simple reason.
Slava Rubin (06:52)
100 % alternative investments. 100%. All your own stuff.
Paul Horvath (06:55)
with the exception of one or two other real estate funds. But there's a reason. It yields a lot.
I'm getting that quarterly, so I don't need the liquidity. Why would I do anything else?
Slava Rubin (07:10)
mean, this is not investment advice, but that's fascinating. I thought I had a lot. I think I'm in the 80s or 90s percents of alternatives, but you're like almost 100%.
Paul Horvath (07:17)
Now here's what I do miss out on. Because of that, I didn't go into the latest venture. Those 10X, 20X, 30Xs I miss out on. But actually, we chart this stuff. If you can make 15 to 20 % every it compounds bigly. we actually, across my personal portfolio, have never had a negative year.
when I was at JP Morgan, we divided the world into get rich funds and stay rich funds. We're stay rich. Got it. know, capital preservation, lots of diversity, low volatility.
Slava Rubin (07:55)
How about crypto? Any exposure to that? No. Zero.
Paul Horvath (07:59)
No, ⁓ zero. And I know there's a lot of smart people this conference and there's a lot of smart people around the world who understand that. I guess I'm just too old school for that. Again, I to always refer to Warren Buffett. He's an amazing man, an amazing investor. But if we don't understand it, then we're not going to invest in it. And I still don't understand crypto.
Slava Rubin (08:20)
collectibles or art? Are there any investments you're doing there?
Paul Horvath (08:23)
Yeah, mean, ⁓ yes and no. Really hobby stuff. ⁓ Our respective wine collections have become, ⁓ they started as a hobby, but they're turning out to be a better investment than we expected. But no, know, again, we're feet on the ground.
Slava Rubin (08:26)
Beyond like a hobby
Paul Horvath (08:43)
banks of the Rio Grande. I literally, my house in New Mexico, we literally live in the banks of the Rio Grande. And, you know, between skiing and horses, we're not fancy people. We're pretty true to us. You're not going to see us at the Sotheby's Art Auction. ⁓ You know, we're not buying a basketball team or a football team. And by the way, the people who done so have done very, very well. That's just not who we are.
Slava Rubin (09:04)
Got it. Thank you for sharing all that. In terms of the economy or the market, what is Paul's point of view on that? What is your point of view on that? And that is a very open-ended question that you can take, because you just have such an incredible view on the market.
Paul Horvath (09:20)
Yeah, so I'm ⁓ and I've been really, you know, kind of screaming this from the, you know, from the from the mountain. ⁓ So the other side of our perspective is I spent 17 years of my life in London. My partner is the same. So we have even though I'm painting this this nice Western idyllic picture, we have had our foot in both the European and the US and indeed the Asian markets. ⁓
I have ⁓ rarely have I had as much conviction as I do on the following. I have never seen the US and European economies and politics and geopolitics go in such radically different directions than they are now. As a hobby, when I'm not buying, when I'm not at Sotheby's Auctions, what I am doing things is things that...
I care about. I care deeply about the Transatlantic Alliance. I think it has been responsible for more peace and prosperity than any other treaty in the history of the world. It delivered two and a half billion people from one meal a day to three meals a day, plus buying iPhones and refrigerators. And for that reason, that's why I'm involved with the Munich Security Conference. And I was just there and I told my European friends this. Here's how I see these economies going in different directions. And I see it as...
irreconcilable differences. ⁓ In the US, I would say the tech bros who have a lot of power, both financially and more recently politically, are looking at the following. We have an existential threat. The West has an existential threat, and it is Cold War 2.0. Cold War 1.0 was with the Russians around nuclear weapons. Cold War 2.0 is with the Chinese around digital dominance. And in order to win, we need to have an aggressive energy policy.
