Thomas Braziel (02:52):
For myself, I mean, I practice distress because people will give me money to do it, and I like to think that I have a little bit of an advantage over knowing the process really well, and then having the network, just like social networks are valuable in our field, and they’re incredibly valuable. I mean, it takes years to build up a network of credible people to do transactions with and to have deal flow with and to be able to get not only inbound, but outbound you’re “Hey, how you doing? What are you been working on? Anything… Clients and new capital, any cases you think you’re going to file?” Or even, we’re involved in Brazos Energy, which is a large Texas co-op that filed for bankruptcy, and to be able to transact 40, 50 million dollar trade claims, you need to have the credibility to transact.

Trey Lockerbie (03:34):
Sounds like you specialize a lot in bankruptcy. Both of your parents were bankruptcy lawyers, which is a fascinating place to start. I mean, you’ve earned your keep as well. You’re not an attorney, but you’ve certainly been in the space for a long time. Inherently you can understand there’s opportunity in bankruptcy because it’s somewhat of probably a mismanaged company that’s over leveraged, what have you, and you’re looking for a turnaround opportunity. But when you’re entering into a bankruptcy deal, is that, like you mentioned, the claims, someone’s got claims on some asset in the company, are you essentially going around and purchasing those claims from those people? So they’re getting money out sooner than they otherwise would have, and you now become, I don’t want to say debt collector, but essentially. Is there anything active beyond that?

Thomas Braziel (04:18):
So I’ll back up a second and get some background, but the answer is decently active depending upon the type of claim. So just to put all the cards on the table, I used to run a hedge fund. We did for a three Buffett special situations. I was trying to do a Buffet partnership, so it was I had my value and then I had my workouts. And he calls them workouts in the original Buffett partnership. Some call them special situations. And then I was also doing a little bit of distress on the side and I really started doing claims because I thought, “Hey, my parents are lawyers. I know a lot more than most people, and also I started really doing claims because I was running a tiny fund and I didn’t have prime brokerage with Goldman Sachs.

Thomas Braziel (04:59):
So if you want to buy distressed bonds, you really have to have access to those brokers and to the deal flow. And when you’re tiny, no one’s going to open up an account and work with you. So I really started doing it out of that was what was available. I was like, “Hey, no one wants to do this. I’ll do this. Hey, this is a nice little thing to be working on.” So what we do in that regard is you’re normally… Think of it as… I mean the best way to think about it is factoring or working capital solutions. Your kombucha company has a client, the client goes bankrupt. Now that person owes you $120,000 invoice. Well hopefully if it’s been delivered within 20 days of filing, we can pay a 100,000 for that to make 120. If it’s really a nasty bankruptcy and it’s likely be a zero or not a zero, but a very low recovery, maybe we can offer five to make 10 or maybe something.

Thomas Braziel (05:46):
So the idea is not double our money, which depends on IRR. Normally underwriting, we have a very high IRR, as you can imagine, because it’s a lot of work. There’s a lot of administrative. And then you also have to push back on claims. I mean, we have claims all the time. I mean, I can wheel a claimant on right now, come on stage here, and he could tell you sometimes the debtor’s counsel really push back on claims, sometimes totally unjustifiably, and we have to assert those rights. So that’s when we do get really active. For the most part we’re not, but that’s the… I don’t want to say the risk, but that’s the service we provide. I really try to take… And this is… I guess you could think about… Maybe guys that do just regular equity investing don’t think about it this way, but I really think of our business as a service business and I try to empathize and think about what does that person need to accomplish? How can I help them accomplish it?

Thomas Braziel (06:33):
And I think that empathy leads to better deal flow, more repeat business. Not that you want that much repeat business, but maybe repeat business from the professional. So for instance who’s our client? Is it the claimant or is it that claimant’s counsel who is going to have 10 claims a year because he’s a top attorney in Pennsylvania or wherever, Texas or Costa Rica. So that is a thing. And I really try to think of it as a service. We want to offer people competitive pricing with what… There are other firms that do what we do, probably 10. So you need to do more than just price, you need to offer the personal solution.

Thomas Braziel (07:10):
I always say, when someone’s selling their bankruptcy claim, if you had a claim with your kombucha company, would you be selling it because you had a bankruptcy claim problem? No, it’s because you probably have a cash flow problem. You’re like, “Hey, this is $120,000 of working capital tied up in a bankruptcy. This could be two years. This guy’s offered me a hundred. I mean, that’s within our margin and I don’t need to hire bankruptcy counsel.” So it is a server. So that’s the main bread and butter business that we do. And we also do what’s called a debt and possession business. Very similar to the alt lenders that you see out there, not too dissimilar to people you’ve had on your show, Baby Oak Tree type situation. We’re hopefully helping companies get out of trouble and restructure their balance sheet if it’s over levered or sell parts of their business or restructure.

Thomas Braziel (07:56):
And I think… We can really get on a bankruptcy soapbox, but one of the things people don’t appreciate is one of the things I think that makes the American economy so dynamic is you have this amazing venture capital arm. Just your kombucha company is able to raise capital, it’s quite efficient, people know what safes are. There’s a whole club of people who invest in startup companies and back entrepreneurs and things. But then the yin to that yang is the bankruptcy system that allows people to watch debts if it doesn’t work. You don’t go to debtor’s prison in America for having debts, and you can’t say that in other parts of the world.

Thomas Braziel (08:30):
And people say, “Oh, well, you don’t go to jail.” You don’t go to jail, but you’re basically totally out of the financial system if you go bankrupt. So you don’t see a lot of venture capital. You see private equity, but you don’t see venture capital and you don’t see… You see a lot of families that have a lot of money, they’re able to access banks, get a lot of that access as opposed to the a little more of a free market where any investor with $25,000 could probably invest in the venture capital deal.

Trey Lockerbie (08:59):
You brought up IRR, which is interesting. So when you’re weighing out your IRR, you’re just betting or you’re obviously projecting out how long it’s going to take to get to realize this investment, correct? So does that just come with time, understanding these deals typically take three to five years? How accurate can that number really be?

