Kyle Cerminara - All In
Please see https://www.fgfinancial.com/corporate-overview/officers-directors/default.aspx for Kyle's official bio.
Kyle "stopped by" The Business Brew to discuss his role as CEO of Fundamental Global. In that capacity, he is focused on four portfolio companies: Ballantyne Strong Inc, BK Technologies Corp, GreenFirst Forest Products Inc, and SPAC that reached a definitive agreement to purchase Opportunity Financial.
Kyle has a very interesting background. He is mentioned in David Einhorn's book, Fooling Some of the People All of the Time, because he crossed paths with David on the Allied Capital trade. At that time, Kyle was a Financial Services analyst at T. Rowe Price. Following his stint at T. Rowe Price, Kyle worked at SAC.
Following his time at T Rowe Price, Kyle founded Fundamental Global with his partner Joe Moglia. Together, they take control of companies and look to create long term shareholder value. In this episode, Kyle discusses why he does what he does, how he thinks about value creation, and what he is trying to accomplish.
Bill and Kyle met when Mike Mitchell was The Business Brew's first guest. Since that time, Bill has watched Kyle work tirelessly to execute his plans. Consequently, Bill has grown to respect Kyle very much and wanted to feature Kyle as a guest.
This episode may give a glimpse into a fantasy many investors seem to have: buying controlling interests in companies. Bill's conclusion is he would rather partner with Kyle and let Kyle do the heavy lifting of execution.
Disclosure: Bill owns shares in 3 of Kyle's companies. He won't name which ones because he doesn't want people to read anything into his decisions. However, he will commit to hold every share for at least a year following this podcast episode.
Album art photo taken by Mike Ando.
Thank you to Mathew Passy for the podcast production. You can find Mathew at @MathewPassy on Twitter or at thepodcastconsultant.com
+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. I'm joined today by Kyle Cerminara. As a reminder, nothing in this podcast is investment advice. This is not an invitation or solicitation to buy or sell any securities. The information in this podcast is opinion based, you should assume it's biased. I got connected with Kyle from my man, Mike Mitchell. Mike Mitchell was featured in Episode 1. Mike is pretty public about owning shares in some of Kyle's companies. I own some shares in some of the entities mentioned, and I will commit to not selling them for at least a year after this airs. That is the bias that I carry into this, and I obviously want my man Mike to do well, and I've gotten to know Kyle pretty well, and thought that he would be a really interesting guest to feature on this podcast. With that, Kyle, what are all your official titles?
Kyle: I'm the founder of Fundamental Global. I founded Fundamental Global in 2012 with my partner, Joe Moglia, who was the Chairman and CEO of TD Ameritrade. Ultimately, everything I do is as a function of being the founder and CEO of Fundamental Global. All the portfolio companies that I'm involved in are as a result of being Joe's partner at Fundamental Global. I'm the chairman of a number of public companies. I'm the president of a SPAC called FG New America, but they're really related to my role at Fundamental Global.
Bill: I'm sure you're not tired at all, huh? It's not like you're working around the clock.
Kyle: We've got a lot going on right now, as you've probably seen, so it's been a busy few weeks but we had to fit it in, so I'm glad to do this.
Bill: Thank you for carving out some time. For those that don't know, in your public portfolio, you've got Ballantyne, BTN, FGF is FG Financial. You've got Itasca, which is now GreenFirst, so that's three. Then, you've got FGNA, correct?
Kyle: Yeah, the way I think about it is, we used to have a much larger portfolio. I'm a big believer in focus, and there's only so many things you can do, so we really have four portfolio companies that we’re highly focused on, plus the SPACs, and that's Ballantyne Strong, ticker BTN, BK Technologies, ticker BKTI, what is now called GreenFirst, which trades in Toronto under GFP.V. Of course, FG Financial, ticker FGF. Under FGF, we have SPACs, which we are sponsoring, the first one being FG New America, which is ticker FGNA, which we announced an IPO in October of last year. Then we have already announced a definitive agreement to acquire a company called Opportunity Financial or OppFi, which once we close that deal in June, we'll trade under OPFI.
Bill: After saying you're a big believer in focus, and then rattling off all those entities, I have to ask, how is it possible to do as much as you're doing right now?
Kyle: We have great teams., each one of those companies has their own CEOs, and a team underneath them. Ballantyne’s historically, had over 300 employees and a CEO and CFO. BK Technologies has its own team and board of directors, and it is a lot of work. Sometimes my wife asked me, like, “Why are you doing this?” I look back on it, and my kids ask me, “Why are you doing this?” My kids are now 12 and 10, and I look back and say, “It'd be great to spend more time with them.” It's true, it is a lot, but I'm pretty passionate about each of these companies. We started out to make money in them. These aren't the only ones that we had. We had more of them. We made some significant investments. We had a company back in 2015 that we started in 2012-2013, called Magna-Tech, which traded on the NASDAQ under MAG. I joined the board, we bought the stock when it was $10, $11, $12 per share. I joined the board, and ultimately, we hired Goldman Sachs and sold the company to a company called Columbus McKinnon for $50 of cash.
Same with a company called Iteris, I joined the board in 2017. The stock went from $1.80 to $7. I resigned from the board a year later, and we sold the company for an enormous gain. With each of these, we get involved and we try and improve them, and make money and then Ideally move on. Sometimes it takes a year, sometimes it takes three, four or five or more years. The goal is not to stick around for an eternity. It's to make money and improve the situation and then ideally, have shareholders be in a better place. It doesn't always happen that way. I think you learn a lot on the way. We certainly had a very favorable outcome with Magna-Tech, Iteris, and GreenFirst, and with some of the others, it's taken a little bit longer to have a favorable outcome, but we'll get there.
Bill: Can you go through a little bit of the background on GreenFirst, because that's interesting to research where you sort of ended up with. I don't want to say sort of, because that implies it's happenstance. You found yourself with a pile of cash at the right time and worked hard to get a deal in front of you and created a fair amount of value if the market’s remotely correct on the bid today. Out of thin air there, it was the right set up at the right time.
Kyle: Yeah, so GreenFirst is a long story, and I'm happy to share it briefly. The company was originally called Kobex Capital. My partner, Larry Swets, found it when he was the CEO of Kingsway. He actually went activist on it, it was a pile of cash. They were making investments inside of it, the former board. He went activist on it. We eventually convinced them to liquidate it, and Kingsway owned at the time 15% of it, and I thought it was an interesting company. We have Ballantyne Strong, took a 15% stake as well. Between Ballantyne Strong and Kingsway, we each earned 15%, and the company tendered to buy 85% of the company. Kingsway agreed not to tender their shares.
With Kingsway agreeing not to tender, you essentially had a company that was going to at the very minimum have a few million dollars of cash. With Ballantyne Strong buying shares, our board looked at it and said, “Well, we can either tender or not tender. We'll make the decision when the tender comes.” The company had significant about $30, $40 million of NOLs, net operating loss carryforwards inside of it in Canada. We thought those might be valuable. We had some Canadian operations. It obviously had some cash and we had a strategic view on it. We thought we'd see how things settled out as the tender came through.
Larry and I called a bunch of the shareholders and said, “Consider sticking around. This is what we'd like to do with the company.” We had a list of the shareholders, we called probably hundred shareholders over a period of time, and a bunch of them decided to stick around. We were thankful for that. Some of them tendered, some of them stuck around, and that resulted in Ballantyne owning a third of the company, Kingsway owning a third of the company and then some very thoughtful shareholders to stuck around owning a third. That was at, I'm going off the top of my head call like 50 cents a share. Yeah, 56 cents a share at the top of my head. At 56 cents a share, we had cash, we had probably $1.52, $2 a share of NOLs, and we started looking for something to do with that cash. In Canada, the laws are pretty open ended about what you can do, so we started looking for some opportunities.
Kingsway was in the middle of sponsoring a SPAC. I had no idea what a SPAC was. Larry called me, I had 102-degree fever and said, “Are you interested in participating in the backend of a SPAC?” I didn't know what the backend or a SPAC was.
Bill: [laughs] “What end am I on and what is this?”
Kyle: Yeah, so I was like, “What is a backend? What is the SPAC, and I've got 102-degree fever, leave me alone?” He walked me through it over two or three days, we worked about 20 hours a day with me having this awful fever. I was like, “This is the most fascinating thing I've ever seen. This is an insane deal, but I need to protect shareholders.” We have Itasca Capital, so we put together-- I represented shareholders of Itasca Capital. He was focused on the SPAC.
Bill: Real quick, so Itasca was your slice of the deal that you encouraged shareholders to stay around for?
Kyle: Yeah, so we changed the name of Kobex Capital to Itasca Capital, I'm sorry, I left that out. Kobex was the name of the bubble company that eventually changed into Itasca Capital. Itasca was just the name of the town that where he lived in in Illinois, outside of Chicago, but it also has two meanings. It's the name of the town that he lived in, but it's also a symbolic meaning, which is like a well of-- if you google Itasca, it has interesting endless flow of water in to the Mississippi River. The word ‘Itasca’ is meant to be this lake, Itasca lake, I believe that flows-- is supposed to be the source of the Mississippi River water. Basically, this never-ending flow of water that flows into the Mississippi River that ultimately flows down into the Gulf of Mexico. If you think about it symbolically, it's a never-ending pool of capital that flows into the Mississippi River. That was the concept of Itasca Capital, the word Itasca. I didn't come up with it, I won't take credit for it. That was Larry's idea. It was already named Itasca Capital. That was Larry's idea. The word Itasca has always been his idea.
