November 2024
Here are some key takeaways from their conversation:
• Cordillera typically focuses on niche, non-correlated investment opportunities.
• Cordillera seeks early investment opportunities in areas that lack heavy competition, aiming for high returns with lower risks due to less market saturation.
• Cordillera has invested in aging whiskey, sports niches, specialized real estate, carbon markets, and media rights, all of which offer unique market dynamics.
• Gus says whiskey aging is an investment opportunity as there is a growing demand for craft whiskey brands that lack the resources to age their own products. Cordillera also invests in land with access to power, water, and internet connectivity, preparing it for hyperscale companies like Amazon to build data centers, offering a high return on investment due to limited suitable land.
• Cordillera’s investments in sports include participation-based revenue, like entry fees for amateur participants, diversifying income sources beyond media rights and sponsorships.
• It is important to consider moving out of asset classes when they become overcrowded. For example, Cordillera moved away from music publishing and litigation finance when these sectors attracted significant institutional capital.
Looking to watch more of the live sessions from our 2024 Investor Symposium? Stay tuned as we release more episodes like these in the coming weeks such as Replacing Income in Retirement and Liquidity: Blessing or Curse?.
Watch previous episodes:
Ep. 111 California Housing Market Predictions
Ep. 110 How the Election Impacts Your Investments
I am Sasan Faiz, Managing Director of Investments at Morton Wealth, and the topic of our conversation today is New Trends in Investing. So I can think of no better firm to have for this conversation than Cordillera Investment Partners Gus Araya, the co-founding partner at Cordillera. So, Gus, thank you for being here.
Maybe you can start by giving you a little bit of background about yourself and your partners, and the thesis behind why you started Cordillera.
Well thank you Sasan. It's a pleasure to be here with all of you today, with the whole Morton team and your clients at this great event. So, really, appreciate it. I am glad we won't be talking about politics on this panel. So you're safe. But a little bit about us. Three of us started Cordillera ten years ago to focus exclusively on investing in niche and noncorrelated areas.
And we're going to talk about what that means in a second. But our background had been investing in alternative assets at a variety of institutional firms actually mostly out here in the West Coast. My two co-founders had been at the Stanford University Endowment. I had been at the Hewlett Foundation and the three of us had been about nine years at a large asset management firm.
That was the spin out of the Stanford University Endowment, focused on alternative asset classes like private equity, real estate, natural resources and hedge funds. And the epiphany that we had about ten years ago was that a lot of these asset classes that we grew up calling, quote unquote, alternative, are really not that alternative anymore. They've attracted a lot of capital over the last couple of decades.
For example, today, private equity is an $8 trillion asset class, many times what it was 20 years ago. And what that means is these asset classes, we've seen the returns compress over time. We've seen the correlations go up over time. That doesn't make them bad asset classes, but it means they're not quite as alternative as they used to be 20 years ago.
And so kind of with that insight, we launched Cordillera to just focus on finding, you know, the alternative investments of today. And that's what we refer to niche and non correlated. And there are two interesting pieces to looking for those types of opportunities. The first one is if you can be early to an investment area ahead of everyone piling in, it is less competitive.
And that means you can get a better deal. In our language that means we can get more return per unit of risk, and that's hard to find. But when you find it is very powerful and it's something that we always seek. The second element is if you can find opportunities that are not correlated, which means the returns that you earn from those investments move in a way that is different from the rest of the assets in your portfolio.
That can be very diversifying. It can help kind of balance your portfolio through good times and bad times. And so we think that combination of three things, you know, looking in areas that are not crowded with capital, seeking better risk-adjusted returns in investments that are not correlated is kind of a really compelling way to spend your time investing.
Examples of that, and we'll chat about a few of these have included aging whiskeys, the nooks and crannies of sports, quirky areas of real estate like owning boat marinas, some different types of royalty strategies, carbon markets of different types, and even media rights.
So Gus, what's your approach when you talk about this niche type of investments that are not as crowded? What if they do become crowded and more institutional capital moves into those type of investments? Are you guys necessarily going to move out or what are some, some criteria that you look for that an asset class has become overcrowded?