Thomas Braziel (09:17):
It’s very hard. And then some people will get claimants to say, “Oh, 80 cents and making a dollar, gosh, you guys are really making a great IRR. I’m going to get paid in three months.” I’m like, “Yeah, for everyone where it gets paid that fast we end up with a few that end up taking two years instead in three months or six months.” So it’s hard for us. I mean, we’re trying to be an insurance company, really. We’re trying to underwrite risk and on the whole be right. But we’re definitely getting it wrong a lot of times. But what you try to do is build in some buffer and also underwrite a portfolio of these things. So you try to not get too concentrated on a docket, you try to not get too concentrated on a type of claim within a docket if it takes longer, if there’s objections to it.

Thomas Braziel (10:01):
So it’s time, it’s experience, it’s time in the saddle. And also whatever you think it’s going to be, double it. But no, in all seriousness, it’s just a lot of experience. I’m very grateful that I’ve had investors over the years that have stuck with me when things are good and things are bad, and it’s not a free lunch by any stretch of imagination. It’s a lot of experience and time in the saddle. You can’t really teach it from a book, it’s not in a book. And that really adds to the value of it.

Thomas Braziel (10:28):
It’s not like if you work for one of these firms for a year or two, you probably learn a lot and you probably can go on your own and do a smaller claims for yourself, referrals club of people, but yeah, it’s just experience dude. And it’s knowing the procedures. If you know a bankruptcy place is confirmed, confirmation to… Confirmation, then you have confirmation order, you know what the days are, and then confirmation to effective date is 45 days, and you know those kind of statutory days and you can add it up, but you can always good extensions for all kind of reasons.

Trey Lockerbie (10:59):
I love this idea because it feels detective work and detective work feels very fun and exciting. So you mentioned books, I know you were reading Warren Buffet very early on. He was a big influence on you and you set up the fund in a similar way to his partnerships, as you said. But your first experience was not really that important that it was a penny stock, but it ties into this idea that you were fishing in shallow waters and really trying to find-

Thomas Braziel (11:23):
Shallow, very shallow.

Trey Lockerbie (11:24):
Some interesting ideas. So walk us through the story of that penny stock opportunity that really set you up.

Thomas Braziel (11:30):
So if you’re an entering investor, there is so… The world’s your oyster, there’s so many things up there. And it doesn’t have to be US, OTC, penny stock, things like that. It can be anywhere. It can be anything. So FNX Energy, when I first found it, it wasn’t true penny stock, it was selling for three cents. And I tried to buy… I found the story. It was on a net net screen, the numbers didn’t add up on the net net screens, because I saw the company file for bankruptcy said, “Oh, okay, this is probably nothing, but I’ll pull open the docs to you, what’s going on in the bankruptcy.” So I did. This is one of the things I want to highlight is… I mean, I guess PACER wasn’t around when Buffett was around. You had to go go to the local courthouse and even then you would have to be in your jurisdiction because they didn’t even have electronic files.

Thomas Braziel (12:14):
I mean, when I was a kid, PACER was only available in the clerk’s office, but by the time I was this age… When I was… I was like probably 20? When I was 20 or maybe 22, they had to be over 20, so 22, 23, you could get PACER on your laptop. So I was able to pull open the docket, look at the trustee’s reports, it was a liquidating 11. And I could see, “Hey, there’s this thing trading for…” At three pennies it was like a 200 or 250,000 dollar market cap. And I was like, “Hey, this company’s going to have a million bucks potentially to the equity holders.” And in addition to that, they have these what are called remission and restitution payments against the insider that defrauded the company.” So long story short, I thought, “Well, this is pretty intriguing. I wonder if this is right?”

Thomas Braziel (12:56):
And it was in the footnotes, it was in the footnotes. It wasn’t even listed as an asset, the remission restitution payment. So I called the trustee, and he’s just a nice amiable whatever, just the local trustee, and he said, “Yeah, these numbers are right. We’re going for remission restitution against a former insider that defrauded the company.” And I was like, “Well that’s interesting.” And he hadn’t even really put it together that, “Oh, by the way, there was going to be equity. There was going to be money returned to the equity in the stock trades. So I bought up, I think, 2 or 3% of the company. Not a lot. I didn’t even have that much money. I think I had 7,000 bucks or something in my Scottrade account, and I bought up some stock. And then I was telling a friend about it and then I was trying to get a block.

Thomas Braziel (13:39):
So I didn’t know anything about trading block. I didn’t know anybody in the industry. So I asked my one friend that I knew, I say friend, but the older gentleman that I knew that was a hedge fund manager, was the only hedge fund manager I knew. I didn’t know any hedge fund manager. And this guy, I was like, “Wellington owns a 20% block in this company. You think you could call Wellington and ask them if they want to sell it? I think there’s something here. I mean, it’s small, but I think I could make four or five times my money.” And the guy said to me, “You know, Tom, Wellington’s a very smart firm. If there’s something there, they found it, so there’s likely nothing there.” And I was like, “Huh, okay.” I’m glad I didn’t listen to his advice.

Thomas Braziel (14:19):
And what I started doing is I realized the way this company went public, it was a reverse merger pipe. So there were literally physical shares, an actual stock certificate. So I actually bought the stock certificate off the former chairman. And for him, it’s not that he wanted to sell it because he knew it wasn’t worth anything. He didn’t think it was worth much, and I told him, “I don’t know, man. I think the work out value in the bank could be good, because they’re pursuing this remission and restitution against a former insider, and then they’re suing the law firm he worked at.” And he said, “Look son, I’m in my 60s. I don’t want anything to do with this. This company was a dark time in my career,” because he was quite a famous guy in the SNL industry and they used his gravitas to help build the financing. So when this company went under, of course he had friends and colleagues in the industry invest in it. It didn’t look great. It wasn’t a bright time form.

Thomas Braziel (15:13):
He said, “Look, you send me a check for this stock certificate, I’ll get a medallion signature guarantored and I’ll send it out to you.” And we did it. I mean I wrote my own contract, I bought a block, paid 4 cents. I can’t remember the actual share denominations, but I bought about 10% of the company from him. When I say block, I’m just referring to a big equity block, like a 10% of a company or 20% of a company or 5% block of a company. So I was able to source that from that guy. I bought more later at much higher prices, but it worked out. I made 22 times my money, 23 times my money. Once you’ve had taste of making 5 times your money or 10 times your money or 20 times your money on something, you’re done. You’re going to work in investments.

