Sreeni Prabhu, co-founder, Managing Partner, Co-CEO & Group Chief Investment Officer, Angel Oak Capital
I wanna welcome everybody to a very special edition of ATL Alts. This is your host, Andres Sundate. I am recording this here in Atlanta, and I am joined today by somebody who, there is a deep backstory to get into, but I wanna welcome, and allow him to give his backstory, Srinivas Prabhu. He goes by Srini. He is the cofounder, managing partner, co CEO, and group CIO at Angel Oak Capital, which is nearly a $20,000,000,000 asset manager, but really a big giant company, in Atlanta.
Andres Sandate:And he leads the overall investment strategy of the firm. He also is co pardon. He's also the CEO and president of Angel Oak Mortgage REIT, which is a New York Stock Exchange, company. Ticker is a o m r. You can learn more about Angel Oak at angeloakcapital.com.
Andres Sandate:There's a lot of great resources, some terrific content, educational resources. If you're an advisor, that's already doing business with Angel Oak, you you can see the territory map and the coverage map. If you're an investor or family office and wanna engage with the institutional team, Adam Bealer and a number of other guys over there are terrific. So lots of really great resources. That's a long introduction, Srini, but I wanna welcome you to ATL Lulz.
Andres Sandate:I'm excited to to have, one of our local terrific, firms that's, just got a great reputation to ATL Alt. This is the first time we've had, you on and the first time we've had a chance to allow Angelo Capital to, tell a story. So with that, sorry for the long winded introduction, but welcome to ATL Wells.
Sreeni Prabhu:Thank you, Andres. I appreciate it. I really, appreciate you having me on, on the podcast.
Andres Sandate:Yeah. So first question is always, you know, the same, and that's, tell us your backstory. How did you arrive at, you know, that long, terrific title that oversees $20,000,000,000, lots of strategies, lots of products? Tell us the backstory.
Sreeni Prabhu:Thank you. It was a different way to get here. In the first part of my life, I grew up in India, you know, played tennis growing up in India, and I had an opportunity to come to the US to play college tennis. So I had a little bit of a different path to come to the US, and found a a small school, outside of Atlanta. Did my undergraduate over there and was able to do my master's, at Georgia State.
Sreeni Prabhu:And then the dentist has played a big role in where I am today. Yeah. My 1st internship that I got at SunTrust Bank, you know, we're both familiar with the
Andres Sandate:We're both alums? Yep.
Sreeni Prabhu:Yeah. You know, I got my internship, because the person who gave me the internship was also a tennis player, and he, you know, I didn't know much about finance. I wanted to do it, and that was my few of the classes I took, at Georgia State University. And I just happened to fall into a great seat with a great boss, who actually, as a part of our firm development, he now works with us, at Angel of Capital, and he runs the financial strategy. So, you know, as you know, having a good seat in the early stage of your career is big, and SunTrust is something you have that.
Sreeni Prabhu:Quickly migrated, and I love, the, the whole background of asset backed structures. You know, asset backed securities or what and how but basically asset backed finance. Yeah. And how, in the US, you know, little differently than the rest of the world, how financing plays a huge role in every single thing that we do daily. Right?
Sreeni Prabhu:Yep. Everything. Everything we do.
Andres Sandate:Buying a car, getting a house, taking out a loan, on your house. You know? I mean, it it it's everything.
Sreeni Prabhu:It's everything. And, so I was in the early stages when there were not many players involved. I learned a lot, and then went and became a portfolio manager. Then I had an opportunity to go to Washington Mutual as, you know, the center of the crisis.
Andres Sandate:Out in Seattle?
Sreeni Prabhu:Yeah. I I was I was the head portfolio manager of the Treasury bond portfolio, not the bank. Yep. And by 2007, you know, I'd seen the writing on the wall, and, I knew that these assets would have to leave the banking system. You know, I can't I, I can't tell you that I predicted the Armageddon that forward.
Sreeni Prabhu:I clearly didn't.
Andres Sandate:But But you became bearish, and and I wanna stop there. There's some things we're gonna circle back to on your background. We have a we have an audience of advisers, family offices, institutions, but we also have, an audience that we target of folks that wanna break into the industry, people that are in the industry, but wanna one day run their own fund. They wanna build their own company. They wanna get on the buy side, if you will.
Andres Sandate:So we're gonna circle back to some stuff, and I don't wanna cut you off, but there's a headline from Barron's. I would be remiss if I if I didn't bring this up, but you could find this out there on Google. I didn't even download the whole article, but it's effectively a profile written in 2017. You know, your firm, Angelo Capital, we're gonna talk about what you all do in the non qm, nonqualified mortgage space, particularly in the, you know, residential mortgages. But the article says and, again, this is Barron's.
Andres Sandate:In 06, you were running $25,000,000,000, bond portfolio at Washington Mutual as you said. When, again, this is the author. When lax lending, iffy appraisals, and general sentiment in housing was you know, housing prices are gonna continue to go up, and you turned more bearish. Yeah. And even, even despite the fact that, other divisions within wash Washington Mutual were churning out loans to arguably, at the time, it's easier to look back, some of those more iffy borrowers.
Andres Sandate:And, and obviously we we all know those of us that were in the market or or participated in the in the space know what happened in 07 and certainly the broader economy. What we saw transpire in 07, 8. You were in the middle of it.
Sreeni Prabhu:Yeah.
Andres Sandate:So again, I I cut you off, but but this is unique that we have somebody that you know, you fast forward now from 0708 all the way to today with that backstory growing up, looking at it at SunTrust as a bank analyst, I mean, you've seen the entire value chain.
Sreeni Prabhu:Yeah. No. It's, and and I wanted to finish that. It's, that's when we started Angel Capital in 2008. I left Washington Mutual.
Andres Sandate:Okay.
Sreeni Prabhu:And and to get answer your point on being bearish, you know, few things. Right? Look. As you said, you know, a lot of people were not trying to do wrong things. It was a
Andres Sandate:Yeah.
Sreeni Prabhu:Very well in the life cycle. And I think what happened before the financial crisis was there was a big fight, in in almost all banks between business and credit. Right? Mhmm. And when there were so much fees and so much commissions and so much, profits that were generated, it is very hard to start as to stop a train that is going at full speed.