Yeah. Great question. The reality is investing is a very competitive industry. And if you find something that generates attractive returns, the reality is eventually other people will find it. And so we are on this constant treadmill of trying to be 3 to 5 years ahead of the crowd and inevitably, good investments get crowded. We move out of the way.
One example is we were very early investing in what's called music publishing. These are music copyrights where you own the copyright and you earn a royalty. Any type of song or a catalog of songs is played on the radio or downloaded on Spotify or appears on a movie or a TV commercial. Five years later, after we started being involved in that industry, it became very crowded.
Probably all of you have read articles in the Wall Street Journal about, you know, artists selling their entire music catalogs for huge sums of money. That's a great example of, you know, five years after we were there, the whole industry found it for the same reasons that we thought it was attractive. But guess what? Prices went up.
Kind of forward expected returns went down. And so that was a clear signal for us, a great time for us to get out of that. Let's go find the next thing. Another example is what's called litigation finance. This is the idea that you have two companies in a lawsuit. It might be over a breach of contract or fraudulent conveyance.
And those companies need capital, perhaps to finance that lawsuit. And so you can provide financing for that. That was, again, an area that ten years ago was very uncrowded. We were very early to that opportunity. But five years later, again, the world found it for the same reasons we liked it. It makes sense why it seems uncorrelated, etc..
A lot of capital has been raised and invested. And so we, you know, eventually moved out of that. And again, our job is to stay on that treadmill and go find the next set of things that remain kind of niche and uncorrelated. Right.
So let's maybe dig into a couple of the examples that you mentioned. I remember five years ago, 2019, the annual conference was at Castle and Key Whiskey Brewery outside of Lexington, Kentucky, and I was going to attend and a couple other people from our company wanted to come too. And then that was like a lot of excitement about that strategy.
Tell us how you guys came across that strategy. And, why has it been such a great strategy?
Yeah. So yeah, we'll talk about whiskey aging and, and how that works kind of as an investment opportunity. So there's a couple of factors to know about whiskey. First of all, it does need to be aged. When whiskey or bourbon comes out of a distillery, it's a clear liquid. It tastes terrible. What gives it that color? What gives it that flavor is it has to sit in a barrel for a certain number of years.
Most of the bourbon and whiskey that you would be familiar with has been aged in a barrel for at least four years. And there's reasons for why that's an important number. The other key dynamic in the market is that there's been kind of an explosion over the last ten years of craft whiskey brands. So if you go to the grocery store, you go to a bar, you no longer just see Jack Daniels.
You see 40 bottles of whiskey. And actually the market's not totally clear why this happened. Bourbon for a long time was kind of the boring brown spirit that your grandfather would drink, and it was really out of favor. But these craft whiskey brands have done a really good job, kind of resurfacing bourbon. It's something that appeals to a lot of young people.
Some people point to the Mad Man TV show as something that kind of brought the idea of brown spirits back, but regardless of why it's happened, it's, it's a real trend. Now, there's a dirty little secret to what happens with all of these craft whiskey brands. The reality is they don't make their own whiskey. And so what happens is imagine Sasan and I start our own whiskey brand, and we are making our whiskey, and it becomes successful, but we're making it ourselves.
And now we need to scale to sell more. Well, we could go raise more money, build a distillery, age whiskey for four years and then sell it. Start selling it. That's a 7 to 8 year process. Most craft brands don't want to do that. So what they do is they buy someone else's whiskey that has been aged, they blend it, they put it in a bottle, and they can sell it right away.
That is kind of the core model. At the other end of the supply chain are what are called the contract distillers. These are the distillers. They don't have their own brand. They just make whiskey very efficiently, high quality. But they don't want to age it. That's not what their balance sheet is for. So there's this really interesting opportunity to sit in the middle of the contract distillers who just want to sell the whiskey that they make on day one, and these craft brands that want to buy whiskey that has been aged for four years, that they can immediately put in a bottle. And so starting about six years ago, that curve is called the aging curve. How much does it cost to buy a barrel full of whiskey the day it comes out of the distillery, that was about 6 or $700.