Trey Lockerbie (15:59):
That $7,000 you had in your trading account, you were all in on this one idea. Is that the idea this concentrated [crosstalk 00:16:09]?

Thomas Braziel (16:08):
Yeah, I was all in, but I mean I was a kid. After I paid my tax, it was still a lot of money. And I was just like… I remember looking at the check and being like, “Wow.” I got the check on my… I had kids quite young, my little girl, her… I think it was her first or… It must have been her… Maybe it was her first birthday, but it was maybe her second birthday. It was on June 23rd. And the check came, cashier’s check from the bankruptcy trustee. And it was over a million dollar check. And I was just like, “Wow, I got to do this the rest of my life.” This stuff exists. It’s just hard to find, it’s a lot of work. Don’t do it for the money because you could spend two years looking and maybe your best idea’s going to come in year 10.

Trey Lockerbie (16:52):
Mentioned earlier that there’s no such thing as bad company, just a bad price. I’ve also heard you share this quote that you should find deals on Madison Avenue, not Canal Street, which brings up this idea that sometimes things are cheap for a reason, sometimes there’s not an underlying solvent business for that price. So how do you marry those two ideas, meaning price is what you pay, value’s what you get. But sometimes the value is questionable depending on the underlying asset involved.

Thomas Braziel (17:23):
I mean it’s experience. I see guys that are bottom fishers, both in distress markets and in value markets and equities. I think it’s a mistake to be too formulaic about the way you approach value. Anything that’s paint by numbers is almost by definition suboptimal. Now maybe it helps you mentally stay strong, but it can’t possibly be an optimal investment strategy, unless it helps you stick to the program, so to speak. And I think how do you marry those two ideas? So the idea of buying on Madison Avenue, not on Canal Street, what they were basically trying to say is be careful if the stuff is too good of a deal because it’s probably fooled gold. And I think that’s true in distress. You get stuff where it’s like, “Wow, they’re giving this thing away.” It’s like, “Yeah, it’s probably fool’s gold.”

Thomas Braziel (18:20):
Maybe you can get compensated for it, but I would just be careful. And I guess for me, that comes with looking at companies… I don’t, for myself, just from my time in the markets, believe, or at least for me it doesn’t fit my investment philosophy, that buying junk that’s cheap is somehow better than buying okay stuff at okay prices. I almost think it’s for me, and I say that as a distress person. And you think, “Well how does that fit?” When we’re doing distress there’s normally… There’s a whole… I think what people don’t understand about distress is there’s a whole spectrum of risk. You can be the guy that takes very little risk and you’re basically just being paid a premium because of complexity. But there’s very little risk in what you’re doing. You’re on one side spectrum, and you’re first lien loans, writing dips, things that are very, very quote unquote safe. I mean, there’s very little capital at risk, or I should say, what is it, permanent loss of capital potential.

Thomas Braziel (19:21):
And you can go all the way together into the spectrum and find stuff where you’re just punting and that’s fine. It just depends on what proportion your portfolio you’re going to punt with. And I say punt, that seems mean, but there’s stuff where you’re buying something for a penny and it’s just a litigation. So you can go the whole spectrum. And I don’t think people appreciate that about distress. They just think it’s all highly risky, and that’s where… What does Peter Thiel say? He says, “Tell me something you know about the world that everybody disagrees with you about.” And I think, I wouldn’t say people disagree with us about it, but there’s not an appreciation that there’s a whole Chinese menu or buffet that you can eat from in distress, and there’s salad that’s good for you. Probably pretty safe. Can’t expect to make 30% returns, but probably make very, very healthy it’s per unit of risk.

Thomas Braziel (20:12):
And then there’s chocolate cake. I mean, there’s stuff that is pretty aggressive and basically good, but extremely high octane. And finding that balance in anybody’s portfolio, I’m sure if anybody has a portfolio, they think about that their own position, like, “Okay, here’s some stalwart stuff and then here’s some spec, and I’ve got to keep it in proper proportion. So that’s how I jive those things is I don’t know that they’re mutually exclusive or they’re… I don’t think they’re talking past each other.

Trey Lockerbie (20:42):
You mentioned liens, and I know you’ve done a bit of work in with mechanic liens and things like that. You say buildings being constructed and this mechanic needs to get paid for his work. So what does the diligence process look like? You go on something PACER, you find this lien or this lawsuit or whatever it might be, listed, you approach them. And then is there a lot of diligence on the company itself to make sure they are able to pay it and they’re good for it? What does that look like?

Thomas Braziel (21:07):
Yeah, exactly. So you have PACER when you’re thinking of bankruptcies. When you’re thinking of lien or real property lien, you only need to go to that county where the real property is located. And I think one of the things early on you learn when you’re doing… I mean, I didn’t come up through lending, I didn’t come up through high yield or come up through fixed income or bonds. I came up really through just pure distress, doing claims and then moving on to loan. So I came from a different angle and you think, “Oh, well just think about this way. Anything that’s a lien doesn’t attach to… It can only attach to real property. It can only attach to property. It really can’t attach to a company.” So you’re always thinking of what’s your collateral. So anything with a lien is like, “Okay, what’s my collateral on this?”

Thomas Braziel (21:51):
And if you’re buying a mechanic’s lien, it’s a building, what’s that building worth? So you don’t even really need to know what’s going on with the quote unquote better or the company that owns the equity. It’s almost irrelevant. And then if you think about… We got involved in maritime. What’s the vessel worth, and where am I in the pecking order? Am I in front of the preferred ship mortgage, behind it? How much is this vessel worth? Yada yada yada. So you’re thinking about what the collateral’s worth when you’re buying liens. Those come up… We started buying them, I started buying them bankruptcy, and then I’ve done up you outside. You need to know how to collect on them in state court and things like that if they’re not in bankruptcy or not in chapter.