Sreeni Prabhu:Right. The whole infrastructure is built around it. I think that we, as a as a general, fixed income community and as a general Wall Street committee, just lost the plot. Right? And that this is not a reserve of what And
Andres Sandate:there were other forces. Right? We comment. We wanna we wanna get into the micro as well, and and we could talk macro, but, I'll leave that to the Bloomberg articles and the Bloomberg conversations. What I but but y'all said regulatory, stakeholders that were sort of promoting, getting, you know, making credit more available.
Andres Sandate:The government at the time, you know, that they they were promoting credit, getting that first home. I mean, there was a lot of moving parts, a lot of influence, quality of earnings, you know, and earnings on Wall Street, that whole machine. I mean, it's it's easy to look back and say this wasn't gonna end well.
Sreeni Prabhu:Yeah. Yeah.
Andres Sandate:It was a moving train.
Sreeni Prabhu:Yeah. It was a it was a fast moving train. Yeah. It was it was and we'll keep it macro, and we'll it was a combination of late nineties where, banks realized that they could be efficient at managing their capital by originating any type of loan, consumer, mortgage, auto, credit cards, and then using the securitization markets, and then delivering it to a a variety of set of investors with different risk tolerance. Right?
Sreeni Prabhu:To a basic premise, that's what it was. If you want safety, you bought the most senior bond. If you wanted risk, you bought the most junior bond, and these assets then, pervaded through the entire financial system. So that was one thing that happened and a lot of banks to create more lending, which probably created more growth in the economy. So that's a that's a positive, and we see the fruits of it now as as as the sector has flourished over the last 15, 20 years.
Sreeni Prabhu:Then there was a government program to, create housing more affordable, which allowed, you know, lower mortgage rates and that with the financing available just created this own little, velocity. And then the third part was, you know, the concept that these mortgages and the way they were rated, and the ratings created its own leverage in the system. Yep. You know, you put all that together, you know, the base fundamentals of what was being done was not wrong. It was the addition and the subtractions that happened afterwards, and I would say from 2,005 onwards that created what we had in 2,008, which was the the the financial crisis.
Andres Sandate:Right. Right. We call it addition subtraction here on ATL Alts because I wanna keep it simple with all due respect. Yeah. A lot of people would call it engineering.
Andres Sandate:They'd call it securitization. I mean, a lot of these things, but effectively, yes. What you're what you're saying is we productized a 30 year mortgage. Whether it was, or we we productized a nonqualifying mortgage. You know?
Andres Sandate:We'll break that down and get into that. All of that is is really important backstory for what we're gonna get into, but I wanna circle back, more on the professional front. You talked about coming from Mumbai to play tennis. For those of the listeners that are in Atlanta and familiar with the south, they're gonna know the community of Milledgeville. But for those that are, you know, not, Milledgeville from Mumbai.
Andres Sandate:Describe that experience. And this is this is also something I wanted to cover because those younger professionals, those people that are thinking, I wanna work at a hedge fund one day. I wanna work in alternatives. I wanna work in private equity. And they're not, with all due respect, they're not at a target school.
Andres Sandate:Yeah. You know, they're grinding away getting a business degree, finance degree. Maybe they're starting a junior college, you know. You are now, you know, co CEO of a $20,000,000,000 asset management company.
Sreeni Prabhu:Yep.
Andres Sandate:And you started out and I looked this up just because I thought it was interesting. US News and World Report, you know what they ranked? Your undergraduate alma mater. Regionally in the South, the 16th ranked school.
Sreeni Prabhu:Yeah.
Andres Sandate:So I don't say that to put you on the spot. I say that because I think there's a really powerful story in where you're at today, and I think we'd be remiss if we didn't allow you to talk more about that experience, getting there, what you did when you got there, the tennis, and and, you know, maybe there's a nugget or 2.
Sreeni Prabhu:Yeah. No. I appreciate it. And and, look, it was it's hard. Right?
Sreeni Prabhu:As you know, it's hard. But, you know, the first thing I would you know, it's funny now saying that if you can remember when I was, applying to school that, you know, it was not like you had a variety of computers sitting there. You know, I had to go to this, US, embassy, which had a small, library. You had, like, couple of, but you were really opening up. I think it was the Peterson's Guide of Schools, and you opened it up and you started randomly.
Sreeni Prabhu:And I I believe that the way they talked about Georgia College was that Milledgeville was a suburb of Atlanta, and I can tell you folks, it is not a suburb of Atlanta. It was a suburb of Atlanta. Right. It looks like. Yeah.
Sreeni Prabhu:So that was the first shock I had. I walked in there. I think I I I've been from 15,000,000 people to 15,000 people. So it was a culture shock. Yeah.
Sreeni Prabhu:And my first breakthrough was eggs and grits. I never had grits before, but I loved it, by the way. Yeah. But I would tell you, you know, the community was phenomenal. I mean, I got I never felt uncomfortable.
Sreeni Prabhu:I I just with my experience, I was on the tennis team. I had a great team from different parts of the world. You know, I had to room with American students for 1st 2 years because of my scholarship, so I you know, that was great. I got to sort of see people that I just would never have seen if I had grown up in in India.
Andres Sandate:Yeah.
Sreeni Prabhu:But, you know, getting back to your school, I mean, look, you know, we can all think about going to the top schools in the country, and there's a value proposition to that. There's no doubt. You create your networks, you create your, and that's the hardest thing for for if I have to tell somebody is, you know, for you and me, and others, like, the networking was just absent. Right? When you come out of small smaller schools, you just don't have that network.
Sreeni Prabhu:That's right. I think, you know, I tell that to all the guys here in the office and others. Like, we, you know, we've learned to we just, you know, you just learn to fight. You just learn to compete with a very positive attitude. Yeah.
Sreeni Prabhu:And and you have to think about long term business. And I think if you work on Wall Street sometimes, your thought process is more short term. So when you don't work there, of course, of that and nothing wrong in that, but it just happens to be. But if you're not work there, you know, our process is more long term, more relationship, but you have to compete. I mean, these are not a lot of smart people in our business.
Sreeni Prabhu:So, small schools, regional schools, yes, you are starting behind, but I would tell everybody that does not mean that you can catch up much faster than people give themselves credit
Andres Sandate:Yeah.
