Private Credit: Canyon Partners' Rise and Investment Insights

Josh Freeman, co-founder of Canyon Partners, built a $26B private credit firm, emphasizing independence and contrarian thinking in investment decisions.

### Josh Friedman: From Harvard Physics Major to Canyon Partners Co-CEO
* 📈 Josh Friedman co-founded Canyon Partners in 1990 with his best friend and Harvard Law School roommate, Mitch Julius, focusing largely on **private credit investing**.
* 💰 The private credit market, estimated to reach **$2.8 trillion by 2028**, has grown significantly due to the **faster and more efficient financing** it offers compared to commercial banks.
* 🏦 Despite concerns about the risks posed by unregulated private credit firms, Friedman believes that the market's **diverse forms and lower leverage** make systemic issues less likely.
* 🏠 Opportunities in real estate credit have emerged as banks have pulled back, with challenges often surfacing when properties face **refinancing or vacancies**.
* 📉 Friedman takes a contrarian view on interest rates and the economy, attributing the avoidance of a recession to **strong fundamentals and fiscal stimulus**.
* 🧠 The best investment advice Friedman received, inspired by Charlie Munger, is to be **patient and disciplined**, avoiding the common mistakes driven by **fear of missing out or envy**.
* 🎓 Friedman emphasizes the importance of **education**, pursuing **what you love**, and choosing **good partners in business**.
* 🌟 "You can't do something because it's financially rewarding and expect it to be financially rewarding. Usually, the financial rewards come from you **doing something that you like and that you're good at**."

If you take a step back, the private markets in general have exploded at the expense of the public markets. I think people overreacted to the Fed raising short-term rates and just anticipated a much worse outcome than what we've actually seen. You've got to think independently. You've got to be a contrarian. And you can't be motivated by fear of missing out or by envy. Canyon Partners co-founder and co-CEO Josh Freeman always knew he would run his own business one day. From the time I was very young, my dad would say to me, You have to go to Harvard. And when you're done, you have to have your own business. He just never thought that business would be an investment firm. What I really wanted to do was I wanted to run a tech company. I got a little bit waylaid in that trajectory because Goldman Sachs was particularly good at recruiting top students at law school and business

school, and he never left finance.
Freeman started KENYON in 1990 with his best friend and roommate from Harvard
Law School. The firm focus was largely on private
credit investing, a market that has soared in popularity in recent years and
could reach $2.8 trillion by 2028, according to Morgan Stanley estimates.
I think people figured out quite correctly that there was an opportunity
to move quicker and more with more alacrity to help finance private equity
firms that were growing quickly and move quicker and more efficiently than
commercial banks. Today, Carney manages more than $26
billion with 200 employees across seven global offices.
Not bad for a kid whose first degree was a bachelor's in physics.
So for those who aren't investment aficionados, what does Canyon Partners
do? What kind of firm is it?
Canyon is basically a credit firm. We focus on things that are
intellectually challenging and complex.

as opposed to middle of the plate types
of things. So we started our careers as Canyon,
focusing on distressed debt. We've widened that viewpoint quite,
quite a bit to encompass structured credit, real estate credit, things that
are transitioning from complex to simple arbitrage, things of that sort, things
where there's a very high payoff to doing thorough and complex research.
So credit is very popular these days. Private credit has been seen as one of
the great growth areas in the investment world.
Why is it that private credit is so popular these days as opposed to ten
years ago or 20 years ago? I think if you take a step back, the
private markets in general have exploded at the expense of the public markets.
Part of that's regulatory. Part of that is just structural in the
market. I think private credit particularly
exploded when the banks took a step back.
I think people figured out quite correctly that there was an opportunity
to move quicker and more with more

alacrity to help finance private equity
firms that were growing quickly, moved quicker and more efficiently than
commercial banks. And the banks would say, well, the
private credit firms that are now dominating this business, large private
equity firms, firms like yours, they are not regulated.
So the banks, when they lend money, they're lending money typically off
their balance sheet or money from the FDIC, guaranteed.
And therefore they have some constraints on what they can do, and they're often
regulated by the Federal Reserve. The private equity firms that have
private credit businesses or private credit firms that just do private credit
or credit kinds of investments. They are not regulated.
So therefore, the argument that the banks make is that maybe these firms are
not going to be really doing good deals and ultimately there'll be a problem
when they when the economy slows down. How do you respond to that?
I think it certainly could be correct.