Thomas Braziel (22:33):
They’re great, they’re a fun little playground, but it’s hard for larger distress firms to make… There’s not enough meat on the bone for them to be that interested in it. So again, I met some guys recently and I’ve of course heard about people buying tax liens. Why do tax liens exist? Because there’s so unscalable. Once you get a certain amount of money or if you’re in a certain institution, you would almost laugh at the idea of going and doing tax liens, doesn’t matter how good the returns are. It’s completely unscalable.

Trey Lockerbie (23:00):
Well, that’s what’s so interesting about this idea right now, especially because with all these major asset prices at all time highs, a lot of people start looking for alternative investments and not really sure where to look. So something like this, it’s interesting because I’m sure a lot of our listeners are fairly small in their investment sizes, and this is a way to find some outside returns potentially. I mean, I’m not saying what you could do, because you’re highly specialized in what you do, but it just… Well, it’s an interesting example of Buffet’s early days at work living on and that this is still alive and well, this idea of special situations. Something jumps out at me about what you just said about you got to go look at the county. So what are you doing, reading newspapers in different counties all over the world and figuring out… There’s an issue with the building? Talk to me a little bit about how these deals come across your desk.

Thomas Braziel (23:54):
So we follow most of the bankruptcy filings, so that’s easy because it’s filed in PACER and you can either… There are a number of services. I don’t know, I think maybe Court Listener, which is a free PACER set up by a 501(c) charity. And I’m a fan of Court Listener, because when I click on documents… Because PACER costs money. You can get the documents for free on Court Listener. So those cases. And then the bigger bankruptcies they have what are called claims administration agents. So Prime Clerk, Stretto KCC, or is it KKC? I think it’s KCC. And there are a few others, but those are the big boys. So Hertz was on, I think, Prime Clerk. It might have been Stretto. I think it’s Prime Clerk. But you can Google these firms and put in claims administration agents they’ll come up and you can look at the dockets of big cases like, I don’t know, a Chesapeake or a PG&E, Hertz.

Thomas Braziel (24:46):
When you start talking about what you’re talking about, which is those liens and stuff like that, I don’t even have… That’s like a fire hose at me. I can’t possibly find all this stuff. Sometimes what I’ll do is I just have Google alerts set up for news articles about the distressed, or even if you have the Real Deal, which is really a real estate magazine, you’ll see people filing court actions that’ll get picked up in local trade publications, and you can just read those stories and be like, “Oh, they’re filing on this building. I should go to that county and look up that building. If there’s one lien, there’s probably 10 liens.” And you can go from there.

Thomas Braziel (25:23):
But you’re right, it’s so fragmented, I don’t… I mean, if somebody… There are, I think, some firms out there that claim that they’re maybe building tech to be able to gather all this information and therefore take advantage of it, put an investment strategy so they can scale it. I don’t know if one exists. I think you just came up with a business idea there, which is if you were able to somehow pull all this data in, that’d be great. I mean, one company which is called Zlien, basically it helped people file mechanics liens.

Thomas Braziel (25:52):
So one of the ways you can do it is you can frankly just watch their blog about people filing mechanics liens and how they had such a great experience because they were able to protect their rights, and they’ll they’ll follow news stories, and then all of a sudden, even on something like Twitter, someone’s filing against some school and you have some Twitter feed that might follow that, a distressed Twitter feed that might say, “Oh, Six Flags might file for bankruptcy,” things like that.” And, “Oh, all these guys that delivered,” literally this happened, roller coasters to Six Flags that filed liens on the property, because they were still in the middle of erecting some ridiculous roller coaster.

Thomas Braziel (26:31):
So it’s just reading the news, man. And you could get more systematic about it. But I would say that for the most part, anything big gets starts to get reported. I mean the problem with a lot of this stuff is it can be very, very small and it’s hard. And then if you build your network, you do get inbounds. But that takes 5 10 years of sending 10, 20, 30, 40 emails a day just to random solicitation emails, like, “Hey, I see you joined the Turnaround Association of America, I see you join American Bureau of Bankruptcy, American Institute for Bankruptcy,” things like that.

Trey Lockerbie (27:09):
It reminds me that as you train your mind, you start learning about investing, you start to realize that investing is everywhere. These opportunities are everywhere for you. You know where to look and you train your eye, how to do it. Shifting gears a little bit, one billionaire that we haven’t really discussed much on this show is Sam Zell, and I’ve heard that he’s one of your favorites. What do you like about Sam Zell’s approach and what do you think you’ve learned from studying him?

Thomas Braziel (27:36):
Well, first of all, his book’s phenomenal. I read it and I did the audio book. I’m not huge into audio books, but I have to recommend the audio book because he reads it himself and his voice is great. So highly recommended it as a Christmas gift, if someone’s looking for one. He wrote an article about grave dancing, it was called grave dancing. Basically this idea was, and I’m going to paraphrase, maybe someone who’s a real estate person would just totally break this part. But there are ways to come into situations, capital structures that are upside down, where you can inject some capital, be the first out, meaning you put in… Let’s say you’re just making round numbers, some hundred million dollar project that’s bankrupt. You put in a few million dollar, but your first out capital, and yet you get a lot of equity, if not all the equity, to basically help a bank or help some lender out that can’t take on… In his case it would be a real estate project gone sideways.

Thomas Braziel (28:32):
But in the case of yourself, it might be any project you know a lot about. You could say another drinks company that’s gone sideways. You put in a million, your million comes out first, you get a big chunk of equity and you rightsize the ship and you figure out out what their co-packing problem is. So there’s opportunities everywhere. And to me, he really exemplified that. And he started quite humbly as well, which everyone thinks they have to… I don’t know, people think they’re going to put the suit on and they have to become a big hedge fund or something to [inaudible 00:29:04] and get out there. And I don’t know that’s the case.

Thomas Braziel (29:07):
I mean, for myself, I thought the same thing and I had a hard, hard time scaling my hedge fund, and frankly I’ve done better not having a fund, just doing deals and building a reputation as someone who can do this and is, I don’t want to call trustworthy, but just is decently professional and can transact, and both give us capital to either do deals or guys who need deals built, some bankruptcy attorney or some restructuring professional that they have a client and the client needs money, and they need someone who’s going to get down the business and who can actually close and things like that. So it just takes a long time to build up. But you start really small. I think you just think you should really start with the unscalable and work your way out as opposed to… I think a lot of guys are immediately like, “Well this is not scalable.” I’m like, “Yeah, you’re 25. It’s just you trying to learn. You don’t need to be scalable yet.”