Anyway, we decided to do the transactions out of Itasca, and inside of Itasca, we had a favorable outcome, it was ultimately Limbach. The way the deal was structured was that to simplify it, Itasca Capital shareholders received a 12% payment in kind or pick preferred, plus about 43% of the upside of the SPAC sponsor. It was a pretty favorable structure. With that, we ended up making about 50% on that investment in about a two- or three-year period. We dividended that out to shareholders right after the investment was liquidated in about two or three years later. Then, we were left with $10 or $11 million of cash, and we use some of the NOLs on that. Fast forward to February/March of 2020, once that was liquidated, we said, “Well, what do we do with this cash now?” We were under some pressure from shareholders to liquidate the company, so we were like--
Bill: Is this how Mike found you? When did Mike find you, when you were distributing the initial distribution back to shareholders or once you were under pressure to liquidate?
Kyle: No. The pressure from shareholders started to come when people were saying, “You should liquidate this company.” It was trading at 45 cents. Everyone's saying, “We want our money back,” and we're like, “Okay, well, we're happy to give it back because we own a lot of it.” Larry at the time-- during that time, Larry left Kingsway, which is a long story in itself, and Kingsway still owned a large stake and I wanted to help clean that up with Kingsway. I saw the opportunity to buy shares. Fundamental Global bought Kingsway shares for 30 cents per share. There's a press release that if you google Fundamental Global and Itasca Capital, you'll see that we bought the shares in Canada--
Bill: Why did Kingsway sell at such a discount because it was what 40--? What did you say it was, like 46 cents and now you're buying it at 30, is just that they wanted the liquidity?
Kyle: I don't remember the exact price on that day, but maybe it was trading for 40. We were cleaning up the affairs and it was a very illiquid stock. [crosstalk]
Bill: Oh yeah, so they wanted the block out. If you sell the block and it's a liquid, you're going to take a discount, okay.
Kyle: It was a small investment for them, a few million dollars. I think it was like a million dollars that we paid for it for at that price. It's in the press release, I don't remember the exact amounts. Then Larry, also he had Kingsway RSUs and shares, and he swapped his shares for Kingsway at that price, or for Itasca Capital at that price. We were thinking about just liquidating the company at because everybody was saying, “Hey, you’ve got to liquidate.” That's what people do, is they pressure you to do things you shouldn't do. We thought about it. We did a thorough analysis of liquidation because that's what we do is we do thoughtful things, we evaluate every single thing we should potentially do. Hired attorneys to look at what does the liquidation look like, and it was expensive.
In Canada, it takes two years to liquidate a public company, a minimum, you're required to keep a public company public for two years before you're allowed to shut it down. Shareholders weren't going to get all their capital back for two years. It was going to cost us millions of dollars to pay attorneys to do this. We only had $10 million, so we're going to pay millions of it out to attorneys. By the time shareholders got their money back, it would be a lot less. We were the biggest shareholder. We're like, “Okay, so we're going to go pay attorneys, so that people that want us to “liquidate the company” can be happy that we did?” We're like, “We're the largest shareholders, we think that this is a bad idea.” Before we liquidated it, we said, “Let's just at least see if there's any interesting opportunities.” Then this is literally the week before COVID hits, we're thinking about liquidating it. Everyone's like, “Ah, you should liquidate it.” We said, “Look, we totally agree. We should evaluate that. Let's consider.” We considered it, and then COVID hits, and it was like, “Oh, thank goodness we have $10 million in cash.”
We called up our friends at Fairfax Financial and Paul Rivett had just left in February. Larry had developed a wonderful relationship with Paul over the years. He had retired from Fairfax after 19 years as their president and was looking -- he had just bought the Toronto newspaper, which is the prominent newspaper in Canada, and was looking for some other things to do. He had interesting thesis on lumber and had this sawmill under, was ready to buy it under LOI, letter of intent. We said, “Well, would you do it inside of our cash shell in Canada?” He's like, “Absolutely. Let me take a look at it.” We ended up doing it inside of that. He and his partner, Rick Doman, ended up investing $5 million into the company. With the thesis, if you read the documents that was put out publicly, that this would be a platform for future acquisitions, like that won't be the last one. That was acquisition that we made, this will be a platform for timber acquisitions, and very focused timber acquisitions. That's why we changed the name to GreenFirst Forest Products. That acquisition was made by my calculations at less than 10 cents on the dollar. If you look at the price of lumber, it basically tanked in April of 2020, because people thought the world was ending. Now, we're in the middle of one of the greatest building booms in history. The price of lumber is-- you can't find lumber anywhere, except for on our acreage where we have lots of it. The price has gone through the roof, and that asset is worth tremendously more than we paid for it. We have some other really interesting opportunities now that we will likely pursue inside of that vehicle.
Bill: Yeah, I'm sorry. I'm just thinking through, how do you think through when you're dealing in a commodity-type business? Right now, we're looking at a lumber spike, how do you think through what normalized lumber prices versus how much of this is a temporary shock because of COVID? It seems like a very, very funky time to plan what might happen to commodity prices. How do you think about that?
Kyle: There's a futures curve. It's not that long, but there's a futures curve. In addition to that, you have to go out and say, “What does our earnings look like if the price of lumber declines by a certain percentage, and normalizes?” We've done that. We don't assume that prices stay high forever. In fact, we always forecast declining number of prices, because that's prudent. In every transaction, we would look at as an acquisition, we would assume prices decline. The numbers make sense with prices down 40%, 50% from here. The numbers make sense with numbers down a lot more than that. You don't have to, like this is just all bonus right now. You don't have to have the numbers at this level for to sustain. We didn't expect prices to go to this high. If they stay this high for some period of time, that's great. They don't have to, this is just nice. Even if they declined by half, it's still amazing. The asset is amazing with the prices down 50% from here.
Bill: Why was it shut down when you got it?
Kyle: Those are long stories that are-- I'd rather not go too much into the history and the details of why we took an asset that-- people sell assets for all kinds of reasons. We were very fortunate to get it at a period of time when others were less fortunate. I'm happy that we were able to buy the asset and take it on at a time when others were looking to monetize it.
Bill: Yeah. That's the optionality cash.
Kyle: Yep.
Bill: If I'm listening to this, I would think, “How the heck did this guy get where he got?” Do you want to go through a little bit of your background?
Kyle: Sure. Yeah. I really don't like to talk about myself, but I'll give you the quick two minutes and you can ask me questions, and I'll try not to answer them.
Bill: [laughs] That sounds good.
Kyle: I was aspiring tennis player growing up. I thought I'd play professional tennis. I met my wife in college, we're still together. She's the best wife in the world, because she puts up with me working till 2:00 in the morning every night and weekends. I met her and she's like, look, like we went to college in the 1990s when it was very similar to today where basically you could buy any stock and it went up. I thought I was like the best stock picker in the world, as many people do right now because literally you could just buy anything and it just went up 100% the next day. I got really interested in stock picking in like ‘95, ‘96, ‘97, ‘98, ‘99, like when I was in college. Ameritrade and E*TRADE and Scottrade and all the online brokers were just starting accounts.
I decided to go into your traditional investment banking program, so I did that. If anyone's in an investment banking program right now, I feel so terrible for you, because it's like the most miserable job in the world, but you learned 50 years’ worth of stuff in 10 months. Then you gained 30 pounds and you feel you're going to die every day. It's awful. I don't know why to the point that was made, I think in the Wall Street Journal this week, I don't know why people have to work 100 hours a week, or 110 hours or 80 hours, or whatever it is. People do work an unusual amount of time as an investment banking analyst. It shouldn't be minimized, like, how awful that job is, but it's exciting to as a 21- or 22-year-old, you're put into all these bizarre circumstances where you're presenting to boards of directors on, why they should merge with this company or that company. I was at a fraternity house last month, and now I'm just sending to a board on why they should merge, like how is this possible? It's a very interesting dilemma. At the same time, you're in the copy room, printing stuff at 2:00 in the morning. It's such a strange, I don't know why it is, but that's just the history of Wall Street, and that's why how investment banking works.
Bill: The thing I never understood, man, was I would watch those guys and they'd sit around from, like, I don't know, they'd probably get to the office at 10:00, because they were working until 3:34 AM, or whatever. They walk in at 10:00 and they're not doing much for most of the day. Then, I don't know, 4:00 or 5:00 rolls around, and I guess it's time to get staffed on something. It's a lot of sitting around to hurry up later. That would be frustrating if you were living life.