I think private credit has a lot of different forms and varieties that straight down the middle of the plate. UniTranche lending, which is basically first lien plus second lien combined into one. That layer of the capital structure has gotten to be very crowded with the with the explosion of private credit firms who have grown based on that product. And at this point, you could argue that's probably too much credit availability, chasing too few deals. So there's probably a half a trillion sitting on the sidelines. And as a result, spreads have come down, rates have come down, that the depth of lending has gone up and the covenants have weakened. Generally speaking, the private credit world is operating with with sophisticated investors who take a certain amount of risk and with much, much less leverage applied to those loans. The leverage in commercial banks is generally much higher than the leverage you see in private credit.

So the problems, while they might arise
here and there, are much less likely to be systematic or existential for the
financial system in the way that we saw in 2008 when banks were way
overleveraged with a lot of not very good credit products.
Mostly in that case, real estate based. Somebody gives you money to invest in
private credit, one of your private credit funds.
What kind of rate of return should they reasonably expect?
I think it depends on what they're doing, what those entities are
on things like distressed. I think we expect that to be mid-teens
to 20% on things like close average returns have been, you know, north of 15
and less than 20. They've been in that range very
consistently for many, many years. Let's talk about real estate for a
moment. It is generally the view that large
cities like Los Angeles, San Francisco

New York, Chicago have office buildings
that are not being occupied that much because people work at home.
And also the rents have come down a bit because they can't fill these empty
spaces there, and because interest rates are so high, the overall cap value of or
capitalization rate for these buildings is lower than it used to be.
So there is a view that the banks have on their balance sheets senior debt and
mezzanine debt that is not worth 100 cents on the dollar, maybe not even
worth $0.50 on the dollar, but they're not selling it in the enormous
amounts that people would have expected. Why is all this bank debt for real
estate not on the market and being sold by the banks now?
Well, some of it is. And what what happens in real estate
with banks is typically the problems don't happen until maturity happens or
you need a refinancing and it's not available, or rents turn over and or
tenants turn over and now you have

vacancies.
Some of these buildings are literally obsolete.
David, I mean, there are buildings that were built in 1960 on
Third Avenue here in New York that have been recapped so many times with money
coming out and more and more debt and with pop.
Migrating to different areas with brand new buildings that look completely
different from older buildings that might have lower ceilings and not the
right kind of infrastructure. Some buildings are just completely
obsolete, and there's a lot of that. I've heard estimates as much as 20% of
the office building stock in the United States.
So it takes a while before those problems hit, and sometimes they're not
really fixable through the capital structure.
Sometimes those properties are actually worth whatever the dirt is, minus the
cost of carting away the structure. Opportunities in real estate tend to
start at the top of the capitalization, and they work their way down.
So the first opportunities are good

properties that just weren't
anticipating 6% interest rates. They were anticipating 3% interest
rates. And when debt becomes, do they have to
figure out a solution to that problem? Eventually you work your way down to the
problems of buildings that have substantially
large vacancy rates and are almost not re tenants, both because they're so
obsolete. And we'll see those and we have seen
some of those already, but they tend to be when there's a moment of default or
crisis. Now, with interest rates as high as they
have been for the last two years or so, the general view was for a while that
we're going to have a so-called hard landing, which is a euphemism for a
recession. We haven't really had that.
How did we avoid a recession, given how high interest rates were?
You know, I've been a little bit of a contrarian in the last couple of
years, and I think now I'm probably a