Sreeni Prabhu:In my mind. And you just have to think like
Andres Sandate:You gotta know what you yeah. You gotta know what you don't know, and you gotta you gotta kinda have that north star. And like you said, you you you you found yourself. You matriculated at SunTrust
Sreeni Prabhu:Yeah.
Andres Sandate:As a bank analyst. You're covering banks, and you had what is now a colleague as that terrific boss. I'm I'm thinking, you know, you you move up to the big city. You start that job, and all of a sudden, you become more fascinated, it sounds like, on this whole world of asset backed finance and mortgages and banks, etcetera. And and then you're kind of off.
Andres Sandate:And it's so easy for us today. Look and say, let's just spend a minute on that, and then let's get to talking about x y z. Yeah. However, if you go and watch the video that you and Mike are featured on on Angel Oak, I wrote this down. Yeah.
Andres Sandate:You wanna build a you have built a company. Yeah. You wanna have relationships with borrowers. You wanna have relationships with investors. You're an alternative fixed income manager generating an income or building an income solution for retail and institutional investors.
Sreeni Prabhu:That's right.
Andres Sandate:Now I am sure that took some time to get to that that what what we are, and that's what I wanna transition to because you spend time as a bank analyst at SunTrust, then you said you moved out west to Seattle, you're at Washington Mutual, you're now more specialized, you're running a $25,000,000,000 portfolio. You see what's going on in the housing market. Talk to us about how you and your cofounders, and now Mike, your cofounder c co CEO, how did you guys meet?
Sreeni Prabhu:Yeah.
Andres Sandate:How did you pull this together at a awful time broadly in the economy and in the market to wanna go start a company?
Sreeni Prabhu:Yeah.
Andres Sandate:Unless you know where the bad paper sits perhaps.
Sreeni Prabhu:And so we knew on that. And we knew where the paper was. You know, I've I've never started a business. You know, to be fair, Mike Fairman, my my partner has always been an entrepreneur. So, again, that's, that's important here because when you partner up with somebody, you know, you need to have some sort of an entrepreneurship and, to be honest, some sort of a Utopian view on on the world.
Sreeni Prabhu:Right? Day to day decline. So, you know, we, we got introduced by a common friend. I wanted to come back to Atlanta. I didn't know anything about Atlanta, to be honest with you, in terms of people over here.
Sreeni Prabhu:We thought we had this, wrong idea that, you know, we could just start a firm, create a presentation, and raise institutional gap. We were clearly wrong in our thought process, but then before that, when we met, we honestly, we probably met for 2, 3 hours, and we it was never about just we just clicked on starting a business. You know, I know we knew we would buy bonds, and we knew we had to go raise the capital. We started it would it was just a part of, hey. Do you wanna do this long term knowing that, you know, you're not gonna see a return on investment for years?
Sreeni Prabhu:Right? Couple of years at least. I mean, you're throwing you're putting your own money in it. You know, interestingly enough, I was also talking to a few folks from New York, and their common theme was you cannot launch a fund without having at least $100,000,000 of capital. My point was how are you Yeah.
Sreeni Prabhu:How are you gonna get a $100,000,000 of capital better? The only way you can do it is institutions. We probably you know, we we started the firm. We put our first presentation together. I told my wife, you know, I'm gonna leave WAMU and, you know, I I'm gonna take this risk.
Sreeni Prabhu:She was you know, without her, this would not have started. Right? She's like, alright. Let's go take the risk. And, she came back to Atlanta.
Sreeni Prabhu:But, you know, 1st 3 months was brutal because we had no institutional backing. The world was changing by the minute at that point. But then it gets back to us. Right? We didn't we thought that the 100,000,000 was a wrong way to go.
Sreeni Prabhu:Right? We could do this all day long and run out of time and effort and money. So we went to, say, the next option and said, just raise singles and doubles and talk to people here in Atlanta. So we would sit at a breakfast place here in Atlanta called Colours, and Great. Yeah.
Sreeni Prabhu:We would literally do 15 to 20 meetings a day. We would wave to people. Yeah. Half of them thought we were crazy. Majority thought we were crazy.
Sreeni Prabhu:Yeah.
Andres Sandate:But we
Sreeni Prabhu:had a a group of guys that gave us a first $10,000,000. So that's how Angel of Dodge started. It was a $10,000,000 fund in June of 2008, I believe, to buy distressed mortgage backed securities. And the one thing we did for investors is even though it was a hedge fund, we would distribute cash flows on a monthly basis.
Andres Sandate:Right.
Sreeni Prabhu:So they got to see that, hey. There's a mark to market element, but, yeah, I'm getting my cash flow. Yep. Right? You know, when they would come to our office, we would show them the bonds we're buying, and they would really look at it and say, oh, okay.
Sreeni Prabhu:How many people will need to default for you to lose your money? Then they told their friends, and they told more friends. And by 2011, I'm leaning forward. Yeah. It's a period of point for us.
Sreeni Prabhu:But 2011, we probably had 200 plus high net worth individuals in variety of our funds. We probably managed about $200,000,000. So our background, you know and by the way, those individuals are still with us in some fashion.
Andres Sandate:Exactly. They are. I used to work for one of those individuals, Andy Cummings. I'm gonna give him a shout out. It it's been a long time since he and I have caught up.
Andres Sandate:But, but I say that because Mike Fuhrman, as you an entrepreneur, he's a he's a he's a he's a cofounder of South Star Funding. They're doing, you know, at peak, like, $6,000,000,000 a year Yeah. Of this origination of non QA Mortgages. You know? They're moving the paper.
Andres Sandate:There's a there's there's a process, a machine working. They're selling it to the bigger firms, the the bigger banks, some of which are not around today. But there that that's working. So so there's an important lesson in what you said. You know, finding complimentary strengths
Sreeni Prabhu:Yes.
Andres Sandate:Thinking long term from the outset, and just you said this 10 minutes ago, grinding.
Sreeni Prabhu:Yeah. Yeah. You're right.
Andres Sandate:You're not you're not coming from these pedigreed institutions. Yeah. Right? So for all those managers that are listening that wanna go build a business, whether it's in real estate, credit, private equity, venture, the 1st 3 years, you're gonna be anonymous, you know, I think is an important message that I heard. And you gotta just do what you gotta do within the bounds of what's allowed, you know.