Kyle: While I was in investment banking, I was pre-TSA. We would print the pitch books, and then drive them to the airport, park our car at the curb, and sprint through security without TSA--
Bill: To go give it to people that were-- [crosstalk]
Kyle: To go give it to someone who was sitting there waiting to board a plane with your car sitting at the curb with blinkers on. I was just like, “What am I doing with my life? How did this happen?” I remember Father's Day 2000 or 2001, it was Sunday, and I'm out to lunch with my dad. My Managing Director calls me, he's like, “I need you to come in.” My dad's like, “You can go and do this, but this is the last time.” I guess, 21 years later, I'm still doing it.
Bill: Yeah, it's different, though. You're doing it for you this time.
Kyle: I go. A couple months later, I interview with T. Rowe Price, which was literally right across the street from Legg Mason. There was amazing opportunity to work for a woman named Anna Dopkin, who was the director of research. She ran the financials services team back then at T. Rowe Price. She was former Goldman had come to move from New York to Baltimore, to run the financial services team at T. Rowe Price. She knew what I was going through, now having been at Goldman, and she's like, “Come work with me. I promise you'll leave at 10 every night. I went to work for her. She was an amazing mentor. She was promoted to Director of Research a few months after I joined and I was like 22 or 23 years old. Typically, at T. Rowe, every analyst there's Wharton, Harvard, or Stanford MBA and I was a 22- to 23-year-old undergrad, and Anna’s like, “Kyle can do this job, give it to him. She made the pitch that I should take over much of her responsibilities, as--
Bill: What do you think she saw on you to give you that kind of responsibility that young?
Kyle: I don't know. I'm glad she did. I remember late 1990s watching CNBC and trading stocks and watching like the T. Rowe Price portfolio managers on TV thinking like, “Wow,” and then her giving me these responsibilities, then going into the T. Rowe Price what was called the Monday Morning Meeting from 8:30 in the morning to 12:30. Now I'm going into the Monday Morning Meetings pitching these large cap stocks to the same people I was watching on CNBC, and I'm like, “What am I doing? I'm 23, and I'm pitching these huge cap stocks to them. This is crazy.” It's an amazing place to grow up and learn research. T. Rowe Price has an amazing research culture. They do amazing research, you learn, you have all the resources in the world. You have anything you need. You spent tremendous amounts of time, great resources, and I learned from some of the best people at a very young age, like, how to do some of the best research. It's great, deep fundamental research, T. Rowe Price prides themselves on great fundamental research, deep, long term, three-to-five-year thesis.
Bill: What does that look like for somebody that doesn't know, you're talking to a lot of industry experts, getting on a plane, going to talk to management teams, etc?
Kyle: Yeah, so everything sector by subject. My first sub sector, and this is an interesting story was the business development company. When I was an investment banker at Legg Mason, I had banks telecommunications company, so I come over to T. Rowe Price, and they give me the business development companies. At the time, they're only four publicly traded business development companies, Allied Capital, American Capital Strategies, MCG Capital and Gladstone Capital. Allied Capital has now become famous because there's a book about it, which I'm a character and called, following some of the people all the time, written by David Einhorn. The book is really interesting, but before we get to the book, I'm given the sector and I spent 10 months researching these four companies, interviewing the management teams, going through their cues and case going back 10 years writing a 50-page research report on them, putting together a 40-page presentation. Ultimately, it culminates in the Monday Morning Meeting where I have to give like this big pitch to everybody on like, what we should do with each of these four stocks, should we buy them? Should we hold them? Should we sell them?
I was like, “We should sell Allied Capital.” That was extremely controversial, because Allied was a stock that we had owned for a long time. We had a great rapport with management. I knew that portfolio companies, I was like, many of these portfolio companies are not companies that I think are valued appropriately.
Bill: Because of that, you thought the BDC itself was overvalued?
Kyle: I thought the BDC was overvalued because I had banked a bunch of these telecommunications companies. I knew that they were toast. I was young, people didn't necessarily agree with me. We sold a little bit of the position, but we didn't sell the entire position. I left like, “Okay, good job, we'll sell half the position. We’ll sell the half position, but we won't sell the whole thing.” We did sell some of the position. David Einhorn who wasn't a well-known commodity back in-- not many people knew who he was back in 2001. They were starting to know who he was, but he was running a billion-dollar fund. He wasn't who he was during the financial crisis or now. Fast forward to the Ira Sohn Conference, which is a pretty famous investment conference in New York, where hedge fund managers get together and present their best ideas. If you google Ira Sohn Conference Allied Capital, Greenlight Capital, David Einhorn, you'll see that there's a very young David Einhorn wearing a goofy tie presenting Allied Capital as a short. He laid out the thesis that I put in this presentation a year earlier, to T. Rowe Price. The stock, he becomes instantly famous on this pitch, the stock falls 40% the next day, the portfolio managers run to my office at T. Rowe Price and say, “What do we do? What do we do?” I'm like, “I told you about this--”
Bill: “You told me to sell a while ago.” [laughs]
Kyle: “I told you to sell. Why are you panicking today? I told you about this six months ago.” They're like, “Well, what do we do?” I'm like, “You buy.” They're like, “What do you mean?” I'm like, “Well, I told you that this was going to happen, and it's now factored in.” We went to the trading desk at T. Rowe. The cost to borrow as a short had become very expensive. It was actually 20% to borrow the stock. The company paid a dividend, and the dividend yield had jumped to 20% that day. Basically, if you bought the stock and the stock went down 40% year breakeven, as long as they paid the dividend, and you locked in that cost to borrow. T. Rowe Price back then had a-- didn't lend out their shares. I think we made a decision to lend out our shares, earn the 20%, receive the 20% dividend. Ultimately, the stock ended up, we bought back the shares that we had sold.
A month or two later, I went to the Allied Capital investor day, not knowing you know what would follow. I show up at the investor day, and I'm met by the management team of Allied, and they say, “Would you like to sit with the CEO of Allied.” I said, “Was David Einhorn here?” They say, “He is.” “I want to sit with David.” They sit me down between David Einhorn and Dan Loeb, I had no idea who either of them was, that either of them will become who they are. Dan Loeb and David Einhorn are at this. This is August of 2002. We sit there debating Allied Capital. I'm like, “I totally agree with you guys.” They're going like, “Well, what about this? What about this?” I'm like, “No, you're totally right.” They're like, “What?” I'm like, “No, you're totally right.” I'm like, “But have you looked at this? And have you looked at this? Have you looked at this.” There was a couple of investments in the ones that they were pointing out were very overvalued. I was like, “There's three or four investments that are very undervalued.” One was called WyoTech, which was education company that I felt that they were holding too well. One was a CMBS portfolio that I felt was held to well. One was a company called Hilman, which I felt was held too well. Ultimately, David gave me his card. We stayed in touch, ultimately, they ended up selling all three of those things over the next two years or so. The stock went up. Probably, I don't know. From that day, maybe 80%, we received the dividends, we received the borrow and made good money. We sold the stock. During that time, I had met Joe-- I have lots of other investments, Ameritrade. I was analyst covering, Intercontinental Exchange and CME and all kinds of other--
Bill: Those are some cool businesses to cover back. A lot of was unfolding.
Kyle: Yeah. I basically transitioned my career more into like FinTech. It was really exciting period of time. I met Jeff Sprecher, who's now the chairman CEO of Intercontinental Exchange, which owns the New York Stock Exchange, right when he was pre-IPO, became his largest shareholder, still have a relationship with him and his wife. It was a really neat investment. I was the biggest bull on ICE, the biggest bull on CME, the biggest bull on NYMEX, the biggest bull on basically all the exchanges. I mean there were other big bulls. There was a group of us that were probably 10 or 20 of us that were great people, that are still some of my best friends today, that all of us made tons of money in these stocks. I don't want to just say it was just me. There's about 20 of us that did extremely well.
Ameritrade was a unique one. I was given the online brokerage sector next. Joe Moglia comes into the T. Rowe Price, and that's where we met. We met probably 2001-2002. If Joe would go into T. Rowe Price now or two other places, he gets a pretty big audience. Back then, it was just me. We met and it was a $700 million market cap. When they sold to Charles Schwab today, it was a $20 plus billion deal. Back then, it was a $700 million market cap and they had $23 billion of assets. When they sold to Schwab it was trillions of dollars of assets. I met with him, I believed in the story, we became the largest shareholder. Over the next couple of years, I got really interested in the idea of consolidating the online brokerage industry, I felt that there were tremendous benefits, they had done about three or four acquisitions, they bought Datek, they bought National Discount Brokers. TD Bank in 2004, was really focused on the idea of doing something with TD Waterhouse. They've been speaking out on their conference calls, and I kept bugging Joe regularly about saying, like, “You really need to do something with TD Waterhouse. They keep talking about this on conference calls.” He's like, “Well, if you feel strongly, talk to my board.”
I eventually wrote a letter to Ameritrade’s board and said, “I'd like to talk to you.” They got back to me and said, “You can talk to us and in the next board meeting.” Then one day, I get a phone call that says hey, “You're speaking on Thursday, this was a Tuesday.” I didn't have a board presentation or anything ready. I spent the next 48 hours putting together a presentation. All the sudden, I'm in the boardroom presenting to the Ameritrade board on why they should merge with TD Waterhouse in February of 2005. A couple months later they did, and the stock which was trading during that presentation like 9 or 10 opens at like $25 a share. It gets halted at like 14 and goes up to 20, 25. They pay a $6 dividend on a $10 stock. A brilliant, brilliant combination basically transforms Ameritrade into a basically looking a lot like Charles Schwab. They went on to do many more acquisitions and it was just amazing transaction.
