Crypto and Junk Bonds — Why I started the Medici Network
Last year I hosted the first Medici LA conference, an intimate and off-the-record institutional investor conference focused on crypto. The event was held in Beverly Hills during the Milken Global Conference and I was flattered by the warm reception. It helped that SEC commissioner Hester Peirce made her first public remarks about crypto here (the only on-the-record talk).
As Medici LA kicks off once again next week, I thought I’d share with the world my opening remarks from our inaugural conference last year about what inspired me to start this conference. A lot has changed since then, including the official name of the event. I believe the central theme and many of the ideas, however, still resonate. I look forward to sharing more of my thoughts in the future so I welcome your feedback.
Hi Everyone, I’m Adam Winnick and I’m the founder of MEDICI…
Welcome to Beverly Hills.
Every year, As April turns to May, the city of Beverly Hills is transformed.
Trillions of dollars of institutional capital descend upon this city right next door to pay homage to the father of high yield bonds.
But high yield was not always known as high yield.
It was not always considered an asset class.
I might mention what they used to be called, but my father, an early Drexel lieutenant, who helped create the high yield market from here in Beverly Hills, would get incredibly angry with me if I ever said the term out loud.
So I’m not going to do it now.
Maybe one day I’ll feel the same way he does.
But I’m getting ahead of myself.
We have work to do — to understand how an asset class achieves institutional acceptance.
To learn from each other.
To educate one another.
To chart a course.
Obviously, doing so represents a tremendous financial opportunity.
As we all know institutional penetration of digital currencies is very low.
But there also risks, real and perceived, especially for the institutions that embrace digital currencies.
Analogs and anti-logs from previous history can help us mitigate risk.
The High Yield market offers some good analogs and probably some good anti-logs too.
Today High Yield has shed the negative moniker of its origin. It transformed the bond market.
But more than that it transformed industries, and society:
This transformation started with new companies facing limited financing options.
They used high yield to finance bold visions that we all benefit from today.
Digital currencies are transforming the way that NEW companies finance themselves as well.
But transformation of industry or society seems more like hype and hope than reality thus far.
Cryptokitties is widely recognized as one of the most popular decentralized applications today.
But as you can see its peak usage was quite small even relative to similar products.
But that shouldn’t trouble us because transformation is the result of a process.
I showed you earlier how high yield is now 20% of the corporate bond market, up from about 4% in 1980.
How did that happen? High Yield scholars broadly agree that there were three phases to the acceptance of high yield as an asset class.
Phase 1 — Securitization, brought new found efficiencies and a direct threat to exclusive bank debt and private placement markets heavily characterized by syndication.
Will crypto be a direct threat to the syndicates that dominate the venture capital landscape?
What will do this to real estate or other asset classes?
Phase 2 saw the the adoption of analytical tools from other industries.
EBITDA had an incredibly powerful impact on the growth of the high yield market.
It wasn’t invented by Drexel or KKR in the 1980’s though…
It was John Malone from TCI in the 1970s
What will be this industry’s version of EBITDA?
You need more than tools to model risk. you need good data.
For the high yield market it took 17 years.
A full economic cycle, recession, scandal, regulatory crackdowns.
Only then were credit analysts able to model risk, then create structures to manage it.
CDOs (collateralized debt obligations, basically securitized bonds and loans) were an innovative way to manage high yield risk and an important on-ramp for institutions.
CDO ownership grew 50 times faster then direct pension fund ownership between ‘89 and ‘97.
The CBO and CLO markets evolved. Most people know of CLOs for their role in the financial crisis.
In fact, CBOs essentially died and CLOs are now 50% of the nearly $1 trillion corporate loan market.
What will be the on-ramp for institutions to invest in digital currencies?
Will they be active strategies
Will they be passive one?
Will they do it themselves?
Will they outsource it?
Will the now 250 crypto hedge funds and growing be the on-ramp
We asked some of the allocators in our network what they thought about that
We also asked them their plans for the next 12 months
We also asked some of the crypto funds in our network what they expected over the next 12 months about institutional participation
70% of the trading volume on the NYSE is institutional. Here’s how long our funds thought it would take to reach this milestone.
Here is what they thought the biggest drivers were of adoption were.
I’ll share more of our survey in our closing remarks. But I’d like to begin the show.
Before I do, I wanted to answer one question I get a lot. Who am I and why did I do this:
Well, I started my career in high yield in 1997, originating securities and then investing through a CDO.
I also created the first institutional seed fund, primarily to commercialize technology out of universities.
Today I run Caravan, a merchant bank, and am a registered agent of Code Advisors, a boutique investment bank in San Francisco, New York, London, and now LA.
I created MEDICI because I saw two worlds I know well, working increasingly closer, and having watched my father help build out the high yield market, I had a deep personal attraction to doing the same in this asset class.
Thank you for reading. I welcome your feedback and thoughts as I look forward to sharing more in the future. I’d also like to thank Alex Daifotis for his help with researching my remarks, and all those that have contributed to the Medici Network past, present, and future.