little more consensus-driven in the sense that I kind of agree with the concept that rates are not likely to come down until after the election and that the economy is starting to see a little more signs of shakiness with consumers and where they're spending their money and so forth. But I think if you go back, if the economy is strong and I think people were so concerned about higher rates and yet there were some there was so much fiscal stimulus built up in the economy, unemployment was extremely low. Consumer balance sheets were extremely strong, Bank balance sheets weren't particularly leveraged. I think people overreacted to the Fed raising short-term rates and just anticipated a much worse outcome than what we've actually seen. I really wanted to do something on my own. I wanted to have a shot at having my own business. Let's talk about your background. So where were you born? So I grew up outside of Boston, in a suburb.

Now you got into Harvard, so you must
have done reasonably well in high school, where you were like first in your class
or something like that. I was I had the benefit of parents who
thought that education was the path to having the kinds of alternatives and
flexibility in what you did in your life.
And so that was a major focus of my parents.
So when I became a good student, they were constantly leaning on me to be a
better student. So you went to Harvard and you graduated
summa cum laude? I did.
Now, Summers, that is the highest you can get.
But you also won a martial scholarship. Martial scholarships are given by the
British government to the best academic students in U.S.
colleges, as I understand it. So you must have been one of the top two
or three people at Harvard academically to get a martial scholarship.
Is that right? I was ranked in that very top of my
class.

I was a physics major.
I think there are plenty of people in my class at Harvard who are an order of magnitude more naturally blessed than I was with.
Why did you want to be a physics major? That's not the easiest major.
It. Well, it isn't.
It isn't. If you're really good at math and science, it's a lot more predictable than trying to rely on someone to grade your essay in history. And I loved math and I love science.
And I thought I was really good at it. And then I got to Harvard and I encountered people who just didn't study and just knew everything, and they were brilliant. So you became a martial scholar and you studied at Oxford? Yes.
And did you get a degree there? I did.
I got a degree in politics and economics.
So I wanted to do something that was completely different, something unlikely to be exposed to in the future, in my at

least in my education.
Now, a number of times when people go to Oxford as a Rhodes Scholar, martial
scholar, they come back and they get a degree back in the United States that
might help their career like a law degree or medical degree or business
degree. But you've got a law and a business
degree. Did your parents say, you know, enough
studying already, get your career going? It was almost the opposite.
My dad didn't know a lot about career paths, per se, but from the time I was
very young, my dad would say to me, You have to go to Harvard.
That's because he was from Boston, and that was the school he knew that was the
best school for someone brought up in his neighborhood and in Roxbury
back then. And he said, You have to go to law
school and you have to go to business school at Harvard.
And when you're done, you have to have

your own business.
Don't work for people, and don't be a lawyer, or at least don't do it for
long. Right.
So you graduate, and you get all these degrees.
What did you want to do with that? Well, what I did was different from what
I wanted to do, David. What I really wanted to do was I wanted to run a tech
company. And tech back then meant electronics.
I mean, signal processing at MIT, all those companies that were located
outside of Boston on Route 128. Eventually, I wanted to own one of those
companies and run it and so forth. I got a little bit waylaid in that trajectory because Goldman Sachs was particularly good at recruiting top
students at law school and business school.
So I thought, well, I'll go to Goldman Sachs for a few years.
All right. So you were at Goldman for a few years,
and presumably you're a pretty smart guy.

You'll rise up.
Why did you decide to leave Goldman? And why did you decide to go where you went?
My roommate from law school and business school, Mitch Julius, who became my partner at Canyon when we started the firm in 1990.
Mitch was a bankruptcy lawyer who decided he didn't want to be a lawyer.
He was writing articles on investing in the 1983 recession, and one of the investment strategies he was writing about was buying junk bonds.
And he came out to L.A. to interview Drexel and Mike Milken, and he ended up joining as a bankruptcy analyst.
He overheard Mike saying he really needed someone to call on private equity firms and try to get them to use high yield bonds as a financing tool.
And he said, hey, you should call my friend Josh.
And so I. I got a call from Mike and three weeks later, I, I left. Right.
So you have these degrees from Harvard.