I get a phone call from what is now Point72, but back then was called SAC. I had really looked up to Steve Cohen and I was promoted to run a-- what was called the Institutional Large Cap Growth Strategy at T. Rowe Price with a guy named Rob Sharps who's now the president and chief investment officer of T. Rowe Price. Rob and I started running that strategy together. He was the lead and I was his number two. Steve recruited me and went up to Greenwich, Connecticut, and spend some time with Steve at his house and had lunch at his house. There's menus that say like, “Welcome Kyle Cerminara.”
Bill: Really?
Kyle: Sitting in a room of Picassos. I think there was two or $3 billion of Picasso's in the room.
Bill: [laughs] It's a good way to wine and dine somebody.
Kyle: Yeah. You're sitting in a room full of Picassos and I don't know if you remember this, but Steve Wynn famously stuck his elbow through a Picasso, like $140 million Picasso, maybe like 10, 15 years ago, and Steve Cohen had already bought the Picasso. Picasso basically painted three really famous paintings in one weekend. One on a Friday, one on Saturday, and one on Sunday. I'm sure I got that wrong, but that's the way I remember the story. Steve Cohen owned the one that was painted on a Friday, and he own the one that was painted on a Sunday, and he wanted the one that was painted on a Saturday, and Steve Wynn owned it. If I'm getting the story wrong, I apologize, but I think it's pretty close to accurate, and he paid like something like $140 million for it. Maybe it's 120, whatever, but it's close to like 140 million. Steve Wynn was having a party at his apartment, Las Vegas, and I guess like it was a crowded room and he accidentally bumped into the Picasso.
Bill: How in the hell does that happen?
Kyle: I don't know, but when you have a lot of Picasso's and you have a crowded room, like you sometimes stick your elbow through a Picasso.
Bill: Yeah, I guess, I wouldn't have the crowded room around the Picassos.
Kyle: Steve Wynn Picasso elbow or something, whatever, you'll see like this--
Bill: I mean, I vaguely remember this story. It's just shocking to hear it out loud.
Kyle: Yeah. I'm sitting having lunch in the room where the Friday Picasso and the Sunday Picassos and I'm like, “Well, where's the Saturday Picasso? I want to see the Saturday one.” Apparently, there's people that fix Picasso's when people stick their elbows through it.
Bill: Right. It sounds like a lot of downtime, and then some very important uptime.
Kyle: Yeah. 30 minutes into my conversation with Steve. He's like, “Well, when are you going to start?” I'm like, “What do you mean? I work at T. Rowe Price.” He's like, “No, you're coming to work here. We'll work out the details.” I was like, “No, you don’t understand? I'm happy at T. Rowe.” He's like, “No, you're coming to work for me.” Sure enough, two weeks later, I work for Steve. We worked out the details. Working for Steve was one of the greatest periods of my life. I learned more in that four-year period than--
Bill: What years are these just to frame it a little bit?
Kyle: I worked for Steve 2007, 2008, 2009, then 11 and 12. I took a little--
Bill: Sabbatical?
Kyle: A little sabbatical. I left and then came back. I worked for him during the financial crisis. I sat back-to-back with him, literally like elbow to elbow with him during the financial crisis. He is one of the most brilliant minds ever to live. I know that he takes some personal heat right now, but it's not. I personally think that just comes with the territory, but it's probably not justified. I learned so much from him. I'm grateful to him for the time I spent there. I still have a good relationship with him and as do most people that work for him, but it's amazing how few people that work for him will say bad things about him because he's actually a good guy. He's tough. He works harder than anyone that I've ever worked with. He is around the clock guy. He's got an amazing memory. If you took Steve and put him on an island with a Bloomberg and no information besides charts, he would turn a million dollars into a billion dollars like he is that guy.
Bill: Really?
Kyle: Yeah, he doesn't need information. People think he needs information. He is so good. He is that good.
Bill: How do you even-- I don't even know how you would articulate what that good means. What is it that he sees--? Why did you use charts, for instance, when you were telling that story? Is he that technically driven?
Kyle: I wouldn't want to talk for him, but he's very technically driven well. He uses fundamentals and technicals.
Bill: Well, yeah. You said that he would have a Bloomberg in your hypothetical.
Kyle: Yeah.
Bill: It's not as if he's not doing any fundamental research. I just thought it was interesting that you mentioned charts.
Kyle: Bloomberg actually is more technical than fundamental. He uses a lot of technicals in Bloomberg. He is really good with technicals. He's also amazing at taking, seeing news and knowing what to do with it better than anyone. If you see a headline, all of us will say, “Well, what does this mean?” Steve doesn't say, “What does this mean? “I mean, he does, but he knows what it means. He knows exactly what to do better than anyone. Then, if it doesn't do what he thought it was going to do, he corrects quickly. He's so good. He's the best. I think he's the best ever. This is something that maybe I need to learn, and partly why I'm speaking today is that I think that I focus so much time on undoing rather than communicating. There's some people that promote, and there's some people that do, and sometimes promoting results in favorable outcomes for stock prices, whereas doing might result in favorable outcomes for things that you're trying to do. You can't always like have great outcomes just because you do, because sometimes there's bad luck, sometimes there's just bad circumstances. Some people spend almost all their time promoting. I spend very little bit of my time promoting, and I've really learned that, like people want to hear what you're doing.
I think Steve spent almost no time communicating with people for a long time. It's amazing to me that he now has a Twitter account. Now that went away for a month because people attacked him, but now he's back. Communicating is really like I found it's actually much more important than I realized. I guess I was blind to that. Communicating much more important than I realized, and people want to know what you're doing and need to. That's why I've asked the question of like, “What are the best ways to communicate? How would you like to hear? He started the question of, “Who are you? How should I refer to you?” I said, “Well, I'm this founder and CEO of Fundamental Global and we have portfolio companies.” I have multiple audiences, I've got Fundamental Global. Fundamental Global has some limited partners. We used to own a wealth management company called Capital Wealth Advisors, we actually have divested of that now. I no longer have any interest in Capital Wealth Advisors. We grew it from nothing to almost 2 billion of assets under management, I'm no longer involved. I'm no longer the chief investment officer, back to the focus thing. I used to have to be responsible for communicating with those several thousand clients, I no longer need to.
Fundamental Global has some limited partners. Directionally, we're going in the direction of, for the people that own the four positions I mentioned, we don't charge them fees anymore. They're basically Joe Moglia, his family, me, my family, and some very close friends and family. It's just like, I want to make them money, I don't really want to charge them fees.
Bill: I'm going to interject real quick, just so my thoughts, even though, who cares what I have to say, but I'm going to say so. I mean, as somebody that probably over communicates, I would argue part of what I'm doing is communication, at least. What I'm trying to do is intertwined. I think it's hard to watch what Buffett is built, and not at least understand some of the game that he was playing through his communications. Some of that, I think, one of the things that I admire about him from a business perspective is, I think he threaded the needle really well between being-- I don't want to say promotional. If you watch the annual meetings, and how he went about his business, it's impossible to not think that his communication has something to do with his deal flow. He was carefully crafting an image that he thought would not only benefit him, but also his stakeholders. I think that what we're doing, or what I'm doing is my version of something similar. Where I draw the distinction is, I think that there are some people that I look at, and I say, “Okay, well judging from what I think I know from the outside, which is obviously limited, is that method of promotion, something that I'm comfortable with?” A lot of the times when I see promotion and finance, I get uncomfortable, but fundamentally, I think that there's a benefit to communication that, I guess I would just say that there's a gray area. I tried to toe the line towards-- I have a soft spot in my heart for retail and individual investors. I'm self-taught, I didn't go through training program at a hedge fund or anything like that. I just try to make sure that I do my part to try to keep people away from the shills to the best of my ability. I do err on the side of-- I'm basically trying to start a media thing here. I don't know how that all ends up, but to argue that communication isn't core to that strategy would be pretty flawed reasoning.
Kyle: No, I agree. Back to what you were saying about Buffett. I have observed it-- I've gone to almost every annual meeting since 2007. I look back on one that I went to, maybe three or four years ago, I was sitting there. Warren and Charlie were saying something about how-- they were talking about their first five years, and how they were running around, and they were doing deals, and they were buying beaten-down companies inside of Berkshire. They were just exhausted and tired. They had this view of like, “Let's just buy high-quality companies with great management teams and let them do all the work instead of doing these big turnarounds inside of it.” I was sitting there, like, “Oh, my gosh, they're talking to me? Did they say that?” I was just like, “Yeah, that would be easier because I'm working way too hard and everyone's just criticizing me. Don't they know what I'm going through? How miserable this is?” I'd much rather be spending time with my family and my kids. I can just walk away, but I feel I have an obligation to just finish this.” It's just like, “Alright.” Well, people can be cruel, but when you're in the middle of trying to turn something around. It's easy to be like, “Oh, you should just go and communicate.” It's just like, “Oh my gosh, when?”
