Collins oversees the firm's investment strategy and serves on its investment committee. After a career at Morgan Stanley, where he was an MD in the alternative investment partners group, Collins has also worked in private equity at Petra Capital and in investment banking at Robertson Stevens. He holds an MBA from the Wharton School and a bachelor’s degree in politics from Princeton University.
 

Joe Reilly: Maybe you can tell us how a Princeton politics major ended up interested in these offbeat assets?
Jeff Collins: It wasn't a direct path to be sure. I was dragged by the hair through all my economics and finance classes by my genius roommates, Fred and John, one of whom is a microeconomics professor at Northwestern now, and the other one trades equity derivatives in New York. And, as we approached the end of college, we thought about the experience of post-college that would provide me with the broadest exposure and the widest launchpad I could secure. 

stuck into a hole at the ripe old age of 22. And that took me to the management consulting interview process and investment banking interview process because the friends that had gone on before me had talked about that two-year training ground, both from a technical standpoint and a network standpoint. There was also awareness of parts of the world of business, whether it's finance or other, that you just don't know about when you're in college. Politics was and remains my passion. 

Q: But it was not necessarily relevant on campaigns? Did you work on the Hill?  
Collins: I worked on the Hill for a summer during college for a senator from South Carolina and I grew up in Georgia. My dad lived in South Carolina. And that was an interesting experience, but it wasn't really work, honestly. It was a very large intern program. 

And it was very interesting. But it was also very apparent to me that it's hard to remain your own person. You get pulled in different directions and it's hard to figure out who in Washington doesn't owe other people a lot of favors. 

Q: You started looking at unique assets when you were at Morgan Stanley. 
Collins: I think Morgan Stanley was unique among its competitors. at the higher end of the bulge bracket in terms of investment management in what effectively acquired through joint venture the pension investment team from the Weyerhaeuser Corporation. 

The pension team began innovating in 1985 in a very quiet way and invested 100 per cent of the cash assets of the pension fund in alternatives. And they got their equity and fixed income exposure through these things called equity or derivative overlays, and they took all the cash assets and they chased off. 

And what that meant on the hedge fund side initially was statistical arbitrage. And then that industry evolved dramatically. And on the private side it meant unique assets wherever they sit in the world. Roll forward to 2000: Morgan Stanley and the Weyerhaeuser Corporate Pension Fund. created by a group inside Morgan Stanley, investment management called Alternative Investment Partners, and is still alive and vibrant and diagonally across the street from me. 

So in the 2000s you had commercial real estate in Japan, distressed non-performing loan pools in Japan. There was an innovative asset consumer in South Korea. Then during the financial crisis specific jurisdictions Portugal, the UK, Europe, and some opportunities in the US. 

Q: What was the outcome of the Weyerhaeuser strategy? 
Collins: It was outrageous performance. And just perpetuated the program inside of Morgan Stanley investment management. And then obviously grew far beyond Weyerhaeuser, but it was they were very strong performers. 

It was led by a gentleman named Jack Coates, who was the CIO at Weyerhaeuser and then the head of the business at Morgan Stanley. He's an investor with us now. The co-founder of Morgan Stanley became the head of Morgan Stanley and now our senior advisor, Corey Poey, my mentor. 

Q: Why do you think it did so well?
Collins: I think part of it was first mover advantage, but there were certainly some examples of successes where they were just looking where others didn't, into episodic, very interesting, esoteric private assets that maybe never came to grow to be a hundred billion dollars opportunity. 

This is an interesting thing that we can do something and make a very interesting risk-adjusted return in an uncorrelated way for our pensioners or at Morgan Stanley for our institutional and high net worth investors, where it doesn't need to be a growth thesis. 

Q: Do they fit comfortably within these firms – the Morgan Stanley's and Goldmans of the world? 
Collins: I think the largest investment banks that own very large investment management operations are in scale, in the business of scale and whatever idea, whatever fund you raise, whatever strategy you raise, it needs to be able to get very large over time. And that comment would apply to the collection of niches where we invest. 