Andres Sandate:Go to sit at a restaurant, you know. Go do the high net worth channel. Talk about the next phase after 11, but before I do that I wanna I wanna we talked about this offline. I had a meeting with Mike and David Wells, your chief portfolio strategist. Yeah.
Andres Sandate:He was a managing director at the time. Yeah. We got introduced. I had a former business partner. I just left banking myself.
Andres Sandate:I think this was the 3rd or 4th asset manager I met. And I was at SunTrust and Capital Markets, one of the divisions that was growing while I was still there. Looking back, it was not the right time to be growing was the securitizations business. You know, they were getting into all this stuff that Wall Street was winding
Sreeni Prabhu:up. Yeah.
Andres Sandate:And that's kind of the story for another day, but regional banks just being sort of behind both in innovation, but also in unwinding, you know, the the the book when it needs to be unwound. And I remember leaving that meeting with Mike and David thinking, I don't know what in the hell these guys are doing, but they're super wicked smart.
Sreeni Prabhu:Yeah.
Andres Sandate:And it's a lesson that I'll never forget in just because you don't understand it on the surface right away, don't allow an opportunity for the advisors listening for your client to miss out on something to your point. Yeah. Imagine being one of those early investors, staying with the business, staying with the strategy over what is now 15
Sreeni Prabhu:years. Yeah.
Andres Sandate:The kind of capital you created. I know some of those people had an opportunity to invest in your business and probably wish they had. Yeah. And some probably did. But I think that's an important lesson for advisors as an aside before you get into sort of that inflection point in 11, which is there's a lot of stuff out there that's on the surface.
Andres Sandate:People just say it's too hard. I don't understand it. And and they and they just move on. But, you know, I kick myself still to this day. I don't have regrets.
Andres Sandate:I'm still glad we're connected and friends. But I'd look back on that conversation. Shit. I wish I would have, you know, spent more time digging in. Woulda, shoulda, coulda.
Andres Sandate:But it's an important lesson for advisers. I think we are fiduciaries. Our obligation is to do the research and find the right strategies. And sometimes that means, you know, doing the extra work, asking more questions. Don't just pass on it outright.
Andres Sandate:So Yeah. Let's get back to 2011, the inflection point. You're at 200 investors. You're growing. It's still a private fund business at the time.
Sreeni Prabhu:Yeah. It's still a private fund, and it's actually a series of funds. So we had probably 3 or 4 funds maybe. So we're creating just a series of funds, getting just a little bit more, you know, differentiated in each strategy. So 2011, you know, if you remember that, that's when Europe was struggling, and we were going we thought we were coming out of, doldrums and we went right back in it.
Sreeni Prabhu:2011 was a not the best year, but, you know, the distressed opportunity in mortgages had kind of disappeared by the end. Right? Because they had come in, liquefied the system, government had come up with public partner, public private partnerships to buy these assets. So the concept of distressed mortgage backed securities became more opportunistic. Okay?
Sreeni Prabhu:So in hedge funds, if you think about it that time, you know, when we're buying these distressed mortgages, you could buy it, not even put leverage and make 20 plus percent IRRs. That opportunity changed in 2011, where now if you if you had to get to do 2 things, you had to go more down in credit or you had to apply leverage. So you're going back to what the hedge fund model was. And we had told our investors that we generally would not apply leverage. We had just been with these guys.
Sreeni Prabhu:And so we knew our returns would be down, but we would still give cash flows to our investors. So we had a choice to make. We could either just hold the funds, take our profit, return money back, or build a business around it. Right? Because just managing a hedge fund at that time was just at that point, you were just gonna amplify more and more leverage.
Sreeni Prabhu:So we actually said we don't want to raise that much more money in the hedge fund structures. How do we deliver this value to all sets of investors, retail and institutions? Right? So and at the at the same time, we were also saying, you know, legacy mortgages are disappearing by the minute, and nobody's originating new mortgages. Right.
Sreeni Prabhu:Why is that? So there were 2, things that were happening, and it was just 3, 4 of us in a room. You came to see us at that time.
Andres Sandate:Yeah. 50 Old Ivy next to the house.
Sreeni Prabhu:Yeah. Old Ivy. It's
Andres Sandate:incredible. And, and,
Sreeni Prabhu:you know, we, you know, we have to make a decision again to put our money back on the line. Right? So we have good money in the beginning. You know, we've been cash flowing as me and Mike and our and then we we were like, okay. We wanna build a business.
Sreeni Prabhu:We wanna build a long term business. How do you do that? Yeah. Well, you gotta hire good people. They'll come work with you and work for this, dream and idea that you're putting together.
Sreeni Prabhu:So we started putting team 3 things we did. We started putting teams together to do all sorts of asset backed securities. So whether it's CLOs, CMBS, ABS, and, obviously, we were doing mortgages. Until 2011, all of you are doing your mortgages. So we put a team together.
Sreeni Prabhu:Then the next idea was, okay. We we are investing in structures that nobody really knows. These were toxic mortgages. Nobody Right. How do we deliver them to the retail side?
Sreeni Prabhu:Who's gonna trust us? And, we had one local, investment adviser, that said, you know, I know what you're doing, but I my clients cannot be in a hedge fund structure. Can you deliver that in a mutual fund structure? And we said, look, we can do that, but it has to be more liquid. It is not gonna achieve the returns that you want, but it's gonna be a good, relative value versus high yield and high grade.
Sreeni Prabhu:Right. Has to be a smaller fund. It cannot be a $100,000,000,000 fund. Not that we were even close to that, but it has to be a small person. And that ROI gave us money.
Sreeni Prabhu:This is a 2 story, and a another adviser in from California, I don't mean I don't wanna mention the name. They cold called us. They screened us for 4 months, and they said, you know, we really like your strategy. We have been looking to invest in non agencies. You know, everybody on in the mutual fund community was investing at that point.
Sreeni Prabhu:Yep. But in the sleeves of it, nobody had a big allocation to it.
Andres Sandate:Sure.
Sreeni Prabhu:We like what you're doing, and, they give us I think they give us $100,000,000. And I've never been like, that was supposed to be.