“I was in the office till 2 in the morning last night. I worked every weekend for the last five years. When would you like me to do this?” It's a lot. What I realize is, the reason they were able to do it so successful is because they basically decided to make their lives easier by buying things that just are on autopilot and then spending all their time communicating. They basically became communicators.
Bill: Yeah, I think that they also, at least from my perspective, did a pretty good job framing when they were open to communicate and when they were closed. It wasn't something that there was any expectation, at least from the minority shareholders, that you would hear much from them until the Ks and Qs dropped. Then the annual meeting, and then I'm sure for the deal flow, they were fully open, but for ideas and stuff like that they were always open.
Kyle: Well, you say that, but they're also regularly on TV. Not now--
Bill: Yeah, that’s fair.
Kyle: Yeah.
Bill: It's interesting. The only word that I can think of is metagame. I don't know that that's the right way to frame it, or even that I want to say it that way. I do talk to some people that I know that are pretty good at media. What I'll tell you is, it's really powerful to have people that are rooting for me to do well. It's powerful to have people that say like, “Thank you for doing this podcast. Here's how I can help you in certain ways.” It comes in different forms. I was talking about supply chain the other day, and somebody that follows me and listens to the podcast and works at some docks, he just told me like, “I'm happy to hop on the phone with you and tell you what I see that's going on.” My personality does better when I'm talking to people in doing the scuttlebutt part of the job. This method of communication has so much scale to it that it facilitates inbounds that is long as people are thoughtful, I'll give anybody the time. It's been really nice to hear from people. What I get personally out of it is a lot of people are like, “Dude, thank you for doing this, because I'm learning a lot from it.” I wouldn't know what to do if it wasn't between this and this other show that I do that's called Value: After Hours. I think I'm helping some people and in doing so, they're trying to help me out too.
I don't know where the world's going. I don't know how much downside you have from social media, or I should have-- I have or whatever. The benefits that I've seen have exceeded the cost so much that, I don't know, maybe it's because I don't have the network that some other people had coming out of college right and this is my way of building out the network, but It's really worked for me and I'm really grateful that people are listening and enjoying themselves. I get a lot of benefit too.
Kyle: Yeah, for sure.
Bill: Back to your experience, when you heard Warren and Charlie talking, that was, were you into the Ballantyne-- you went activist on Ballantyne in 2014, is that fair?
Kyle: It's fair, but I'm not a big believer in going activist. As I'm an activist, but I don't-- you learn a lot over a period of time. I think activism is disruptive. I didn't want to go activist on Ballantyne, but I wanted to be active in Ballantyne. There's a difference.
Bill: Like constructive as opposed to just passive.
Kyle: I left 120 voicemails for Ballantyne before they call me back. I sent dozens of emails before they responded to an email. I just kept calling and emailing. No one would call me back. I filed a 13D showing 14% ownership and they wouldn't talk to me. I'm like, “I'm your largest shareholder, you won't speak to me.”
Bill: Why did you buy such a large stake when they wouldn't even speak to you?
Kyle: Because I had such a great margin of safety in the company, from the financial. I felt very good about the margin of safety. I'd done tons of work on the company, and who was running it was irrelevant to me. It was part of the equation, but it wasn't necessary. I felt like the Graham and Dodd nature of it was good enough that it was so undervalued that I wasn't concerned about the management. I wanted the management to be good. Looking back on it, it's a great question. If I could do it over again, I probably would have spent a lot of time with management because some of the things they did for example, buying Convergent cost me lots of time and money. I would have stopped them from doing buying Convergent.
Bill: For those that don't know that Ballantyne was-- you bought the screen business, right? It's like a movie screen business, it's got an exclusive with IMAX.
Kyle: Yes, so the movie screen business, you wouldn't know it now because but it's a wonderful business, it's a nice cash flowing business. Should it be a public business? That's a great question, but it's a wonderful little cash flowing business. The former board went out and bought a company called Convergent from Sony, when it had over 40 million of revenue. By the time I joined the board, it had 17 million of revenue. They crashed revenue from 40 to 17. It was losing tons of money. The value of the business, it was all non-recurring revenue. It was a disaster by the time I got there. I knew that when I joined the board, so I was inheriting like a mess. This is one thing I caution people is that when an activist takes over a micro-cap company, you should expect the next two to three years are going to be a total disaster. If that activist is good and knows what they're doing, because they're basically going to take over like the sins of the past.
The sins of the past are bad management teams don't write off bad inventory, bad management teams don't write off bad accounts receivable, bad management teams don't make the tough decisions to do things that they need to do. People criticize me for doing the things that are the right decisions. We made the right decisions, that's why we were able to sell Convergent for 23 million, because we made the right decisions. We made things that were valuable. Along the way people like, “Oh, you're destroying the company.” It's like, “Oh, wait. Then why did we sell conversion for 23 million then?” What I have loved for COVID not to hit our center business? Yes. Our center business was extremely valuable prior to COVID. I mean, like, very, very valuable. Ballantyne Strong announced prior to COVID, I don’t know, maybe a year before COVID that we were contemplating strategic alternatives for all three businesses. We had three businesses, Strong Entertainment, Convergent, and Strong Outdoor and we also had some Strategic Investments, GreenFirst which was called Itasca Capital, FGF, which was called 1347 Property Insurance Holdings.
Bill: Strong Outdoor was a sign business right on the top of taxicabs more or less, is that fair?
Kyle: Yeah, taxis and neighbors. There's a story behind each of those. Just starting with Ballantyne Strong. Ballantyne Strong was a company that was in the same industry for close to hindered years, and that cinema business has evolved over a long period of time, when I got there, it's the number one manufacturer of movie screens in North America. We have 80 some thousand square foot plant up in Joliette, Quebec, which is a really neat town if you ever want to go up and visit it. It's really cool. No one speaks, I shouldn't say no one, very few people speak English in Joliette. If you got lunch or dinner there, bring your French translator.
Bill: That’s nice. You keep the culture in a town like that.
Kyle: Oh, it's amazing. You feel you're in France. I would say there are fewer people speak English in Joliette than in France. It is really out there. It's just a really neat town on a river. Just wonderful people there. We have a neat little factory up there. It's a factory town, and wonderful loyal employees have worked for a long period of time for the company. We have our own proprietary paint, which is the secret sauce behind making movie screens, part of the secret sauce. There's only one competitor in the world that really can make a quality movie screen like we can. It's called Harkness. They're based in Ireland. They dominate Europe, we dominate North America. We share the--
Bill: Shipping costs are just too darn high, right?
Kyle: They're high.
Bill: How would you ship an IMAX screen?
Kyle: Well, so we ship IMAX screens, because we make every IMAX screen in the world. Every IMAX screen in the world is made by us. Without going into like all the details of like an IMAX screen. There's no one in the world that can make the quality of a screen, like Strong. IMAX has partnered with us on that for 20 years and--
Bill: You ship it in pieces?
Kyle: No, it's rolled.
Bill: Okay. That's amazing.
Kyle: Yeah, it's rolled. It's typically done on a large boat, if it needs to be there fast-- Look Strong now as a facility in China. Now, we don't have any our intellectual property there. All our intellectual properties in Quebec, but it's a wonderful business where we make very good money. It's not a massive growth business. There's opportunities to grow, we can grow into Europe, we can grow, but cash flow is nice. That's why we have GreenFirst. We had all this cash, it's like, “Well, what do we do?” We made a $2 or $3 million investment, and Itasca Capital, which became GreenFirst, and that $2 or $3 investments now worth $17 million, like shame on us, sorry. The former board took that money and bought Convergent, that was their mistake. They use all that cash to buy Convergent. By the time I got here, they destroyed Convergent and I had to fix it, and then sell it. It took us a while to fix it. That was tough.
We also had a business called Strong Outdoor, which was a business that spun out of Convergent. We basically had some digital signs that we were using and Convergent. We decided to build a business, putting those digital signs on top of taxis. We saw Google Ventures partnering with a company called Firefly. Really smart Stanford MBAs received $50 plus million in venture money, most notably from Google Ventures, and NFX and a few others. We said, “They're super well-funded, they're brilliant, they've got great technology, they're aggressive. They're talking about the things that Uber did. They're going to do the same things, we should own shares of them. We like these guys rather than compete with them.” I was like, “I don't want to compete with these guys. I want to own them.” I called them up or one of my employees called them and said, “Why don't we partner? We put together a deal. We said, “We don't want to sell it for cash.” They had lots of cash. We said, “We'd rather sell for stock, because we see huge upside here.” We took a convertible preferred. The preferred nature of it protects us to the downside. Meaning that if for some reason they sold for less than the value of the common stock, we get our $13 million principal back, but we can convert into common stock to the upside.
We have downside protection, the preferred. We have upside, where we can convert into common at the value of the common at the most recent round. We like that. It's a typical venture deal. It's got the risks of a venture deal. It's got the upside of venture deal as well.