You know, all of the above, yes, solar, yes, wind, yes, nuclear, but yes, hyperscale in the Permian Basin, yes, fossil fuels. You know, the way they look at the world is industrial energy and data centers right now is around 8 cents a kilowatt hour in the US. If they get their way, if Elon Musk gets his way, we're going to hyperscale the Permian Basin, and we're going to get that down to 2, 3, 4 cents a kilowatt hour. ⁓ And understandably,
Don't regulate tech. So that's the US. Now let's go to Europe. Everything's the opposite. They want, you know, net zero yesterday. And guess what? Germany electricity is at 40 cents a kilowatt hour. That's why nobody's building any new plants in Germany. ⁓ And on the regulation, this is an unbelievable, I bet you a lot of your podcast listeners don't know this. European governments collect more revenues
by fining American tech companies than they do from taxes paid. And they have pretty high taxes in Europe than taxes paid by their own tech companies. That's wild. It is wild. It's the wrong way around. And I say this, it makes me sad. I actually have, ⁓ it makes me sad. My wife is European, my father's European, my kids are European, they all speak German fluently. ⁓ It's sad to see them going in the wrong direction.
Slava Rubin (12:33)
You
short Europe?
Paul Horvath (12:34)
Well, so this is really interesting. And I said this to the German finance minister, Munich Security Conference, even though if I were an equity player, I would be short Europe. But what we do is we're lenders. And if you're lending, actually Europe, because it's not as dynamic as the US, is where we're putting 85 to 90 % of our marginal dollar is going into Europe.
Slava Rubin (13:01)
stable.
Paul Horvath (13:02)
because lending is different, debt is different than equity. ⁓ If you're an equity or venture investor, you want to be in the US for all the obvious reasons. Hyper growth. Hyper growth. And by the way, when the economy is growing at 4.5%, that's great for equity, but ⁓ you don't want to lend to that. Spreads are too tight, asset prices are too high, so when there's defaults, recoveries aren't as good, and you don't get covenants. Europe, which didn't do banking union.
didn't do monetary union, doesn't have a BDC market like we have here in the US, doesn't have a well-developed securitization market like we do in the US, doesn't have the CLO market. Their banks are deglobalizing Brexit and all the rest. Because of all that, I can make a loan, because that's what we do, I can make a loan in Europe at 200 to 300 basis points wider than here in the US for given risk unit. So I told the German finance minister of the Munich Security Conference,
who said, how do we get investing more in Europe? I'm like, dude, we're there already. that's great. I said, that's a bad thing. Because we're able to get more. So debt versus equity is different. so yeah, now ⁓ I wouldn't lend money to a European company for 20 or 30 years. We're three, five, seven, because I think the headwinds that Europe have are significant. They have incredible demographic challenges, regulatory challenges.
taxing challenges, welfare state challenges. ⁓ so, ⁓ you know, but by keeping our feet on the ground, being those New Mexico, Texas, Coloradans who can go to Europe and say, hey, there's amazing opportunity here and executing on it, that's how we differentiate. Got it.
Slava Rubin (14:49)
So, lightning round here. ⁓ 12 months from now, I have you back. Recession or no recession in the US economy?
Paul Horvath (14:57)
No recession in the US economy.
Slava Rubin (14:59)
Same timeline, ⁓ interest rates are flat, up or down.
Paul Horvath (15:03)
down 50 to, remember I was at the Fed, ⁓ down 50, I'd like to say 100 basis points, but it's gonna be 50 to 75.
Slava Rubin (15:12)
50 to 75 basis points, okay? How about inflation, flat, up or down, 12 months from now?
Paul Horvath (15:17)
So inflation, ⁓ so 12 months flat to up a little bit, but I'm gonna change that. Two, three years out, inflation has to kick in, very simple reason. We owe $40 trillion. The only way, well, you can grow your way out of it, we're working on that. You can immigrate your way out of it. That's up in question now. But ⁓ you're gonna have to inflate your way out of it.
Slava Rubin (15:44)
So 12 months from now, what's your answer?
Perfect. I love the specificity. Unemployment? little months from now?
Paul Horvath (15:58)
Higher higher. Yep. Yeah, I we all know what's going on with AI ⁓ and ⁓ I Think it's gonna be the first number is going to be a four but the second number is probably going to be an eight or a nine
Slava Rubin (16:03)
much higher.
We're almost at five.
Paul Horvath (16:12)
So 4.8, 4.9. I'm trying to keep it there down.
Slava Rubin (16:16)
⁓ The stock market, it's flat, up or down 12 months from now.