Andres Sandate:You're like, yes. Yeah. We We've got something here, folks.
Sreeni Prabhu:So, you know, again, you know, people are taking faith in what we're doing. You know? We didn't even know this group. You know, we still look back, and, we feel that this is was the most important group for us in what they did for our our firm. Right.
Sreeni Prabhu:And then we got onboarded on, on a warehouse platforms, right, which is very difficult to do as you know.
Andres Sandate:Oh, yeah.
Sreeni Prabhu:And, again, you know, we just, screened well. People like what we have to say. And even today, when you go to this, you know, okay, there are years when we will underperform, there are years when we'll outperform, but we do what we tell you we are doing. Right? We don't we didn't scope creep.
Sreeni Prabhu:We didn't go crazy in other things. Even we even when, you know, when you think about subprime mortgages, a lot of our funds didn't own a lot of subprime mortgages. Yeah. So we committed to what we wanted to do. So that was the one thing is to put a team to really say that we can't just say that, asset backed securities are the best.
Sreeni Prabhu:We have to look at it across the board in terms of fixed income. So, like, today, we have a high yield corporate bond portfolio manager. We have a CLO portfolio manager. So we look across, fixed income credit. But at the end of the day, we are asset backed, mortgage backed securities franchise, but we look at it.
Andres Sandate:Yeah. You do.
Sreeni Prabhu:The second thing the second thing we did, which really started in 2011 but took off in 2013, is we launched a mortgage company Yep. To do the new nonagency or what is called non q m.
Andres Sandate:Non q m.
Sreeni Prabhu:I call it this.
Andres Sandate:Explain what that means real quick. I know that, folks will wanna understand that non QM mortgage agency, nonagency. Help people understand that.
Sreeni Prabhu:So after the financial crisis, the government wanted to really come and define, like, what why this, fraud or or poor underwriting happened.
Andres Sandate:Why did we have this big bubble?
Sreeni Prabhu:This big bubble. Yeah. Everybody was getting mortgages and they created these names, but at the end of the day, how do we contain it next time around? So they came up with
Andres Sandate:Sure.
Sreeni Prabhu:A few things. They said if you're w two income, if you're under the threshold of government mortgage cap, if you have, you know, 2 years of whatever, you know, earnings, Yep. Then you're qualified mortgage. Right? It's a checkbox.
Sreeni Prabhu:It's called delegated underwriting. You go in and it's a it's a government mortgage. Banks can do it, and you're qualified now.
Andres Sandate:That's right. And so so before and people have heard of Fannie and Freddie, these big sort of quasi government agencies. They will if it's QM paper, QM Mortgages, they will support the banks that originate that mortgage or the wholesale mortgage companies that originate on behalf of the banks. How do those entities just, again, education a little bit. How do those agencies fit into the QM market?
Sreeni Prabhu:So they are the QM market. Right? So Fannie Fannie Mae and Freddie Mac are the qualified mortgage. So when you buy a total return bond fund and they say agency mortgage backed securities, that's all qualified mortgages, basically.
Andres Sandate:And so those banks, those lenders feel safer lending to that, higher quality borrower, proof of income, higher credit score, debt to income, all the things check, and they know that they can do another one tomorrow if they have a good marketing and originations business because they can sort of offload that paper to the Fannie Freddie's.
Sreeni Prabhu:That's right. And and so cycle. Yeah. It's a balance sheet light model. Right?
Sreeni Prabhu:You Yeah. You keep the servicing, the securities that then go through the entire fixed income community globally. It could be pensions buying it. It could be sovereigns buying it.
Andres Sandate:Right. Safer.
Sreeni Prabhu:And so but what they did, reportedly, is then they said, look, guys. If you're not qualified, I'm not gonna make a a claim whether you're a bad borrower or a good borrower. You're just a nonqualified borrower.
Andres Sandate:Right. Non If you want
Sreeni Prabhu:to originate that, it's your risk now. You have to underwrite it. You have to keep all the paperwork.
Andres Sandate:And you've gotta reserve more capital.
Sreeni Prabhu:You gotta reserve more capital. It's your risk retention. Right? Yep. And this is the same thing to the private investors like ourselves.
Sreeni Prabhu:Right? So, basically, effectively, what that created so, for example, when I left Washington Mutual, I I had a w two income. So when we started Angel Oak, I go from w two income to no income. Right. I'm a nonqualified borrower.
Sreeni Prabhu:I may have savings. I may have a bank statements, but I'm a nonqualified borrower. So I have to be fully underwritten. And the somebody giving me that loan, pools of these loans, they have to keep the risk retention on their give a little capital towards it. That was the basic
Andres Sandate:And that creates more just friction, right, for that lender. So they have to then make a decision. Do we really wanna go and, you know, provide the loan to Srini? He see like he's gonna pay us back. You know, he's got a degree.
Andres Sandate:He's got good job history, but he doesn't have that w two anymore. I mean, it's amazing, but that's kinda how decisions kinda get made. Right? So let's talk non q m and this whole RMBS space because there's a it's a massive market, 1,000,000,000,000 of dollars. Right?
Andres Sandate:People wanna own a home. People not everybody, but a lot of people wanna own a home. So it's a massive market, and at the same time, the banks got really hammered coming out of 0 8.
Sreeni Prabhu:Yeah.
Andres Sandate:So they gotta start making some board level decisions. Do we wanna be in this space or not? You all create a fund
Sreeni Prabhu:Yeah. A a mutual fund,
Andres Sandate:a 40 act mutual fund. You're distributing it. What are you putting in the fund at that time?
Sreeni Prabhu:Yeah. And so in that fund, you know, we were not putting non q m loans in the fund because it was a illiquid sector that went to our hedge funds. In our
Andres Sandate:Got it.
Sreeni Prabhu:Fund, we really were introducing structured credit, mortgage
Andres Sandate:Got it.
Sreeni Prabhu:Still legacy mortgages. Sure. We get investors, saying that, hey. If you have, $100 in fixed income, I'm not your, core bond manager. Right?
Sreeni Prabhu:That's
Andres Sandate:Right.
Sreeni Prabhu:You if you want a little alpha, on your money, relative to other risk assets, high yield, corporates or bank loans, you should take a look at what we do because this is other form of spread and risk. Yeah.