Bill: It's a cool concept. It's digital signage that you're going to be able to-- while you, like an Uber driver would be able to put on top of their Uber and then it's geolocated advertising. Is that accurate?
Kyle: Yes. think of it this way. This is how I got really excited about it was, think about a company that's got a couple thousand screens globally in major cities. New York City is the best city in the world for digital out-of-home advertising, but they're in New York and San Francisco, LA. I don't remember all the cities, but it's like Dallas and Vegas and Miami and wherever, Chicago, and Metcalfe's law is the value of a square. Value of a network is the square of its nodes. It's why eBay is valuable and other online auctions are not. It's why the Chicago Mercantile Exchange is valuable and why other platforms are not. Metcalfe's laws, when you add nodes to a network, it becomes valuable. Visa and MasterCard are valuable because when you have a visa, you can use it in anywhere in the world, when you have a Discover card, Discover is valuable, but not as valuable as Visa, because you can't use your-- Discover card and Diners Club International is less valuable than Visa because when you go--
Bill: Were you one of the early ones to figure this out with the exchanges?
Kyle: Yeah, it's Metcalfe's law. You add nodes to your network and it's valuable. It's why Facebook is valuable. It's why--
Bill: Does it decline after a certain critical mass?
Kyle: No.
Bill: Really?
Kyle: Metcalfe's law, it's exponential. The more nodes you add, the more exponential in value.
Bill: I mean that makes sense. It just seems like you would get an incremental point of diminishing marginal return.
Kyle: No, it actually accelerates. Each node adds more value. That's a math exercise that I have to think through what you're saying.
Bill: Yeah. Like Facebook scale, for instance. The next user seems like you hit the scale that you need but I'm sure mathematically I'm wrong.
Kyle: Well, mathematically, you might be right, I need to think through that. The whole concept of when a network is growing fast at the beginning two nodes is more valuable than one. Time is more valuable.
Bill: No, 100%, I totally understand that.
Kyle: You get to several tens of thousands of nodes on an advertising network, and you have amazing software and technology, and you make it available to advertisers, and then you make it programmatically available. You think about YouTube, all the different types of ways that Google allows you to advertise, through YouTube, through Google search, through other ways. Then, you make Firefly one of those options, you can see how valuable that could be if you can advertise on YouTube, you can advertise on Firefly, you can advertise on Google search, you can advertise in other ways. That's the-- [crosstalk]
Bill: Makes sense why Google would want to partner with them. Right?
Kyle: Yeah, so it's an advertising network. It's an advertising network that becomes extremely valuable when you add nodes. In order to make it valuable, you have to add nodes, and that's the future that I see is they add nodes, they have their own proprietary screens, their screens have all kinds of embedded technology that goes beyond advertising. They have weather forecasting inside of it because they've got these moving vehicles that have-- There's all kinds of data they can collect. They can collect traffic patterns that they can use for all kinds of interesting information. Think about your Google Maps. Google Maps can use that information for all kinds of interesting things. There's all kinds of information that you can use from the information that's being generated from Firefly. We haven't gotten to that point. Right now, it's an advertising network, there's embedded technology inside of those digital signs, that goes far beyond just advertising. We intend to use it.
Bill: That’s cool to be a part of.
Kyle: Yeah.
Bill: It's a lot different than just like a print sign on-- I think everybody-- well, I shouldn't say everybody, I associate just like a dumb sign on the taxi. Once you start to flip that smart sign, things can start to get powerful.
Kyle: Exactly. I was on the board of a company called Iteris and they do some of the stuff with Smart Cities. I think Smart Cities are really an interesting future. The whole internet of things, this is a really neat place.
Bill: That's cool.
Kyle: Ballantyne Strong's got some really interesting pieces. It's got a lot of cash right now, we have an interesting investment in GreenFirst, we have an interesting investment in Firefly, we have an interesting investment in FG Financial. Then we have the center of business that we mentioned that we were doing, exploring all kinds of different alternatives for it. Publicly, we reiterated that in every conference call for a while. You can assume that we do what we say. You can assume that I ruined my life for a couple of years. Deals take time, they don't happen in two weeks. It's so funny watching people on Twitter, bossing CEOs around, acting you can put an M&A transaction together tomorrow. These things take time in finding the right partner. You can assume that we know how to do this stuff and we tried to. there were lots of interesting deals that probably almost got done and then COVID hit. I wouldn't want to say that a deal was almost done, but COVID hit. Things will come back, and they're already starting to.
Google, IMAX CEO forecasts for the cinema industry, he's already like extremely bullish. We had the biggest Chinese New Year. Look, I'm not obsessively focused on like what the cinema industry does. I'm focused on building value for each of these companies long term. One of the things I realized is that people really want to have a focus bet on each of these companies. The nice thing about having multiple public companies is that we can have one play each-- people say, “Well, why don't you merge all of them together?” It's like, “Well, people don't want that.”
Bill: Then you'd have to do the trackers, then you'd be like Malone.
Kyle: Yeah, and we thought about that. Look, Malone does trackers because he's huge. We've looked at doing trackers, and it's complicated and expensive. When you look at doing trackers, you spend money on legal fees. There's only like one or two attorneys in the world that know how to do trackers, and they're expensive, and they're all retired.
Bill: They all work for Malone. [laughs]
Kyle: They all work for Malone and expensive. Okay, so we're spending money on attorneys. Let's focus on like, actually-- It's a better idea to just make each of these companies bigger. We've talked about, it's expensive to liquidate a company, companies need to be bigger to justify their existence. I think a focused strategy and each of these public companies makes sense, which is why GreenFirst is focused on timber. BK Technologies is a really interesting focus on public safety and technology. BK used to be called RELM Wireless, it was a mess when we got there. I mean, when I say mess, I'm underestimating it, it was a mess. We spent years cleaning it up. We changed the name to BK, we created a holding company, we cleaned up inventory, we brought in a whole new technology team. We've reinvented all the products. It is awesome now. What we've done with the company, I'm so proud of it. The things we did for that company, they're so underappreciated, and it's painful to watch people talk about, “Oh, you're such a deadbeat.” It's just like, “Are you kidding me? Do you know what we've done for some of these companies? What they were in?” Quite frankly, maybe like people--
Bill: Well, here's a devil's advocate real quick. Would you think it would be a fair criticism to say that maybe you underestimated the size of the headache that you were incurring when you made some of these acquisitions?
Kyle: Oh, for sure. Magna-Tech, it was extremely well managed, amazing management team, amazing business, amazing cash flow. We caught the secular tailwind. Management team was awesome. Everything went our way. The business was improving and we had a stalking horse fire. It's like, wow, that was it. There were scary moments there, too. It all looks so good from the outside. I lost lots of sleep on Magna-Tech on the inside deal. There were days where I was like, “Whoa, this is scary.” It's sold July 27, 2015, my birthday. A couple of weeks before that, I was like, “Oh, this is terrible.” That deal fell apart many times. Everything--
Bill: How much of your net worth was in it? Just you don't have to say like exactly. I'm just trying to get a sense of your sleepless nights and how tied your family was to--
Kyle: It was 10%, 15%. It wasn't like--
Bill: It's a good amount. You don't want it to just shit the bed.
Kyle: To me, it was just a very critical investment. I wanted to see it do well. Regardless of how much of my net worth was in, I wanted to do well. I have lots of other people's money in it, too. I wanted them to do well. I have my parents’ money, and I had my family's money and I had friends and I want those people to do well, too. It's not just me. Sometimes, I lost more sleep over my friends’ money than mine. It's not just about my money, it's about my friends’ money. If I lose money for my friend, I'm more upset than if I lost my own money. I mean, my wife gets mad about that, but--
Bill: No, that I understand.
Kyle: I can personally take the pain. I can personally take the pain better than my friends can. When you lose money for a friend, it's like, [sighs]. When you lose money for yourself, it's like, “Whatever, I'll deal.”
Bill: Yeah. I was only asking about how much because I've only been close to one friend that's run his own sale process. He had bet everything twice. Watching him on the second one, it was an oil E&P company. Man, I'll tell you what it was right before the oil crashed. He was going to flip to a public company and he was going to be locked up. He was like losing sleep crazy. He was just like, “I don't want stock. I want cash. I want my employees to have cash. I do not want to get locked up.” It was just interesting to watch him. It's funny, when it was over, he said, “I'm either going to retire for a while or do it again.” I was like, “Oh, you're crazy if you don't do it again.” Now that he's been retired for four or five years or whatever, and seeing I'm happy, I understand how dumb I was on the outside saying like, “Yeah, just go do it again,” because I finally started listening to him when he was saying, “Do you understand how stressful this is for me? I don't do anything except for this. What he was doing, he was a land man at his company, so he's flying around the like, parts of Texas that you may not want to go to on for a vacation. Then and then all the stress having the employees, like you said. He was in it for the other people, not so much for himself.