degrees from Oxford, top of your class,
practically everywhere you go. Goldman is the pinnacle of the
investment banking world. Drexel, while Mike is brilliant, was not
considered in the league of Goldman in terms of prestige.
Did your parents tell you, you know, you're going from the top to a place
that's kind of, you know, new boy on the block?
I knew exactly what he was doing. One of my friends at Goldman and I had a
little file box of all these entrepreneurs doing transformative
things in the capital markets, people who were doing bootstrap transactions,
which is what they called leveraged buyouts back then.
There were maybe two handfuls, three handfuls of leveraged buyout firms at
all. And Drexel's mission was to try to do or
Mike's mission, at least for me, was to try to get these private equity
firms not to deal with Equitable and

Prudential and CNR and Northwest Mutual to try to finance their deals, but rather to use high-yield bonds, because we could be quick. Her more efficient and and really facilitate a much higher velocity of transactions and much more certainty. Right. So you get the Drexel. What year was that? Yeah, it was 1984. All right. So Drexel is doing really very well. But eventually Mike gets into trouble legally and eventually go Drexel goes bankrupt. So were you at Drexel when it went bankrupt? Yes, I was. What was that like? That they had filed for bankruptcy. Were you shocked? No, I wasn't shocked. I think you could see the cracks in the foundation as much as two years before. So I was already planning an exit whether or not Drexel vanished. Right. So Drexel filed for bankruptcy. You're employed there. Do your parents call you and say, hey, your firm just filed for bankruptcy.

What are you going to do?
You know, I don't remember, David. I think I. I do know that I didn't want
to take a job. Once Drexel was gone, many of my
colleagues went to other firms and started high-yield groups.
That became huge profit engines for all of those
firms on the street. Every one of those firms.
I really wanted to do something on my own.
I wanted to have a shot at having my own business.
So I don't think I ever would have left if things continued on the trajectory
that they were on, and things were great. It was so much fun and so
innovative and so exciting. But here was an opportunity that landed
in my lap to do something on my own. So you started KENYON Partners in what
year? 1990 with my partner, Mitch.
And are you other what's the likelihood of starting your business with your
roommate from school?

That rarely happens, right?
It does. It was a great opportunity.
I think we both wanted to take a shot. We have different strengths and
weaknesses. We thought we could do something.
We really didn't have a very well thought out or intel.
How did you capitalize the. Well, initially we each put in some of
our own money, and we had a couple of other partners did the same thing that
at least let us hire some people and get started.
We were doing advisory work initially because that could put bread on the
table every day just through advisory fees that you receive every every month.
And we had some very high profile, significant restructuring advisory work.
We didn't really want to do that. We wanted to be investors.
So we talked a few institutions into giving us some managed accounts, and we
started investing as well. So today the business has taken off.
How large is Kenya Partners now in terms of assets under management?
We're about $26 billion, 26 billion.

And how many employees do you have?
About 235. And you are still running it with your
partner? Yes.
And you think I might you might step back from some point because I've been
running for a while. Are you just going to keep running it
for another dozen years or so now? Well, we did just sign on for another
five years. So as you know, we took on an outside
investor for the first time in our history, which really helped capitalize
the first. And then outside investor you took on is
a large Japanese insurance company. Yes.
The largest insurance company in in Japan.
And what did they do for you? We want to create a firm that has
permanence and has stability, bringing in an outside investor help do
that because first of all, we capitalize the balance sheet with hundreds of
millions of dollars of capital that doesn't go in our pockets, but goes on
our balance sheet so that we can face

the world in a more forward-leaning way, as opposed to a more defensive way where it gets capitalized every year. Now, as we mentioned earlier, you were born in Massachusetts. You're educated there largely, though, sometime in England. You've lived largely in New York and Los Angeles, and now you've moved your headquarters to Dallas and you're living in Dallas. So I Dallas, a wonderful city. I saw a TV show called Dallas. But is that what attracted you to Dallas or why are you in Dallas? Dallas is a great place to do business. California is an amazing place. New York's an amazing place. They're both difficult places to do business for a variety of reasons. From a regulatory point of view, from a cost of living standpoint, it's not so easy to hire people, particularly middle and back-office people where they're facing an enormous cost of living and enormous tax rates and gas prices.