Andres Sandate:And spread tight spreads, less return, wider spreads. You've got a you've got experienced PMs and experienced risk managers. They're gonna be able to pick and choose and know where to get exposure and where not to because spreads have gapped out and they're wider. So it it it it pays again advisors to do the work to find the teams that have the experience having been in those trenches, having originated that paper. So
Sreeni Prabhu:Yeah. It it was really what what I mean, if you go to our website and you see it, you know, for the 1st 2 years, it was really the education of what what was this. Right? You you were this was the first time. And to be fair, you know, this asset class imploded.
Sreeni Prabhu:Right? So Oh, yeah. It was right to be skeptical. You know, if you go to offices today across the country, I travel now, there's a lot more, education that has happened about these types of, assets. Okay?
Sreeni Prabhu:Clearly, they may still decide not to, buy them for different reasons, But the, you know, the concept that, hey. Don't even walk in here because I'm never gonna look at this stuff. That doesn't exist. There's a lot more information in the in the retail community, in the in, in advisers. And but in 2,000, 11, 12, 13, I would say we were at the beginning stages of this.
Sreeni Prabhu:There were some some, groups that absolutely had a bigger risk tolerance and and, but also had more educational level just because of maybe the background they came with.
Andres Sandate:Yeah. Yeah.
Sreeni Prabhu:So, you know, our 1st 3 years was just literally educating people on what these assets are.
Andres Sandate:What is it? Yeah. But but the idea of starting a mortgage company that and I'm my my numbers might be low. I mean, because I know I've heard over the over the years, like, the mortgage company's growing, you're moving, you know, there's more people. 8 800 people today in the mortgage business?
Andres Sandate:And why why start the mortgage business?
Sreeni Prabhu:That's right. So, so when we learn getting back to like, when you when we learned in 2012 that banks did not want to do nonqualified mortgages, If you think about it, they were still settling the previous issues that they had.
Andres Sandate:Yeah. They
Sreeni Prabhu:didn't wanna start. Right? So they basically just exited the sector. So created a vacuum, and so who starts it? It would either be private equity firms, the big private equity firms, or guys like us.
Sreeni Prabhu:So we stepped into this because of one important thing. I had a partner that knew how to start a mortgage company. You know, we as asset managers, I would have no idea how to go in and start a mortgage company.
Andres Sandate:Right.
Sreeni Prabhu:Why did we need to start a mortgage company? Because nobody was originating these loans. So so where do I buy them from? But the other thing we did is we said this time around, we want to originate to home. So our whole belief was that we wanna introduce this asset class to institutional investors.
Sreeni Prabhu:Mhmm. This time around, we want to be, what we call private credit managers of mortgage credit. So how do we start that? So we said we want to own if you wanna own credit, we have to prove that we're underwriting it from the time the loan comes in. And how do you do that?
Sreeni Prabhu:You start a mortgage company. So we started a mortgage company. We were doing 10,000,000 a month, probably not even making money. But, you know, it was, how do you say, you know, chicken and egg kind of story.
Andres Sandate:Gotta make that call.
Sreeni Prabhu:Yeah. If I go to institutional investors and say, I wanna raise $100,000,000, and they're like, what asset class are you starting? And if I told them I'm doing 10,000,000 a month of origination, and nobody knows about this sector, nobody's gonna give you money. So you have to prove to raise institutional money that, a, this asset class was legitimate, b, the securitization existed, and, c, the size of the market would grow. Those are the 3 things we are working on.
Sreeni Prabhu:So by 2015, we had originated about 200,000,000 of these mortgages. Mhmm. And actually, we were and we were doing it in a hedge fund, but we knew that was you know, that growing, we got a small part of the hedge fund and, obviously, we couldn't just put every single mortgage in there. And we did the 4th I think we were 1st cash to do a securitization in December, I believe, of 2015.
Andres Sandate:Yeah. It it was a private was it a private securitization? Like, you got it rated?
Sreeni Prabhu:Do not do the rating. This is the You didn't
Andres Sandate:you didn't do any rating. No private rating. Okay.
Sreeni Prabhu:So you
Andres Sandate:did a securitization,
Sreeni Prabhu:This is a securitization.
Andres Sandate:You put you put a bunch of the mortgages in there. And did you take it to the insurance market? I know they like this stuff now, but Yeah. At the time, were they buying?
Sreeni Prabhu:It was insurance companies, asset managers, some hedge funds. Right? The guys who knew about this asset class. Yeah. Large money managers that knew what we were bringing to the table.
Sreeni Prabhu:They came to our offices. They underwrote they looked at the underwriting standards. There was a full blown due diligence. The world has changed dramatically. They're just buying bonds now.
Sreeni Prabhu:They like it.
Andres Sandate:You get a total different reception? The fact that you could say we underwrote it. We originate it. We underwrote it. We know exactly what's going on.
Andres Sandate:We're servicing it. I mean, that's different than saying, oh, we we bought it here and, you know, it's like, well, I don't know. I mean Yeah. What was the reception?
Sreeni Prabhu:Well, reception would also, you know, just again, you know, things happen in your life. You know, they didn't have to. The these guys who bought our senior bonds, they they didn't have to sponsor our securities. They could have said, look, let me buy the next bond. It's unrated.
Sreeni Prabhu:Why would I take a risk as a portfolio manager? But they came to us and supported our program. They also wanted to grow the next non q and, 2 point o, which is what I call it.
Andres Sandate:Yeah.
Sreeni Prabhu:And they want the bonds, you know. So, you know, it's it's satisfying to start
Andres Sandate:small. That's amazing.
Sreeni Prabhu:That's amazing. And approve of concept. And then we could go to the, introduce your community and say, now I need to raise the dollars, and I'm gonna give you risk retention. And then, you know, we manage your credit. You're managing your credit.
Sreeni Prabhu:We are not just, you know, we're not a capital markets. We're managing credit for you, number 1. Yep. Number 2, we are creating an efficient financing for those bonds. That, that was the basic thesis.
Sreeni Prabhu:Right? It was not, hey. We already had loans, refinance, and you get your levered return. No. No.
