E403: Why the Best Investment Firms Stay Small | Sound Point Capital Founder
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What is the main topic discussed in this episode?
In today's conversation, we explore why excess capital destroys returns, why incentives drive behavior, and why the best investors often look boring while everyone else is chasing excitement. Joining me is Steve Ketchum, founder and CEO of SoundPoint Capital, a $46 billion investment firm built around discipline, risk management, and long-term thinking. Without further ado, here's my conversation with Steve. Steve, you said one of the biggest dangers in investing is having more capital than ideas. Why do you think that to be the case?
One of our big mantras is it's better to have more ideas than capital. So why is that? It's just a math problem, right? When you have too much capital and you don't have enough ideas in your pipeline, it's human nature to end up convincing yourself that things that are marginal end up in the portfolio and that ends up reflecting badly on your performance. And I think The reason it's relevant in this conversation is, if we were sitting here a year ago, your first question would have been, Steve, do you think we're in the golden age of private credit? And as a result, I think in some pockets of private credit, and now private credit is a $1.5 trillion asset class, so it's unfair to generalize too much, but I think there was too much capital that flowed into some of those areas, and the manifestation of that was maybe some challenging performance.
And in particular, There's a headline every single week about the overexposure to software. Why does that matter? It seems pretty implicit now that AI will have some impact on some sectors of the software industry, and that seems like it may affect returns in private credit.
To your point, a year ago, private credit was the hottest asset class on the planet. And ahead of that, you decided to invest differently than everybody else. What made you think that we are maybe out of time?
It goes back to, it's better to have more ideas than capital. And it felt like from an industry standpoint, we were flipping into a paradigm where there'd be more capital than ideas. But let's talk about software, which is there's a, not a week goes by without a headline about the perils of being overexposed to software in the private credit business. For us, it was less about software being bad than it was about our lack of desire to lend at six or seven or eight turns of leverage. And the reality is because software companies were being acquired at 15 or 20 turns of EBITDA,
Why does having more capital than ideas hurt investment returns?
In order to have the privilege to lend to those companies, we had to stretch, and we weren't willing to do that. Our objective is to have low loan-to-value, to lend at sort of four plus or minus turns of EBITDA, and by virtue of that discipline, it kept us away from software. I will say in our performing credit business, our CLO and long-only business, we're investing in broadly syndicated loans. I'm very proud of the team because a year and a half ago, fundamentally, we started to see the risks creep in where we thought that AI could be disruptive to at least some segments of the software industry. So in the broadly syndicated loan market, the average concentration of software is about 14%. Our performing credit business is about 7%, so 50% lower than the norm.
Does excess capital always lead to worse investment decisions?
It's a math exercise. So think about, we, like every other asset manager, we're in the funnel business. We want to put as many good ideas at the top of the funnel, go through a rigorous process, and we want these polished diamonds to come out the bottom. And if we need to, I'm making up a number, if we need to deploy investments in five ideas every quarter in a particular specialty, and we put 100 ideas at the top of that funnel, funnel, if you will, and we end up doing 5% of what we start with, that probably ends up with a good outcome. If we need to deploy 50 things every quarter, and we put the same 100 at the top of the funnel, and we end up doing 50% of the things that we initially look at, the math doesn't work.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:00–2:37
2
Why does having more capital than ideas hurt investment returns?
2:37–8:34
3
How did Sound Point avoid overexposure to software and AI risks in private credit?
8:34–23:18
4
How does Sound Point manage fund size and why cap funds at modest levels?
23:18–28:07
5
When and how does Sound Point decide to raise a new fund vintage?
28:07–40:24
6
Why does ‘long‑term greedy’ discipline build trust with LPs and create optionality?
40:24–1:02:32
Speakers
2 identifiedMore from How I Invest with David Weisburd
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