Trey Lockerbie (30:01):
What were some of the other challenges with your own hedge fund? Because you hear about it’s hard to scale, but is that so bad? I mean, if you’re getting deals and making your fees and you could probably still make a nice living off of a smaller hedge fund, is it always just scale or die when it comes to hedge funds or is there… Was that the issue or is there something else?

Thomas Braziel (30:21):
I think there’s a bifurcation in the market. You’re either a high net worth hedge fund, and that’s a particular type of product, or you’re an institutional hedge fund, and that’s a different type of product with a different type of cost structure. I think for the high net worth guys who can self promote, they can get on Twitter, they can go on podcasts, and it’s amazing the democratization of just people being able to get out there and pitch their investment process. That’s fantastic. And those guys can get by on 5, 10 million dollar funds. They won’t be living the life of Riley. They they’re really saving and they’re probably pretty young and they’re living humbly, but you can make it happen. And if you put up 5, 10 years of good performance, maybe get to 20, 30, 40, 50, who knows, maybe up to 100 million. And that’s a business. That can work.

Thomas Braziel (31:05):
The flip side of that, institutional grade hedge funds, I’m sure someone’s going to totally disagree with me, but I would argue you need way more than that. You need probably 30 million out of the gate, 50 million out of the gate. And you need infrastructure. You need compliance and high, high end service providers. Because you got to have them… A, because they are better, and B, because institutions not request it, they demand it. I mean, they absolutely demand it because they’re not getting fired over you. If you can’t check the boxes from an institutional standpoint, they will not allocate to you. But I just think in terms of… I’m just trying to share there are other ways to do it and go about, invest in capital and doing anything you love without just going that similar route of, “Hey, let’s just launch a fund.” Because some guys have gone IRA and separately managed account models, and other guys have gone research based models. Some guys are working internally with one client, maybe a family office or something like that. There’s just lots of ways to do it. That’s my only…

Trey Lockerbie (32:04):
Why are the costs so big? I mean, especially for your fund, were there just crazy attorney fees given that you’re dealing with bankruptcies and all these other issues that involve special contracts and reviewing and where does the cost essentially lie?

Thomas Braziel (32:22):
I think it’s service providers that… It’s a cottage industry. It starts out cheap and then people say, “Oh wow, there’s a lot of demand here. I can charge more. I can charge more. I can charge more.” So this cottage industry builds up. So all of a sudden it’s 10,000 or 25,000 to do something where basically the documents all look the same. And I don’t think that’s the big hurdle. I think the big hurdle is crossing the chasm between the high net worth hedge fund and the institutional grade hedge fund is almost impossible. That is a hard chasm. And the high net worth individual doesn’t necessarily have the same… They don’t want the same products as an institution might want. The high net worth guy is probably just looking at the numbers, maybe reading your write up, meeting you and being like, “Oh, I like you. You’re an entrepreneur, I’m an entrepreneur. I’ll give you a million bucks.” And that’s great, but they probably expect you to knock the cover off the ball for them.

Thomas Braziel (33:14):
And the institution is more like, “Hey, we want good returns. We also want a lot of risk control. We’re fiduciaries, we’re trying to target whatever, 8% in our pension here. We’re not allocating to you to swing for the fences, unless that’s a directive, which I guess there is the concentrated equity manager, which has become in vogue, I think with some institutional allocators, That puts a lot of risk on the GP itself, because they’ll pull their money if the GP has big drawdowns, I’m sure. But they say they won’t. But for myself, with doing distress, it’s hard because all the things are basically level two, level three. So meaning there’s no market price. If I buy a claim in Hertz, maybe I can use the bond, that’s a pari-passu to market, but for the most part I own that thing. And I could probably call some brokers and try to get a quote for Mark’s purposes, but it’s hard when you’re running a $5 million fund and you have, no offense, very low end service providers to be able to manage that and have a full compliance and investment evaluation committee around that.

Thomas Braziel (34:22):
Does that make sense? So it’s hard for the strategy of distress to fit in that emerging manager category. It’s a barrier of entry that a lot of the larger, call it, 50 million up, or even maybe 30 to 50 million and up, alt lender and distress firms, a luxury they have, really. That barrier of it’s hard to get the proper compliance and valuation oversight. I mean, you might have… If you take any big position, you might need a third party valuation for your end, and that can cost you 25 grand. So the actual bankruptcy administration isn’t going to do a lot. I mean it can, but that’s not really it. It’s more about just the cost of running something that’s really a bit high end, and the cottage industry for emerging managers doesn’t know how to handle that. They know how to check your Interactive Broker account to make sure that the stocks you say you own, they say you own, matches, and they can look up price on a Bloomberg, but they don’t know how to handle some of that ridiculously off the run no market type securities.

Trey Lockerbie (35:25):
You mentioned your investors expecting you to knock the cover off the ball sometimes. There is this unbelievable example or this investment that you did that I think encapsulates a lot of what we just talked about on this episode, and that was your Mt. Gox investment. So start at the top of this example. I know you’re going to try and spin it in a very humble way, but this is just such an incredible investment. Give us the lay of the land here with this, what you saw and how it’s panning out.

Thomas Braziel (35:54):
You know, I would just say that so much of your life in business, your personal life, and in investing is going to be serendipitous in the sense that I really believe so much of it as preparation meeting opportunity. I happen to be in the right place at the right time. I happen to know a lot about bankruptcy. I happen to know how to buy claims. And I just so happen to something I thought, “Well, wow, this is ridiculously asymmetric. If this works, yeah, this could really work, and I’ll get this ridiculously magnified return on probably the most volatile and interesting asset of our time.” So Mt. Gox was interesting. I mean, I tripped upon Mt. Gox reading the FT, and I saw the administration. It was probably year into the administration and there was an article in the FT. And I had known what Bitcoin was, but I didn’t think anything of it. I mean, I’m living, as we all do, I’m living in my own bubble.