Sreeni Prabhu:No. We underwrite credit. Now we can underwrite credit and you leave it unlevered for you, but if you want leverage, the best way to do it through securitization, locked in financing. Yeah. And that really grew our private credit business, which is about 3,000,000,000 today, all institutional money.
Sreeni Prabhu:But, you know, we have 2 companies, retail and wholesale. Yep. At the peak, we had 800 people. We sold our retail business
Andres Sandate:Okay. To
Sreeni Prabhu:IHOP 2021. That that was not core to what we did, but it was a great business to have had. So today, we have, I think, close to 250 plus people, and all we do is nonqualified mortgages, prime jumbo mortgages, and, now start of HELOCs.
Andres Sandate:So so yes. And we're gonna talk about HELOCs. This is, man, we're getting out on the curve here.
Sreeni Prabhu:Yeah.
Andres Sandate:So to simplify it in terms of the chain of how this works, if I'm a gig worker.
Sreeni Prabhu:Yeah.
Andres Sandate:And I've had 5, 6, 7 years of consistent, income, but it's nontraditional income. It's not maybe w 2. Right. It's it's gig income. Maybe my spouse works, freelances.
Andres Sandate:Maybe not. Maybe I'm solo, and I wanna go get my first more I wanna go get my first real estate property. Maybe it's an investment property. Maybe it's a owner occupied property. But who's that individual calling?
Andres Sandate:How do they find their way to the funding that you guys provide to, I would assume now, that's that retail, customer facing originator. How Explain that value chain and how it works and where your capital and and your investors' capital comes into play for that gig worker.
Sreeni Prabhu:Yeah. So that that big worker, it could be also be a dentist that's Yeah. This it could be what exactly what you're doing right now. And, basically, you're working for yourself, real estate agents, real estate brokers. Yeah.
Sreeni Prabhu:And our first our first clients were probably real estate agents because they understood what we were trying to do. And if you Yeah. You know, if you you know, when we started, you know, it was a good, timing because if you're a real estate, so that individual is going to a real estate broker in town or a bank. Right? He's going to a bank and he said, can you give me this quote?
Sreeni Prabhu:And that guy who's sitting at a table, he's probably doing 5, let's say, 5 to 6 government mortgages or agency mortgages a month. He doesn't have time to understand the non qualified. He knows he's not gonna originate the loan. The bank's not bank's just not gonna do it.
Andres Sandate:Nope. So he
Sreeni Prabhu:goes and says, I wanna keep the relationship with this guy. So he calls Angel Oak and said, Angel Oak, the most important thing for me is to keep my relationship with the guy. So if you don't wanna do the loan, don't do the loan. But don't drag him for a few months and
Andres Sandate:then Right.
Sreeni Prabhu:I can't do this loan.
Andres Sandate:Right.
Sreeni Prabhu:So what we go what we told those brokers or real estate agents, or bank brokers, hey, Angel Oak is here to originate this loan and buy the loan, and we have fund capital. So it's not like every loan we make, then we are looking to find out where we could sell this loan to. Right.
Andres Sandate:No. No. No. Yeah.
Sreeni Prabhu:And the other thing we did is we said we took we took all the, the work out of that broker's hand. We said we do it. We're willing We'll
Andres Sandate:underwrite it.
Sreeni Prabhu:We want to do it. We want to do it. We want to do it. Because also that give us data and analytics. Right?
Sreeni Prabhu:So every time you're doing a loan, you're getting better and better and better. You know, what is a good loan? What's a bad loan? What documents do we need? What documents do we not need?
Sreeni Prabhu:Right? Originally, we were asking for a lot of documents. Right? Then because we didn't know which ones we we really needed, and we got more efficient. We started using more technology.
Sreeni Prabhu:But in the beginning, that was a, it was like you said, it's customer. It's it's education of the customer. Then the reason we have to explain to them is if the mortgage rates are 5%, why am I getting 8%? So now we have that to to, go to. But Right.
Sreeni Prabhu:Customer service was where our mortgage company shine and even today shines. Right? So we still have guys that we have, you know, there's a lot more competitors. It's a competitive market. It's a it's a little bit more commoditized market today than it was when we started, but people come for service.
Sreeni Prabhu:Right? That's right. There are places where people go for price. There are places people come for service. We are the service on that.
Andres Sandate:And when that's yeah. That's huge. And when I've been private credit. When you develop a reputation for saying, we're gonna take a hard look and we're gonna give you a quick no or or we're gonna actually get constructive on the underwriting, That's the best thing that that you could possibly hear if you're a broker or trying to arrange finances. Just give me some certainty.
Andres Sandate:Don't drag me along. Don't drag me out because they're trying to get that capital, execute their deal, close on the real estate transaction. And if you get hung at, you know, at at the, at the altar, you know, there's different terms for this in the industry, it it's just a nonstarter. You're never calling you're never calling that lender again. So the service, the reputation, delivering, saying this is our credit box, you know, all that, it's it's huge.
Sreeni Prabhu:Yeah.
Andres Sandate:You all are I mean, there's a lot of things we could cover, but there's some areas that you're now evolving into today
Sreeni Prabhu:Yeah.
Andres Sandate:At Angel Oak. You've got this obvious, you know, deep reservoir of data, deep reservoir of experience, a a much bigger team of experts now. Fast forward, you're running 17, $20,000,000,000. You've got an ETF it just surpassed $1,000,000,000.
Sreeni Prabhu:Yeah. Did the experience
Andres Sandate:I wanna ask, did the experience you learned on the on the on starting the mutual fund and hey. Retail investors want this, exposure. They want these underlying they want this underlying collateral in these assets, but they don't want it in a private fund. We need to go start a mortgage company. What was the thinking of starting the ETF business?
Andres Sandate:I'm curious.
Sreeni Prabhu:So, no. As as we evolved as a firm, a few things we learned is that the retail committee no. If you think about it from our business, everybody when they launch funds, they think that, oh, you have to raise institutional money because that's more sophisticated money. That is not true. I've learned that along the way.
Sreeni Prabhu:Right. The retail first of all, the retail investor base and the depth of, in terms of the overall market is a huge market in the US. Yeah. It's it's more sophisticated than people think. You know, it's an insult to call them not, not sophisticated.
Sreeni Prabhu:Right. They want to learn more. But they also need to be in, in, what we call solutions. Right? We have to provide them with solutions.