Kyle: Yeah. It's not just also investing people's money. It's also like, people don't realize this, like when you work for someone else, you can just quit. When you starting your own company, and you hire employees, and you have people that, it's like, it's painful to have to think about the consequences of these people work for you, and they came in bet on you. If you let them down, they're not going to have jobs. Those are the kinds of things you'll lose sleep at night on. Like, you're losing money for your family, you're losing money for your friends, if this doesn't work out, you're potentially losing jobs for people that left secure jobs to come work for you. It is all on your back, but it all worked out.
Bill: Do you ever regret leaving the hedge fund industry? Would it have been a less stressful life?
Kyle: No, I'm doing what I want to do. My wife always pushes me and says like, “Why don't you just manage your money and not do this?” I think you've mentioned Mike Mitchell once or twice. He seems to have like the most ideal life.
Bill: [laughs]
Kyle: Why don’t I just do it.
Bill: Mike’s playing his cards well right now. [laughs]
Kyle: I'm doing all the work, and he's--
Bill: He's letting crazy people on Twitter pitch him ideas like Qurate, and then he's outsourced some of it to you, too. He's doing it smarter, not harder.
Kyle: That's probably what I should do. Mike is super talented and smart guy. I met him a few years ago and like him a lot. He reached out to me and asked me about Itasca Capital a few years ago, because it was trading-- actually it was not even Itasca Capital, it was PIH, and it was trading at a discount. We started talking and he sounds like he's made some money on some of these stocks.
Bill: What's going on with this insurance company you got that had to relocate to Florida? What happened in all that? Okay, here's my real question. Value investors, I think, see Buffett, hear the word ‘insurance,’ say, “I want to do that myself,” and then get themselves into-- I have heard of a couple people getting themselves into situations and being like, “Oh, shit, this is way more complicated than it looked underwriting.” It was that the case at the insurance company too or not really?
Kyle: Sort of.
Bill: I'm not saying that that's what you've done. I hear it pitched a lot. I'm like, “I'm not sure that I want to get involved in that.” [chuckles]
Kyle: Look, Buffett has a great setup on the insurance side. Others do as well, like Markel, Fairfax. Insurance is an interesting business, but it's hard. Insurance is a hard business. You have to really understand it. It's not as easy as people think it is. This whole idea that you can just buy an insurance company and manage [unintelligible [01:13:14] is a fallacy. We have a lot of insurance expertise. We understand the business. I've been a financials guy since 2001. I've been looking at financials my whole life. Larry Swets is probably one of the smartest insurance people you'll meet. His background is really on distressed, difficult-situation insurance companies. He really knows how to deal with an insurance company that's got problems. He's done really well with those types of situations and knows how to handle them. The interesting thing about insurance, what I found is that in the US, it's different state by state, every state matters. The regulators matter, it's a very political situation, it's very much in control of what the regulator thinks about your particular situation. You have to write policies in the US, you can't just stop running policies. You have to ask for permission to raise pricing, so you can't just raise pricing. Pricing is controlled. You can get away with raising pricing if you ask for permission, but your investment portfolio is very much-- there are regulatory guidelines about what you can do state by state. There are certain states that are good, there are certain states that are bad, and you really have to be careful.
We thought the insurance business was interesting. We still think it's interesting. I think reinsurance is very interesting as well, but you have to be very careful, and you have to be very knowledgeable and I'd be very careful for people thinking they can do it if they have no experience.
Bill: You see some of the greatest that have ever-- reinsurance particularly has gotten some people in a jam, right? That’s tough.
Kyle: Yes. I mean, reinsurance is a dangerous term because it means so many different things and people try and make it sound like it's one thing. The types of reinsurance we're writing are-- I hate to try and make it trying to characterize as one thing, because it's not great. We look at batch that we think are prudent, we try and cap the losses. We say, “This is the amount of money we're willing to lose.” We were willing to lose one and half million dollars, and no more. If you think about what a rating is, a rating from Moody's or S&P or other rating agencies is technically like a licensed-- not license, it's the idea that you-- they're saying that you are creditworthy, and therefore you can borrow money. It's a measure of credit worthiness, and people don't think about that. It's a measure of credit worthiness. They think about it when they think about with bonds, but they don't think about it when they are thinking about their insurance company.
The whole idea behind having a credit rating as an insurance company is that you can borrow, and borrowing in the context of insurance companies putting on liabilities, which are insurance liabilities. If you put on lots of insurance liabilities, the more you put on, the more you can lose, which is why you get downgraded, and then once you get downgraded, then your business is over. We are not a rated reinsurance company, which means we have to post collateral, since we have to post collateral, like we can't lose that much. I don't want to suggest that we can't lose, we can lose. We are very careful with the amount that we can lose relative to if we were writing really risky reinsurance, which makes it possible to take a little bit more risk on the investment side, because of the way we're writing the reinsurance. If we were taking huge risk on the reinsurance side, then we wouldn't be able to take as much risk on the investment side. It's a little bit better on the investment side, because of the reinsurance that we're running.
In Florida, Louisiana, and Texas, we're taking large insurance risk. Therefore, we can take large investment risk. We had to minimize it. The risk you're taking the insurance portfolio, on the insurance liabilities is directly tied to the risk you can take on the investment side. If you take too much risk on the insurance side, then you can't take much risk on the investment side and vice versa.
Bill: Yeah, that makes sense. Well, man, I don't want to take up too much of your time, because I know that you're busy and working around the clock. I'm just going to kick it to you and say is, I don't know if there's anything that you want to cover off on? I don't know if you want to do a quick SPAC lesson or not?
Kyle: Well, let's talk about SPAC for a second. I read a lot about people talking about SPACs, and saying that this is a hot new trend that's going to go away. SPACs have been around for a long time. They've been around for 20 plus years. They've only recently become mainstream in the last probably 12 months or so. Big name people are doing SPAC now. I think in some cases, too many people are doing SPACs. Some people that should-- celebrities and others that like really have probably no business doing SPACs, or doing anything in business, are doing SPACs. I don't mean that to be a jerk.
Bill: It's just what's going on.
Kyle: I'm just saying like, there's certain people that are doing SPACs that, like Joe Moglia was the chairman and CEO of TD Ameritrade for 19 years, did 11 acquisitions that were all very successful, took a $700 million market cap and turned it into a $20 billion market cap. You look back at the track record on those 11 acquisitions. They were all very well thought out. They were all very successful. He has a great reputation and he ultimately sold Ameritrade to Schwab. I was his largest investor for many of those years. I've been his partner since 2012. We have a great relationship. I've been involved in many of the strategic decisions he's made over the years and we now have us back together FG New America. We bought a company called OppFi, we're under definitive agreement, we found our proxy, that deal should close sometime in June of 2021 and trades under the ticker FGNA.
You look at it, it's a comparable company to Upstart, UPST is the ticker. Upstart’s stock has gone from 20 to 140 in the last short period of time, amazing. I was watching a video of Upstart CEO talking about his business and I'm like, “This is a very similar business to ours. Their businesses trading like 24 times revenue. Ours trading like two-three times revenue.” It's very interesting to me, the valuation dispersion, and that comes back to like communications of like what you were saying. It's like, they're communicating and we probably should do a better job of that, so we will. Just getting the message out of like, what our businesses and what their businesses and how we're similar and how we're different. There's many similarities and there's some differences. I think it's important to highlight both of those.
When you look at the SPAC market, there's a lot of specs out there, there's some questionable deals being done. I think when we looked at the number of deals that were done, I think, and don't quote me on this, but it's like, hundreds of SPACs have come public, I think like something like 60 some, 60, 70 deals have been announced of those. I think there was like, seven companies were profitable of those deals. When we looked at those numbers, our OppFi was either the most profitable or one of the most profitable SPAC transactions announced. I thought it was a very good deal 10 times, like 2023 earnings or something like that. Pretty reasonable numbers, like we actually are very profitable in 2021, we're profitable in 2019, 2018. I think there's a lot of discussion around like, companies that are not profitable. I think that's fair criticism.
One thing I do think, though, is that there's a discussion about the SPAC market is this fad that's going to go away, or I see people saying, “Well, it's like--" I think the SPAC market is here to stay for a couple of reasons. One is, I think it'll come and go, it's cooling a little bit right now. Just like the IPO market, it'll cool, it'll heat up again, it's cool, it’ll heat up again, that's normal for capital markets. It's not fair to say like when it cools off though, it's dead. The IPO market calls all the time, too, it's not dead just because it cools. It's a viable alternative to the IPO market. The IPO markets not dead, it's here to stay, too. Companies that are considering going public have to evaluate, should we go the traditional way? Or should we go the SPAC way. There's benefits to both. One's not better than the other. It depends on the circumstances for each. There's much more cash costs, potentially with going the IPO route. There's constraints with going on the IPO route that don't exist with the SPAC route. With SPACs, there's things that you can do, like your forward projections that some better disclosures, different structuring, that you can do with a SPAC that you can't do with an IPO. There's things with the IPO that you can't do with the SPAC. There's benefits of both.
Bill: What would be a benefit of an IPO that you can do it a SPAC?