and everything else. So we thought we should offer an alternative. I think many firms in New York have been creating outposts or headquarters, and in Florida, Dallas seemed like a great place to raise a family. There's there are great schools. There are a lot of places to live that are very close to the the sort of uptown and downtown neighborhoods where most offices are located. So we thought it was time to offer an alternative, and we did that. Most of the big mistakes people make is because they see others doing it, and they feel like, Oh my God, how did I miss that? I better get into that. So is it a good time to invest today for the average investor who says, Well, interest rates are pretty high, inflation is still reasonably high, I should wait for a while, or is it time to invest now? I think it depends on the area. I think, for example, distressed investing is very good right now. It doesn't have the same tone and flavor

as prior distress cycles because in
prior distress cycles, there were a lot of bankruptcies, and the economy was
weak. What we have instead is a very strong
economy, and businesses that are doing quite well, but simply have too much debt,
and they can't really refinance it. So there's a lot of balance sheet
restructuring, and there's a very, very long list of situations like that.
But they're not for the faint-hearted because the behavior, both by the
borrowers and by the creditors vis-a-vis each other, it can be pretty rough.
But I think that's an area of immediate opportunity.
Real estate credit is an area of immediate opportunity because the banks
have just been forced by both regulatory initiatives and by their own balance
sheets to take a step back, and an enormous step back.
And a lot of the balance sheets there are unstable as well.
So certain areas, I think, are extremely opportune, and certain areas are more
evergreen areas.

I think that hedge funds try to be an evergreen strategy. And I think we're in a bit of a sweet spot now because credit is yielding so much versus where it was. So what is the best investment advice you've ever been given? Charlie Munger used to have a saying that things fall into three categories: So yes, no, and too complicated to figure out. We kind of ignore that a little bit because we tend to gravitate toward complexity. But I think there's a basic message in there that's a terrific one, which is that you have to be patient and you have to be aggressive when the opportunities are abundant and you have to be quite disciplined at a time when they're not. And if you look at that period that we lived through where rates were ridiculously low, it was easy to put money to work in things that were silly in retrospect. That was true in venture capital.

It was true in equity markets.
It was true in credit markets, particularly.
And I think having the kind of patience and discipline
that Charlie Munger, Warren Buffett have had, is a great
lesson for everyone in the investment world.
What's the most common mistake that investors make in your view?
I think that people are motivated. Another lesson from the great
Charlie Munger, who, if you have the benefit of living in Los Angeles for a
while, you know, he, you get the benefit of
interacting with him periodically. An extraordinary person.
He had a way of looking at both sides of the balance sheet, and he really taught
Warren Buffett, I think, to buy quality businesses as opposed to buying low
quality businesses and being desperate to do it.
When you look at what other people do, they tend to be motivated by fear of
missing out. As he used to say, it's not greed, it's
envy that motivates people.

And I think that most of the big
mistakes people make is because they see others doing it, and they feel like, Oh,
my God, how did I miss that? I better get into that.
I want to look like so-and-so, who's doing a lot of growth equity, and they
transform their hedge fund into that. Or I have to be involved in this
situation because everyone's doing it. You've got to think independently.
You've got to be a contrarian, and you can't be motivated by fear of missing
out or by envy. It's a very, very bad characteristic of
human beings that makes them make bad investment decisions.
So suppose somebody is watching this, and they say, I want to grow up to be Josh
Friedman, a very successful financial entrepreneur, businessperson,
philanthropist. What is the best advice you can give to
young people who might be interested in being like you?
I think that people should, first of all,