But not to any one or two or handful. And, thankfully, there was a home for this operation inside of Morgan Stanley at a point in time, but then it was never going to be a $20 billion investment management business, it was not necessarily de-emphasized. The firm will chase scalable opportunities and support those. 

Which is the reason why an independent firm like Cloverlay should exist to perpetuate this program at the right size, on the right sort of pacing, and do it in the right way without the pressure of saying, "I need it to be be $20 billion in five years, otherwise I've failed." We don't feel that pressure at all. 

Q: So how did the firm start? What was that first year like? Who were the first investors?
Collins: The first year following my one year of non-compete non-solicit I couldn't own a management company in a "competing business." And I couldn't talk to current or potential Morgan Stanley clients, which I think means everyone. The only thing I could do was talk to friends who had started firms and been successful doing so. 

And organizational design was the emphasis for the first-year subletting office space from a friend out here in on the main line in Philadelphia. And trying to get smart and one of the huge benefits of our business at Morgan Stanley and my daily existence at Morgan Stanley was having seen through deep diligence, thousands and thousands of different general partners. It's hard to raise money with a PowerPoint and five employees and an idea with no track record that you can claim. 

Q: Was there a chicken and egg problem, obviously there's a lot of long runway? Did you have issues that first year securing investments?  
Collins: Not really issues, but because of our smaller size at the time, you roll forward 10 years, this summer we will be $2 billion so our per deal investment size, and the control implied in our second five years is very different than our first five years. And so initially deals were not an issue, but our role because of our size was different than it is today. 

Q: I assume there's often some give up in liquidity with these assets. How do you think about what you have to give up versus the higher returns? 
Collins: Exit path is a critical component. It's the second discussion item when we start reviewing opportunities in our pipeline. The first discussion point is dimensioning our downside. 

Assets, tangible or intangible, are not operating businesses. There are no public compensation, there is no EBITDA. These are things, sometimes you can touch them, sometimes you can't. And we're doing so on an unlevered basis. Discussion point number one is if the world ends, if we get everything right, what is our recovery? 

If we're buying an asset with no debt, is it a cacao plantation that you can sell for 80 cents on the dollar as cattle land? Or is there more downside because we're creating these assets or creating our entry point below intrinsic or replacement value? That is, we are value investors first and foremost, and so we look around and say, if the world ends, this cannot be a binary outcome. 

There must be a recovery. The second discussion point is exit path because they are unique assets. And the exit path will vary by asset type and asset category. 

We invested in Broadway theatrical Rights. We are not putting shows on Broadway or the West End, but we are taking Phantom of the Opera to Singapore on an actuarial basis in terms of how frequently you come back to Singapore with a guaranteed box office. We take no box office risk – we receive a check before the set is sent on a boat. You're building these long-term durable royalties based on the intellectual property of iconic titles. 

Q: We could talk a little bit about how you source and structure.  
Collins: The top of the funnel is never large enough, but it's quite large. The reason it's large, I think, is partially reputational. We, as a firm and as individuals at Cloverlay have been a known audience for the niche and the weird for decades. And so, when there is an opportunity in the largest coin collection in the world. We're gonna see that and we want to see all of it.

Now, the second layer of the funnel tightens up a lot because the initial is a lot of low grade or, but we want to see all of it because we'll learn something from any conversation in any of these, off-the-run asset types. But the sourcing, the way we talk about sourcing really is through three channels. 

Q: Maybe we could take a specific example – maybe Care Bears. So maybe we could talk about how you found it when you decided, what made you decide to pull the trigger and then maybe how you structured it. 
Collins: Sure. it's an interesting example because we divide the intellectual property world into two camps. One is mechanical. The things inside your iPhone that are long-term durable licensing agreements, technology, that you're not actually making it, but someone is using your technology to make a device work. 

And we've been active there. The other part of intellectual property is content. And we had been spending a lot of time and content with different types with a going in thesis in one part of content around long dated. 