And how much is a craft brand willing to pay you for that same barrel when it's been aged four years, and that's about $2,500. So if you think about buying something at 6 to $700, selling it four years later at about $2,500, that's kind of a really attractive or compelling multiple on your capital, that aging curve does move around depending on supply and demand, but why does it exist?
Basically, in our opinion, that there's more return there than the level of risk that we are taking. We don't feel like we're taking as much risk as that return as the return is there. And it's because it's something that's very niche, right? Banks don't know how to finance barrels of whiskey. A lot of institutional investors are very comfortable buying companies, but they don't understand how do you buy a barrel of whiskey.
What type of mash bill would you need to buy? Who are the contract distillers that are the best at doing this? What is it that the craft brands are going to want to buy four years from now? So that's an example of something that we mean by kind of niche. Not a lot of capital around. It's also fairly uncorrelated.
I think this is easy to intuit, which is what drives the return of the investment, is not so much... is the S&P 500 going up or down or interest rates going up or down is simply the supply and demand of this market. And the fact that these craft brands just don't have balance sheets to age whiskey for a long time, and you don't have a lot of other institutional investors that are willing to provide the capital to do it.
So that's an example of kind of how the whiskey aging story works.
Great. Again, I was just at the annual conference. We had an interesting, presentation from Jeffrey Fox tracks. And many of you obviously know the growth in artificial intelligence and data requires a lot of data centers. One way to play it is through public equities, which we view negatively right now, especially on the Mega-Cap technology companies. But how do you guys try to capture that growth from a different angle, looking at it, besides what the public markets can bring?
Yeah. And I think what you're referring to is you know, we wouldn't go buy Nvidia stock to go play on this. You can do that yourself directly. There is a really interesting opportunity around data centers and the niche that we found that, you know, was not crowded or certainly not when we started investing in it was around acquiring the land that is used for data centers.
Where that land is located is very limited because it needs to be within areas where you can bring power. Data centers that power ChatGPT to the cloud. All of this, you know, AI that you read about every day requires a huge amount of power and so you need to make sure that the land is somewhere where it can get cheap power.
It also requires a lot of water because you need to cool these computers. If you haven't seen what a new data center looks like, these are a couple of hundred acres. These are very, very large buildings and they require a lot of water. And also they need to be connected to the internet, to the fiber optic networks of the United States.
And so when you think about like, well, I can just go put a data center anywhere, that's not the case. It can only be in some very particular areas. So we've been very involved in an opportunity to, to grow and basically shoot ahead of the duck of where we know the big they're called the hyperscalers, the companies that are building all these data centers.
So think about Microsoft and Amazon and Meta in Google. They telegraph what their needs are and their demand far outstrips the supply of the capacity that's available today. And so we are they're basically one step ahead of them buying the land, getting it ready. And that takes a lot of work doing the power contracting, bringing in the water.
You know, getting it ready to be plugged into a fiber optic network. So then we can say to Amazon or Meta or Microsoft. Oh, you're looking to build your data center in this area. We have this piece of land ready for you that is fully permitted and has everything you need. Now you just need to put your building on it.
And what's really interesting is that the land is about 4% of the cost of a data center. The reason is that you might spend $100 million on the land, but you're going to spend $10 billion on the data center because of all the computers that go in there. So a lot of these companies, for them, the land is like a rounding error.
And you might say, well, why doesn't a Microsoft or Amazon just go be out there buying lots of land themselves? And that's just not their business model. They have ROI projects that are much larger with their capital. They're not in the business of land banking for data centers. And so that's been a great niche to pursue, which is get the land ready for them, permitted all completely and what they're willing to pay because they need it right away.
What they want is speed and certainty. And so if we can deliver that, you obviously get a big uplift on the cost basis of putting all of that together.
All right. Great. So whiskey aging, land for data centers. We have about four minutes left. Maybe we can talk about kind of sports-related strategies that you're looking at and maybe the potential for those.
Yeah. So sports gets a lot of headlines these days. Because as you may be familiar with, some of the larger leagues have now allowed institutional investors to own minority stakes in, in clubs. So in the NFL now you have to go through a special process. But it is possible to own a share in NFL teams. And same has happened in different major leagues.