Thomas Braziel (36:50):
And that’s the hard part about investing is this time period where you need to have your ears up and your antennas out and you’re looking, scoping out, trying to find opportunities. But then when you find something that might be interesting, you have to choose and choose wisely as best you can on where you’re going to spend your time. So for this, I saw the docket, I thought, “Wow, Japanese insolvency cryptocurrency claims. Wow. That’s amazing. That is really crazy. I wonder how you buy these.” It was out of curiosity. I wonder how you actually paper buying this kind of thing. And I thought, “Wouldn’t it be cool to buy one just to see if I could do it?” It was like someone saying like, “Wouldn’t it be cool to build a cabinet, see if I could just do it?” And there’s something like that. Someone.

Thomas Braziel (37:35):
So I did. So I went out there in the market, and it’s easy to read about the case. It was all in English and in Japanese, it was in dual languages, just because there were so many foreign creditors that they do everything in English and Japanese. So this is 2016, Bitcoin was probably at $300. I remember I bought some Bitcoin on Zappo and maybe on Coinbase as well, just to be like, “Hey, if I’m going to buy these claims, I should probably know what Bitcoin really is. People talk about it.” I bought one claim and I thought, “Oh, that’s really cool.”

Trey Lockerbie (38:08):
Where did you buy the claim? How did you find someone to sell you a claim?

Thomas Braziel (38:11):
So this is true in American cases, it’s not always true in foreign cases, and it just happened to be that a list of creditors, of approved creditors was… It is available if you’re a creditor in the court, but someone had actually leaked the approved creditor list, and I remember, hopefully this was pre-GDPR, but we had gotten ahold of the list and it’s all public there. I mean, I think there was even links probably to a newspaper where they had the list posted or at least in their servers or whatnot. But there was a list of approved creditors floating around. So I started fishing around and I figured, “Okay, I’ll start with the funny names because those will be easier to Google and find somebody that matches it, because John Smith’s going to be pretty hard to find. But your last name is Lockerbie, is that how you say it?

Trey Lockerbie (38:58):
Lockerbie, yeah.

Thomas Braziel (38:59):
That’s pretty, Trey Lockerbie, I might Google Trey Lockerbie and I’d look for a guy who was maybe into computer science.,Maybe he was into crypto, if he had it as an interest on LinkedIn or on Twitter, something, and maybe he’s the right age, maybe he’s below 35 and is into computer science or is somehow into cryptography and whatnot. So I started doing that and I basically found a few claims, bought them, and I didn’t think… At the time crypto was at 300, we bought the claims for a look through price of about $100 in Bitcoin. So it was an OK trade. It was like, “That’s an okay trade.”

Thomas Braziel (39:36):
This happens a lot of times in the life cycle with trades. It’s like a company you know a lot about. I don’t know, maybe if you follow Disney really close or something and you’re like, “This is an inflection point.” The real inflection point in the trade was 2018, I think when Bitcoin went to over 20,000, but it kind of pulled back, and the trustee was sold some crypto to basically raise a fiat. And we were able to buy the claim, where we were buying the crypto for free. And let me explain how. If you added up the cash in the estate and you added up the crypto, or you just added up the cash, leave the crypto for a second, and you divided by the outstanding claims, you were going to get about 450 to 480 dollars per claim, per BTC, per Bitcoin.

Thomas Braziel (40:23):
And we were able to buy them anywhere between 300 to 400 dollars. So we always knew we were going to get the 450 to 480 back in cash. And on top of the cash was Bitcoin. And I pitched this trade all over town in New York, trying to get a hedge fund to put in capital and let’s do it. And they were… People were like, “Hey, this is not that scalable, this is crypto. We’ll never get it past…” The common objection, too small, not scalable, it’s crypto. I’ll never get it past my investment committee. Or, “Oh, I get it. You’re getting free optionality, but what is Bitcoin even worth? I mean, let’s be real.” And I was like, “Yeah, I don’t know. I think it’s a real possibility it could be worth something, and it hasn’t died yet.”

Thomas Braziel (41:06):
Even at the trade I was putting it on, assuming Bitcoin stayed where it was, it was somewhere between the 8 and 10 X return. And that was in Bitcoin, I think was at about 10 grand. So we’re getting the Bitcoin for free. So our downside extremely limited. I mean, in my mind, practically zero, other than legal risk and cost of collection and IRR risk, and optionality and convexity was incredibly high. So I loaded the boat. I mean, my hedge fund at the time, we were actually winding it down, so we didn’t add any in the hedge fund, but I was able to get a family office on board, and since my hedge fund was winding down, we were making distributions. I mean, this is crazy and I would never recommend someone do this. I put all my personal money in it.

Thomas Braziel (41:49):
So I did that knowing that it was a little aggressive and maybe I did it out of spite for my hedge fund closing, but no, not really. I really thought it was an amazing trade. I remember I actually had a… The claims that we bought in the whole setup, I remember sitting at dinner here in London, where I am now, and one of my investors was coming through. And I remember sitting at dinner with him, trying to explain to him how great this was. And his just… And he is a nice guy and he’s very smart but just can’t be bothered to look at the spreadsheet that… I’m such a young, somewhat naive person just thinking that this guy at dinner, when we’re having drinks and dinner, wants to see my spreadsheet that I printed out where I lay out the convexity and how great this is and all this stuff.

Thomas Braziel (42:36):
And he’s like, “This is great. Yeah, whatever, whatever. Great, great, great.” And he just doesn’t… He did not care. Maybe I wasn’t very good at pitching it, but anyway. So I got a family office on board. We bought a few million dollars worth. I put all my money into it. And I’m going to say the rest is history, because we’ve been buying claims over the years, but now we buy claims, of course we’re not making 40 X, we’re buying the Bitcoin for about half price and maybe 60 cents on the dollar. So we buy them for a large crypto hedge fund that believes in crypto. And I have to say, I’ve spent a lot of time in crypto now because of this, and I’m a bit of a believer.