Paul Horvath (16:20)
You know, I like to say that we really don't ⁓ have a view on that stuff. I'm gonna say flat because I think it's overvalued, but because I'm saying there's gonna be some inflation and I can't, this whole AI boom, I mean, there will be a correction. I just don't know if it's gonna be here from now.
Slava Rubin (16:39)
Perfect, thank you for playing. ⁓ So you just have such an incredible view of the alternative lending market. You've given us this perfect, unique perspective on Europe versus the US. Can you give me one other omniscient macro trend that you're seeing?
Paul Horvath (16:59)
And it's okay if you Yeah, no, no, I'll tell you. And this actually, I'm glad I thought about it. One of the things by growing up and living in New Mexico, it's one of the poorest states, is what is going to drive economics, macro, and politics is what I call the great divide. In this country, in Western Europe, and in lots of places, if you're in the top 10 or 20 or even 30%, you're gonna do just fine. But man, that bottom 65 % in this country,
It hurts. If you look at things like credit card, you know, the inflation that we've had since 2021, it's been profound. The official numbers are it's up 21%, but the Everyman index, it's like things are 35 % higher than they were, and wages are not up 35%. The current administration is doing some things to help recently, but, and you can see that in numbers like the following.
Credit card debts went from 700 billion to 1.2 trillion over that period, and they're borrowing at 25%. That is unsustainable. did they do it to go by Ferraris? No. They're feeding their kids based on that. And that is going to be a ⁓ problem politically. You're going to see it in the affordability. You're going to see it in the 26 ⁓ midterms. Again.
Trump and company are doing lots of things to help that, but you can't reverse what the previous people did. But I think it's going to be major in 28. And here's a prediction that you may not be hearing. I think politically, we can all say who we think the Republican Democratic nominee is. I think before the 28 election, there's going to be like a populist style, like AI backlash. I I think before the 28 election, instead of the boogeyman being China or Russia or whatever,
it's gonna be like those science fiction movies. It's gonna be the people to pitchforks against the machines. And the tech bros ⁓ better be ready for that because there's gonna be some targets painted on their backs.
Slava Rubin (18:59)
It's a hot take.
All right, and then the final thing is we do the predictions for three years out. We like to put you on the spot and keep your seats for three years out. So give us one pick for the public markets, and I know this is not financial advice and it's not your focus, but we always like to get a pick. Give us one public markets pick and why, and then give us one pick that's not public markets and why.
Paul Horvath (19:23)
So this is a little bit nerdy, but it does qualify as public markets. ⁓ In three years time, the yield curve is going to be steeper, and I would say much steeper. Why? Because everybody is too indebted, and we've got to repay our debts. Exactly, but the inflation. ⁓ So the 10-year and the 30-year are just going to have to yield higher because that's what we're going to need to do.
Slava Rubin (19:40)
Back to the inflation.
So what's the ticker I need to buy?
Paul Horvath (19:52)
Well, there's some ETFs that look at the steepness of the yield curve. And so that's public markets. Private markets, ⁓ here's my prediction. Right now, there's a lot of ⁓ uncertainty in private credit. And it's really around one or two managers who got their asset liability management long on retail and in high net worth. And they're going to work through that or not or whatever. I think that's kind of manager specific.
but I think that's gonna wake everybody up. And I think the big pick, and I think this is ⁓ relevant to many of the people who listen to your podcast, is I think that there is going to be a renaissance, a significant growth in retail and high net worth investors through their 401ks and other things in alternative assets, private markets, because I think this hiccup,
will cause everybody, the practitioners, the regulators say, okay, let's not throw the baby out with the bathwater. It's totally fair and understandable that the high net worth investor or even the retail investor should get the access to the same good stuff that the sovereign wealth funds and the pension funds have. We just need to get the platform right, the asset liability management right. So my big prediction is retail and high net worth. And please do ask me back, because I will be right on this.
they're gonna play a significant, much more significant role in private markets, private credit, alternative assets than they do now.
Slava Rubin (21:25)
love it. That's why the podcast exists. Paul, thank you so much for coming on. You're obviously so smart, so accomplished, and have such an incredible view across the markets and all these assets. Thank you for spending the time here.
Paul Horvath (21:35)
Thanks for having me.