And you have some very, very large investors focused on that. That is not what we do, right. We are in the niche. So we call it the nooks and crannies of sports, which is a global industry. It's not just a US industry that we think is really interesting. One bucket of nooks and crannies are women's sports. Here in the United States, you probably have heard of the story of what has happened with women's soccer, but that's just one small story among a much broader industry.
And it doesn't always have to be professional sports. It doesn't have to be soccer. It doesn't just have to be in the United States. But there's a clear view and trend that a lot of women's sports are massively undervalued relative to their commercial potential, particularly when you compare them with men's sports. And that's not to say that in every sport, the women's and the men's would reach parity.
But there is a pretty significant imbalance. We think that's really interesting. The other area of sports that, we think is interesting are what's called emerging leagues. So the opposite of an emerging league are the established leagues. So the NFL, the NHL, the NBA, those are leagues that have been established and around for a long time. Later in life came the PGA for golf, the ATP for tennis.
Well guess what, there's lots of other sports are out there that haven't yet created their PGA equivalent. So, for example, one area that we find really interesting is the sport of triathlon. It's an Olympic sport. Probably many of you, have a friend or family member that at some point, especially out here in California, has done the triathlon. It's a very big mass-participation sports, kind of like how people do marathons.
But believe it or not, until very recently there had not been a professional circuit for professional triathletes, which are some of the best athletes in the world. Imagine there being no PGA for golf or no ATP for tennis or no F1 for racing. And if you think about not just triathlon, but you think about sailing and you think about kind of these other, I might call them second tier sports.
There's this really interesting potential to actually own the league itself. So instead of thinking about owning a team in the NFL, imagine actually owning a piece of the NFL league itself. That's really interesting. The other piece is where we think things are going to get crowded is around media rights. So the reason people love sports or want to own sports, especially broadcasters, is because sports is one of the last few things that people want to watch live, right?
Your favorite movie, your favorite TV show? You'll watch it whenever. But your favorite team, your favorite athlete, you're going to watch that live. You're going to watch it with your friends. You're going to watch it with your family. So that type of live content is really, really powerful. But there's only so much TV time that's going to be available for sports in total.
So we actually think it's really interesting to look for sports that don't totally rely on media. So I'll go back to the example around triathlon. It's a circuit where there are races and iconic cities, you know, ten times a year, and the city of Singapore is willing to pay a couple million dollars, for example, to say, hey, please host your Asia event in Singapore.
Why are they willing to do that? Because they want to put in, by the way, same with Dubai and lots of other cities. They want to put their city on the map as this is a place for professional sports. In addition, a lot of these countries have big budgets for health and fitness. They want to incentivize, their population to become more fit, be more active.
I mean, we live in California. We almost take it for granted, but in lots of parts of the world, that is not the case. So in triathlon, you know, the pros race on a Saturday and then thousands of people like us who who can register for the triathlon can race on a Sunday on the same circuit that the pros race.
And so a lot of governments, out of their health and fitness budgets are really driving that. A lot of these also newer sports and leagues have gender parity. So again, in the case of triathlon, the men and the women get paid exactly the same. They race on the same day. They race on the same circuit. The races are just as exciting to watch one or the other, and that's really appealing to sponsors.
So what's another kind of revenue line besides what our cities willing to pay for hosting is sponsors willing to kind of be the headline of that type of sport. So the average salary of someone who follows the PGA in golf is about $100,000. The average salary of someone who follows and participates in long distance triathlon is about a quarter million dollars.
Think about the value of that demographic to banks, insurance companies, luxury goods producers. And again, that's not directly tied just to media rights. And then the last piece and I'll wrap it up here is some of these leagues have this mass participation element where you can make money just because you have people who are passionate about the sport who do it themselves.
So in the case of triathlon, yep, the pros race on Saturday and you have 5000 people who race on Sunday, and they each pay $300 to register and participate in that race. So that's another example of a diversified revenue stream that is not purely tied to media. So that's an example of the nooks and crannies of sports. Lots of things going on with women, lots of things going on in these emerging leagues.
And we think that's, a really interesting place to spend time and look for, for unique deals.
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