they should make sure they get the most
they can out of their education. That's a good thing.
And I think it's important to do something that you love doing.
You can't do something because it's financially rewarding and expect it to
be financially rewarding. That's just unlikely.
That's not usually what happens. Usually, the financial rewards come from
you doing something that you like and that you're good at, and then you have a
certain measure of luck because you happen to be in the right industry at
the right time. I do think it's really important to pick
good partners and good people to do business with.
I was very, very fortunate to have met Mitch back in law school, in business
school in our first year business school section, and then to stay closely in
touch and remain best friends for a long period of time and then start a business
together. I do by far my best thinking when I'm
talking to someone else.

There are others. I'm not sure that's a model that I would necessarily encourage others to pursue, but at least for me, the experience of being able to have somebody to interact with, to disagree with someone who has a different viewpoint, but enough of the same viewpoints has been just a source of great rewards throughout my life.

Bloomberg Wealth: Josh Friedman

David Rubenstein

The Soaring Popularity of Private Credit Investing

Josh Freeman, co-founder of Canyon Partners, initially aimed to run a tech company but ended up in finance.

The firm, founded in 1990, focuses on private credit investing, which has become a $2.

Private credit has boomed due to the opportunity to finance private equity firms more efficiently than commercial banks, especially when the banks pulled back.

The private credit market is currently oversaturated, leading to lower spreads, reduced rates, and weaker covenants.

Unlike commercial banks, private credit firms operate with less leverage, making any potential problems less likely to have a widespread impact.

In the real estate sector, the market is facing challenges with low occupancy in office buildings, reduced rents, and obsolete properties, leading to potential future problems in the sector.

Despite these challenges, opportunities in real estate are expected to emerge, starting from the top of the capitalization structure and working their way down.

The Impact of High Interest Rates on the Economy

High interest rates have led to concerns about a recession, but the strong economy and fiscal stimulus have helped to prevent it.

The individual's background includes academic success, a physics major at Harvard, and a Marshall scholarship recipient.

The decision to study politics and economics at Oxford reflects a desire for a different and unique path.

The Academic and Career Influences on a Successful Businessman

Growing up, the interviewee's father emphasized the importance of attending Harvard and pursuing a law and business degree, as well as starting his own business.

Despite his initial goal of running a tech company, he was recruited by Goldman Sachs, where he worked for a few years before leaving to co-found a firm with a former classmate from Harvard.

The interviewee was aware of the prestige difference between Goldman Sachs and Drexel, but he was drawn to the opportunity for transformative work in the capital markets.

Founding KENYON Partners and Building a Successful Business

Michael started KENYON Partners after Drexel went bankrupt, instead of joining other firms' high-yield groups, aiming to have his own business.

He co-founded the company with his former roommate, Mitch, using their own money and some partners' investments.

KENYON Partners, now managing about $26 billion in assets, initially focused on advisory work before transitioning to become investors.

A Business Expansion and Relocation to Dallas

The company has taken on a large Japanese insurance company as an outside investor, bringing in hundreds of millions of dollars of capital to capitalize the balance sheet.

The CEO and his partner have relocated the company's headquarters to Dallas, citing the city's favorable business environment and quality of life.

The move to Dallas is aimed at offering an alternative to the high costs and regulatory challenges of New York and California for hiring and living.

Current Opportunities in the Investment Market

The current strong economy has led to a high level of business debt that requires restructuring, creating investment opportunities.

Real estate credit and hedge funds are seen as particularly opportune areas for investment.

The most common mistake that investors make is being motivated by the fear of missing out, rather than following a patient and disciplined investment approach.

The Key to Successful Financial Entrepreneurship

Think independently and avoid being motivated by the fear of missing out or envy when making investment decisions.

Focus on getting the most out of your education and pursuing what you love, rather than just chasing financial rewards.

Choose good partners to do business with, as having someone with a different viewpoint can lead to great rewards and success in entrepreneurship.