Kyle: With an IPO the company is, is basically marketing itself immediately, whereas with the SPAC, if you're a company looking to go public, you're basically not negotiating an M&A transaction with a SPAC. You're just basically saying, like, “We're on our own, we're going to go public, and we're not going to deal with the confusion around, founder shares, and warrants and so on. We're just going to have a nice clean IPO and be public.” With a SPAC, there's the whole period of time where you're closing a transaction where there's some confusion, and I think that some of that's the opportunity, so there is a period of time where you market the SPAC and you explain the deal, but if you don't do a great job with that communications process, it creates a valuation gap between the IPO and the SPAC, in the IPO market--
Bill: The IPO can do the whole road show and really drum up interest, and it's very, very mechanized. You've got investment bankers that are driving the process.
Kyle: Then the sell sides launching their sell side reports on the IPO right afterwards and initiating coverage. That will happen with the SPAC, too, but there's positives and negatives to both.
Bill: The sell side is not going to get ramped up unless there's M&A opportunities for the SPAC. For instance, you take a SPAC public, the sell side is not incented in the same way to initiate coverage and get all amped up about that entity. Is that fair or am I too cynical there?
Kyle: It's a good question. It's probably fair. I do think that you do have sell side coverage on both sides. I think that there is a pretty-- I hate to sound like I believe the laws actually exist. I do think that the there is a pretty decent separation and that research analysts do cover what they want to these days, and they put their-- like at the bigger firms. At the bigger firms, the ratings are the ratings. If you look at Upstart, for example, some of the analysts that rolled out coverage from the big banks came out with cold ratings and they didn't pump the stock, for example. I think that there is some reason-- there people were putting it, but they got it wrong. They put $50 targets and stock’s at $1.40. They probably would have been better off putting buy ratings.
Bill: As someone that's really been in the center of that, like of Wall Street for a while, do you defer when you see it-- when you see a share price rocket like that, do you defer to the market or does your gut say maybe things are a little bit too heated here because you read a lot about like, “Oh, unprofitable companies and everybody's buying them.” There's another side of that where I'm profitable could be investing through the income statement for the future. It's not quite as easy as people might like to say.
Kyle: I started my career to a price where we-- so I've had the benefit of three different firms that are three different strategies. I understand why stocks trade the way they trade/ I understand why Tesla trades the way Tesla trades. I think FinTwit is universally too negative on things like Tesla, and all the things that are the go-go stocks of that today, that technology sucks. I think FinTwit-- Now, there's things that have no revenue that are trading at multibillion dollar valuations. I totally understand why people don't like those. There are companies that are technology companies that have real revenue that are legitimate, like I was bullish on Amazon in ‘98, and people thought I was insane. I was like, “Okay, I think I'm insane.” I was bullish on Tesla, ask Mike Mitchell, I was like, “People are way too negative on Tesla.” This is two years ago, I mentioned this to him. I was like, “I want to say something controversial to you. I don't want you to think that I'm a jerk. I actually like Tesla.” He's like, “I don't think you're a jerk.” I'm like, “Okay. I think Tesla could be a good investment.” This is two years ago. I felt bad saying it. On the other hand, I understand--
Bill: Why did you feel bad saying it because everybody was so negative about it?
Kyle: Because everyone hated. I was like, “I think people are way too negative on this. Elon Musk is like brilliant.” I had already own two Tesla's myself. I was like, “This is like an iPhone.”
Bill: Yeah, they are pretty cool cars.
Kyle: This is an amazing vehicle. Now, at this valuation, I have no idea.
Bill: He also toes-- I mean, he messes around with the SEC sometimes. Some of its in how you deliver the message, and then the other side of it's like, “That guy's a genius, changing the world. I'm a guy in a room. Who am I?”
Kyle: Right. Yeah. I think that universally, people, there's reasons to be skeptical, and then there's reasons-- if a company has 10 million in revenue, and a $2 billion market cap, and it's going to the moon, it's going to Mars or whatever, it has no revenue, that's probably a reason to be skeptical. If it's got like a product that you love, like the Peter Lynch principles of like, I love this product and it's trading 40 times earnings, but I love this product and it's growing like 30% a year, it's probably okay to buy. If you love the product, I'm not recommending anything, but I'm saying--
Bill: Yeah, well, you seen that growth mindset, and you implemented that at a firm. That's why I'm asking.
Kyle: Yeah. To your point, you don't have to be like, “Oh, it's 40 times earnings, I can't buy it.” You can be like, “I love this product and I can see all these other growth opportunities.” It's okay to buy things. You don't have to be like, “Oh, there's no way I can own this. Even though I love this product.” Sometimes you look back two years later and the stock’s up several 1,000% like, “Why didn't I own that?” Then some people liked Peloton, like, “I should’ve owned it,” or, Netflix. “I really liked the product, I should’ve owned it,” things like that, or Amazon, like, how obvious was that?
Bill: Yeah. Well--
Kyle: Amazon not the most--
Bill: [crosstalk] -the entire time.
Kyle: It's easy in hindsight, it's like, how obvious was Amazon? Come on. How obvious was Google?
Bill: It's interesting that in your own life, you're more attracted. It seems like to the margin of safety-- Like Ballantyne, for instance, right?
Kyle: Absolutely. My point is like, but I do have Firefly inside of one of them. I do have GreenFirst inside of one of them. Some of these have really interesting things inside of them. We have OppFi inside of FGF. OppFi is an amazing investment. GreenFirst is an amazing investment. Firefly could be a really amazing investment. That's the T. Rowe Price mentality. T. Rowe Price was one of the original great growth investors years ago. I don't know, when Mr. Price was alive, but that was he was one of the first amazing growth investors. That resonated through the culture. Then Steve has his own strategy, which is different. He's very focused on the short term, but he also has Point72 Ventures, he owns the Mets. He's obviously able to make bets that you can't sell today. Then, I worked for Tiger Cub. I worked for Lee Hobson, who ran Highside Capital, it was a $5 billion at its peak, $5 billion Tiger Cub, that's now his family office that spun out of Maverick. Tiger’s really neat culture. They are a combination of buy growth companies that have earnings that are going to materially beat the consensus. They do amazing research. I learned a lot from tiger.
Bill: That's cool. That's a hell of a career, man. Now, the transition of your operating companies is complete, and you can put your own cherry on top of yours, and maybe end up at your house a little bit more often. Hopefully living the Mike Mitchell life.
Kyle: Hopefully.
Bill: In closing, I do have one question. You have a Super Bowl champion on the board of directors, how did that happen?
Kyle: Couple of ways, but mainly--
Bill: Mr. Suh.
Kyle: Yeah, my partner Joe Moglia, who I've talked about a little bit already, who is the Chairman, CEO of TD Ameritrade. His story is an interesting one, but he grew up in the Bronx, became very interested in football, was a football coach first and then went to Merrill Lynch and rose to the top of Merrill Lynch, but after going to Ameritrade and was the CEO of Ameritrade, had this real strong interest in going back into football coaching. Ameritrade is based in Omaha, Nebraska, and Ndamukong Suh played for University of Nebraska as an undergrad. Joe, when he moved from CEO to Chairman of Ameritrade in 2008, decided to go back into coaching football, and his first football coaching job out of Ameritrade was at University of Nebraska, when Suh was there, and he developed a great relationship with Suh. He introduced us years ago, a long time ago when Suh was much younger. We've developed a great relationship.
Ballantyne Strong has the distinction of being if you google Ballantyne Strong, Warren Buffett, Ndamukong Suh, you'll see that we are one of the one of the only public companies in history that's had Warren Buffett quoted in their press release. When Ndamukong Suh joined our board, we asked Warren Buffett to be quoted in it because we thought it might be controversial, because Ndamukong is actually a really successful businessperson. People were like, “Oh, you're putting him on because he's a football player.” “No, we're putting him on because he's a smart businessperson.” The fact that he plays football, I could really care less about, I wanted the board full of great business people. He is an extraordinary business person, much more accomplished than most. We knew that he has a great relationship with Warren Buffett. Warren's a big University of Nebraska football fan. At the time, he was playing for the Miami Dolphins and Stephen Ross, who owns the Miami Dolphins, we asked him to be quoted in the press release supporting it. He said, “I'll be quoted if Warren Buffett will be.”
Bill: [chuckles] Huh, I like it.
Kyle: Saying like, “You'll never get Warren Buffett to be quoted, so I'll never be quoted.” We're like, “Done.” We asked Warren to be quoted, and he's like, “Of course, I'll be quoted.” His quote was, “I would never want to run against Ndamukong Suh for a board seat.” I'm not sure if that's the exact quote, but you'll see if you google it in the press release. Stephen was like, he agreed to be quoted, and we're like, “Yes.” Then, he had to come up with a quote. Both Stephen Ross, the owner of the Miami Dolphins, and Warren Buffett are quoted in Ballantyne Strong’s press release. Ndamukong has been on our board. He's a great board member. Since then, I've gone to a football game with Warren Buffett to watch Ndamukong Suh and with Todd Combs and with others, and sat in Suh’s box with--[crosstalk]
Bill: That's cool.
Kyle: Yeah.
Bill: That's a fun story. All right. Well, good, man. I'm going to let you get back to your job because I know that you were up super late and I appreciate you stopping by. Anytime you want, the mic’s open to you.
Kyle: I appreciate it.