It's just an iconic piece of content that maybe hasn't been managed by Warner Brothers for the last 20 years. And we had looked at several opportunities that did not end up coming to fruition inside the intellectual property content space. And we've been talking to several potential CEOs or operating partners in the space as they were looking for different kinds of assets. 

And some of them were not interesting to us, but we had ongoing conversations with a number of them who were looking for something that kind of rhymed with our going in thesis. And what ended up happening was, again, network nodes. We heard from one of them that the Care Bears might be for sale and then nothing ever happened. 

a separate conversation where we got very close with an operating partner on a different collection of assets. They suddenly said “we are dropping that because we can close on the Care Bears in 45 or 60 days. We know everything about the asset. We know the team incredibly well.” And the seller has said, “we will not sell to Mattel or Hasbro or Warner Brothers because we like our team, and we want to perpetuate our team.” 

It was “I am selling to someone that I know at a fair price, and it was a family office as I get my affairs in order, and this is the third to last asset that I'm selling, so I'm a little bit maybe less focused on it.”

The Care Bears from that point forward has performed extraordinarily well, and that global licensing and royalty stream has grown significantly. 

Q: But where in the process did you decide that this was going to be a good investment and how did you think about structuring it? 
Collins: I think there's a parallel between the Broadway Touring IP and the Care Bears IP in that the intellectual property has existed for so long. That the baseline performance is very predictable. The question becomes at what price? And can we do anything to improve that? 

Sometimes the answer is “no.” Sometimes it would be trying to reignite a brand as if it were new because you bought it so well. But the reason you bought it is that no one knew the brand. But in the case of the Care Bears, it is an anomaly in so many different ways. If your listeners know about the Care Bears or their kids have Care Bears t-shirts, that's based on episodes that ran on CBS in 1981. There's no Care Bears movie. They haven't been on TV for 35 years. It's solely based on the quality of the intellectual property and how it resounds with the Western public. 

Q: what's the exit in that regard? 
Collins: Sometimes those are the self-liquidating style where once we meet our predetermined return on both a multiple and IRR basis, they own all their intellectual property again. 

So that's almost a bridge to an event that you need capital to do your thing. We will provide that capital. We don't care about your thing. We care about your intellectual property, and we will generate value from the intellectual property away from your business. And then when we make 2.2 times or 2.7 times, or whatever the case, maybe you own all your IP. 

Q: You've been in the unique position of seeing the entire life cycle of one of these assets, which is litigation finance. 
Collins: It started in 2000 probably…The pendulum of power in litigation finance swung from the initial days of one of the few providers of capital. 

I would visit a law firm and ask to look at its entire caseload and let it know which five I care about. In not very much time, there were so many providers of capital that litigation finance started looking a lot like mezzanine debt. 

Sitting on top of the entire caseload of every law firm in the US, that's very different from the earliest innings. The problem, the primary problem with litigation finance has been duration of cases. 

Q: Could you give an example of something, an asset that was particularly intriguing, but that you ultimately passed on? 
Collins: There are a lot. I mentioned the largest coin collection in the world. We looked at the largest classic car collection in the world. It's $250 million or something like that. 

I guess painting is liquid, but the value of the painting is intangible. That's where we've always had the shortcoming, the actuarial sort of analysis behind what is the value of this piece of art. 

We haven't been able to get there. It's an asset class that could play a role. It remains too qualitative. 

Q: What kind of frameworks can you apply? What kind of heuristics can you use? 
Collins: We have a number and a growing number of family office investors, some of whom we work with very closely and have brought into a couple of our deals as co-investors. There's always a bit of an education process. 

With the starting point being the valuation metric, that's the biggest challenge. The blessing for family offices is that most of them were created due to growth. 

Q: How does risk management work within the portfolio? 
Collins: It can be a great idea, but we need to understand the small correlations that we may have embedded in any individual investment or the first five investments taken on, as a group and as you build it out to a 12 or 15 investment portfolio.