Trey Lockerbie (43:15):
This is incredible. And while you were describing that, I always think of The Big Short, that movie, and I was just envisioning you as the Christian Bale character sitting there being like, “I’m trying to buy some credit to Paul Swanson,” and these bankers laughing at them. This is you shopping this deal around town and getting laughed out the room a lot of the time. And then to even go from that and have all this conviction to put all your own personal money in it, that’s the brilliance here, when you know what you’re doing. I mean, I have to especially asterisk this and say you have to know what you’re doing, because it reminds me also of the Druckenmiller Soros bet of shorting the pound and Druckenmiller takes it to Soros and says, “I put 100% of the fund in it.” And Soros says-

Thomas Braziel (43:55):
You’re an idiot.

Trey Lockerbie (43:56):
Yeah, you’re an idiot. Why aren’t we putting 2 to 300% in this? So walk me through the idea of even getting the family office involved. Is that your leverage in some way you. What does that do for you to get them involved? You make some fees off of the deal shopping to them, but is there anything more to it than that?

Thomas Braziel (44:13):
I mean, so the original family office gave us your traditional… I shouldn’t say the exact numbers, but think of 2 and 20 and think about what they might have given us. It’s something not too far off that. I wouldn’t say it was… It was a lonely trade. We did have people… It’s funny, most of the time when I pitched it to the hedge funds, I would have the guy that I met with email me afterwards or messaged me afterwards, be like, “Hey man, it’s not good for the fund, but do you think I could get some of these claims for my PA?” I can’t tell you how many guys I had do that to me. And I actually did try it with a few people to get them a claim here or there.

Thomas Braziel (44:49):
Family offices are funny. I met them because I had been quoted in a Mt. Gox article about how I thought the case was going well, and I thought if the… It’s a long story, but if the Bitcoin gets returned to the original claimants, which there was some discussion where might go back to the company, then it’ll be a fantastic return for my investors and this is a great thing and whatever. So I’d been quoted in this little Forbes article about Mt. Gox and somebody that was into crypto who ran this family office just reached out to me. And I said, “Yeah, I’m working on this trade. Frankly I was closing my fund and I was trying to find a seed investor to start an institutional grade hedge fund.” And meanwhile, he was like, “Oh, would you mind working on this trade for me?” I was like, “Absolutely not. I’d love to. It’s a great trade. It’s a fantastic trade.”

Thomas Braziel (45:41):
But I wasn’t sure about him because I didn’t know him. Family offices, they might use a Gmail account and they might be in the second floor of a walk up office and you think, “Gosh, does this guy even have the money to invest?” I mean, he wasn’t that bad, but he was very, very legit. We transacted and got an LLC agreement together and the rest is history. So I get a lot of it, is we get carry and very small management fee to run the investment, but really it’s all carry. This guy wasn’t going by heuristics and then he thought, “Yeah, this person knows about bankruptcy. I know about Bitcoin. I believe in Bitcoin and I’m buying it really, really cheaply. So I’m getting a ton of convexity on the price of Bitcoin. So if Bitcoin 10 Xes, I make 100 X.”

Thomas Braziel (46:26):
That was always the trade. And like I said, the time he was buying it, he was buying it where he was getting the Bitcoin for free. So that guy is a fantastic investor, no one’s ever heard of him. And he runs around trying to find stuff like this. I’m glad that he thinks that Mt. Gox is the best trade he is ever done, but he’s, I’m sure, found tons of stuff over the years, and he is just a regular guy who’s just out there hunting.

Trey Lockerbie (46:52):
As I understand it, they’re still voting on, or they were considering for a long time-

Thomas Braziel (46:56):
Just confirmed, yeah.

Trey Lockerbie (46:57):
So walk us through this idea of what the issue there was as far as the claims and the par value of the Bitcoin versus appreciation. So talk to us about the issue there and if that has been resolved or not.

Thomas Braziel (47:08):
Oh my gosh, yes, so that’s been resolved. And what’s interesting about it, and I don’t want to get too… Well, I enjoy this stuff, so I apologize. But in American bankruptcy and in most insolvencies around the world, if you have a claim, Trey, if your kombucha company is owed $120,000 the day the company files for bankruptcy, how much are you owed? You’re owed 120,000. You’re not owed more than 120,000. So the question with these crypto exchanges that went under, and this one in particular, was what happens when the value of the property that you had at this brokerage goes up in value? Not a little bit, a lot. So who gets the increase in value? Do the claimants get the increase in value or does the company get that, and you just get what we were referring to as that damage claim, that $120,000.

Thomas Braziel (48:00):
So the question was, this has come up in a few jurisdiction, not just in Japan, is who gets that increase post petition? And it really hinges on whether Bitcoin is considered property, and if it’s considered property, then you should have a claim for the full amount of your property, meaning if you’ve lost 10 Bitcoin, you should have a 10 Bitcoin claim, no matter what that US dollar, fiat dollar value is. Or is it currency, and you should have this damage claim that’s calculated at the time of the petition, being… At the time they went under Bitcoin is at 400 bucks ish, so you get 10 Bitcoin times 400. Now that’s a much lower number than 10 Bitcoin times 50,000. So the question before the court was who gets that increase?

Thomas Braziel (48:47):
So this got litigated, but not really. What happened was the Japanese court punted on the question. They said, “Oh, we’re not really going to answer this. It likely is property, but let’s just switch it from a liquidation to,” what they call civil rehabilitation in America. We would say from 11… Excuse me, from a chapter 7 liquidation to a chapter 11 reorganization, and therefore everybody can consensually give the increase in value to the claimants without having to provide a legal opinion on whether Bitcoin is property for purposes of the Japanese insolvency code, or whether it’s currency and there should be a damage value and that’s all you get. So they punted on the question, which is genius. But they got the votes, an impaired accepting class, which is the claimants to vote in favor of it. And that was confirmed earlier this year.

Thomas Braziel (49:42):
Boy, things in the Japanese, and I can’t speak for the other parts of the Japanese legal system, but in the insolvency system move snails pace… Well, compared to America or American banking system, which people refer to as speed court. And I don’t know exactly what the question was, but it’s been confirmed and it was done consensually, because the impaired accepting class was the actual claimant. So just to be clear, imagine if Coinbase went bankrupt, God forbid, but imagine Coinbase went bankrupt. It’s your Coinbase account. This is what these guys had. They basically had Coinbase accounts from 2014, and Mt. Gox at the time was 70 plus percent of the volume of crypto, which at the time crypto wasn’t really crypto, it was just Bitcoin.

Trey Lockerbie (50:32):
Unbelievable, such an amazing story. And what an investment and what conviction. I mean, it’s so fascinating. It could be a movie, in my opinion.

Thomas Braziel (50:40):
I have some other great stories, none that have led to such a great workout. I think that you’re better off spending time in these areas, though. Stuff where people think you’re crazy to spend your time thinking about, I don’t know, longevity, going to Mars. I don’t know, kombucha, things that people think why would you spend a bunch of time on that? Everybody knows you’re supposed to go work in a PE firm. I just think that life will be more interesting and the opportunities will be more interesting if you find a road less traveled.

Trey Lockerbie (51:12):
I agree, and I’m often overwhelmed by just the sheer size of the investing universe. So talk to us, if you’ve got any advice we can wrap up with about how these retail investors can essentially filter down the opportunities to a much more appropriate size or something that fits their bill a little bit more. What would you recommend?

Thomas Braziel (51:31):
If they enjoy investing, but they don’t want to spend an inordinate amount of time doing it, there’s nothing wrong with the never sell David Gardener tin can stock type of approach. I think that’s eminently advisable to somebody that’s just going to buy Disney and own it for 20 years or 50 years and they have a day job, they like what they do. They work as an accountant or they work as a doctor and they don’t need to… I see people getting into danger when they think that they can armchair it. I’m not saying you can’t invest a little bit in the stalwart project, but why are you punting around on little alt coins? What are you doing? I think it’s a propensity… That’s not really investing, it’s just gambling. Again, it’s fine, you can do it, but just remember it’s entertainment. That would be my first thing that I see people do. And I just think why? Why?

Thomas Braziel (52:30):
But if it is of interest, try to hone in on something you really like. I mean, I met guys that rolled up all things, lawn care businesses, guys have gotten self storage because they like real estate and they came across a deal and they liked it and they stuck with it. Even for yourself, you’re going to learn a lot about running a company with your current company. I mean, you must think… I think there’s something to be said for pulling on the string of that. If you’re a doctor and you know, a lot about med tech, why not find some interesting med tech stuff to invest in? If you’re a bankruptcy guy, find some bankruptcy stuff.

Thomas Braziel (53:02):
If you know about CPG and brands and stuff, try to find some smart people that are launching their own brands or brands that are… It’s a hundred million dollar evaluation cap raised now, but it’s definitely going to be a billion dollar company, because I know the space and I really think that this is a brand that’ll get escape velocity in 10 years. Coke will want to buy them or something. So I just think that you should use your unique advantages, use your unique advantages.

Thomas Braziel (53:28):
And then the third thing that individuals can do that institutions cannot do is who cares if you have big draw down, who cares if it takes five years, ten years? If you’re a money manager and something takes five years, you’ll be fired before that works. If you’re in an individual, you should be using that into your advantage. So I actually really this book, it’s an autobiography about Bill Zeckendorf that’s a phenomenal book, and I had somebody push back to me on Twitter recently saying, “Oh, well he went bankrupt.” I’m like, “Yes he did.” I’m not saying be Bill Zeckendorf. But was a phenomenal person, and he did some amazing deals and had a great bite, so I highly recommend that book.

Thomas Braziel (54:11):
There was one book about the Orient Express hotel chain, which is fantastic. Again, I really autobiographies actually. I know a lot of people read Alchemy of Finance by Soros, but my favorite Soros book is Soros on Soros. And it sounds ridiculous because it’s not an investment book, but Marcus Aurelius, which was fantastic, Meditations and things. But those are books about life. But they’re important for investing. Buffet’s totally right. I mean, once you have a certain, I don’t know certain IQ, you don’t even need an IQ, as long as you have a certain interest in investing, it’s so much more [inaudible 00:54:46] once you pass that.

Trey Lockerbie (54:47):
I came to investing, stayed for the philosophy. That’s what I feel like has been my experience.

Thomas Braziel (54:54):
I love it. That’s funny you say that because I think I originally went… Buffett was such a north star. He still is, but he was such a north star for me growing up because he was such a fatherly figure for me in more than just investing. He was a gentleman, someone who had ethics and actually had some principles. There was a business, and then there was a philosophy to it.

Trey Lockerbie (55:20):
Awesome, Tom. Before I let you go, I want to give you the opportunity to hand off to our audience where they can follow along with what you’re doing and any other resources you want to share.

Thomas Braziel (55:29):
Oh gosh. I mean, I work for a few large family offices and one in particular. I’m on Twitter a bunch, not talking about stuff we’re working on, just because I can’t, and they wouldn’t like if I did. So normally I’m talking about stuff I’m buying with my own money, so clearly if I’m wrong, I’m wrong with you or I’m wrong and I’m losing money. I have no nothing to sell. Yeah, I’m around, and I love looking at weird and interesting stuff.

Trey Lockerbie (55:57):
I love it. This was a fascinating discussion and I highly enjoyed it. I think it’s a place we don’t explore very often on this, on this show, but there’s so many interesting opportunities abound that seems if you know where to look and listen. I’d love to do this again soon and I really enjoyed it, so let’s do it again.

Thomas Braziel (56:14):
Yeah man, thanks for having me on. Opportunity is everywhere. Remember that. Opportunity is everywhere.

Trey Lockerbie (56:20):
Love it. All right, everybody, that’s all we had for you this time. If you’re loving the show, don’t forget to follow us on your favorite podcast app to make sure you get the episodes automatically. If you want to share some feedback about the show, please reach out to me on Twitter @TreyLockerbie, and if you haven’t already done so, definitely check out my favorite new feature on TIP Finance, and that is the billionaire portfolio. Take a look at all your favorite billionaires and what their currently holding in their portfolios and then compared to your own. Just Google TIP finance, it should pop right up, and enjoy. And with that, we’ll see you again next time.

Outro (56:51):
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