Sreeni Prabhu:And used to be that a lot of, not I'm not saying, hopefully, in a bad way, but, you know, you pushed what you thought was good for them, and now they're pushing back and saying no. No. No. No. I know what I want, and you have to offer me a solution.
Sreeni Prabhu:So if you come with a product every time, you know, I'm not I'm gonna take your meeting a couple of times. But if you could give me solutions, give me a group of solutions, I'll do business with you at some point when it makes sense.
Andres Sandate:That's absolutely right.
Sreeni Prabhu:And and then, you know, we have because we've been in the business long enough where when we go into, you know, we go across the country to individual reps, whether they're in Morgan Stanley or whether they're UBS or whether they're in the independent RIA.
Andres Sandate:RIA is like myself. Right? Like yeah. We clear and custom you through Schwab.
Sreeni Prabhu:Yeah.
Andres Sandate:But, we, that independent advisory community, we think in terms of just like the guy that's sitting or gal sitting over there at private bank or, at at at, Wells Fargo or Morgan Stanley. We're thinking, how do I best serve the client? Right. How do I bring a solution? And you can't the the days of selling a product, those are short lived.
Andres Sandate:And as alts have proliferated, just calling up the client say, oh, we can get 8% here. Like, that's done.
Sreeni Prabhu:Yeah. It it it works it works for a short period of time.
Andres Sandate:It works for a trade or 2.
Sreeni Prabhu:Of course. But that does not create a relationship. So the ETF business is interesting. You'll see it. We had a, again, you know, the risks you take in the business, and, you know, they were not risk.
Sreeni Prabhu:It was you know, we we wanted to do it anyway. We had a we had a, individual by the name of Ward Boorse. He worked at Invesco, a very, sophisticated shop, and he wanted to build out an ETA business. I had no idea about the ETA business, but he walked me through the transition of what's happening in fixed income space and how, advisors are using ETFs relative to mutual funds for the lack for the ease of, and for a variety of different reasons. And so we started seeing this.
Sreeni Prabhu:So, again, the feedback mechanism, advisors came to us and said, look. We love your products. Number 1, I want you to, I want you guys to give us more solutions. Again, not one fund. A solution.
Sreeni Prabhu:Let me decide. Give me different shades of risk and return, and, b, you gotta have it in both rappers, a mutual fund rapper and ATM rep. Yeah. And we give it to our friends on the warehouse platforms, and they appreciate it. And like I said, if you want a total return bond fund, you know where to go.
Sreeni Prabhu:Yep. We don't have to. But if you want, what we call a core plus plus or satellite funds, we'll provide you solutions. They will be based on asset backed securities, mortgage backed or or or ID, and you decide how it affects you. And, you know, there will be times when high yield is wider than us, as at times when high grade is cheaper than us.
Sreeni Prabhu:You you you can make your decision. So that's what led us to launch ETFs. I would tell you to transition and just structurally, mutual funds, will, be will shrink as a business. Happen in equities, now it's happened to fix it. No.
Andres Sandate:Yeah. Definitely. Yeah.
Sreeni Prabhu:And ETFs are going to be so, a, for the long longevity of the business, you have to offer it. Right? You could have said you could have said, why ETF? It's too much cost structure. It's a lot of learning to be done, but we were excited to do it.
Sreeni Prabhu:We had Ward who knew a lot about it, and he's put a team together. It's been fascinating journey. But our our our core thesis is still the same. We are managing credit for for an individual.
Andres Sandate:That's right.
Sreeni Prabhu:Right? That's that's the basic thing.
Andres Sandate:Yeah. I I love it. I mean and so many managers I've had the opportunity to interact with over the years. I mean, doing this now 15 years, they the single biggest challenge some of the managers seem to have is they have a short term orientation on results. There's a a a sense of if I go and hire somebody and don't get an immediate return on investment, that's a salary I just am not willing to continue to carry.
Andres Sandate:So there's high turnover, misaligned expectations, and not a long term orientation. I know that a lot of times the PM and the founders, and this is to the fund managers listening, it's your capital.
Sreeni Prabhu:Yeah.
Andres Sandate:You're putting your money on the line. But you've articulated over 45, 50 minutes multiple times over the course of Angel Oak's history where you said we gotta build a team. Yeah. We gotta make an investment in a mutual business. We gotta make an investment in growing that team.
Andres Sandate:We gotta make an investment in ETF business. We gotta bring in an outside expert. We gotta give that person time. I get on my soapbox about this because so many people think that this is just about having a couple stock jockeys and a couple smart people, you know, that came out of really target schools and, like, big funds, and it's it's like trust them. They're they're they're good.
Andres Sandate:They're gonna they're gonna be good. Those are not really more I don't call them real asset managers. They're more lifestyle kind of family offices.
Sreeni Prabhu:Yep. No.
Andres Sandate:And and so I really applaud you because to have a firm that's that's grown and innovated and changed with the times, recognize the importance of the adviser and the relationship and the investment in education to support the adviser, those dollars trickle in. A ticket to an ETF might be a $1,000,000 to $2,000,000, $3,000,000 ticket. But over time, if that business grows, that could be a $30,000,000 relationship. Could be a $50,000,000 relationship.
Sreeni Prabhu:That's that's that's what what you just said is what, you know, people miss out. Yeah. Our retail business is not a $100,000,000 ticket they want. Right? So you have to go get your first 1,000,000 to get your next 2,000,000, and it takes time.
Sreeni Prabhu:But then the compounding takes over. Right? And and a lot of people will say, why am I doing why am I launching a fund with $10,000,000? What if it stays at $10,000,000? Well, that's the risk you have to take.
Andres Sandate:Yeah.
Sreeni Prabhu:Right? Yeah. Generally, you know, if you do the right thing and patience. You gotta be very, very patient. And, you know, we have, you know, wholesalers is what we call them who meet all the, advisers.
Sreeni Prabhu:You know, I give them a lot of credit because the PMs is great. Like, money comes in, you manage money. Somebody's gotta go get the money. And and I'll take it to somebody that we are a small $10,000,000 fund, but he should trust us. And what you find along the way is all the relationships you've built in the past, people trust you and say, I I know you guys.
Sreeni Prabhu:I like this fund structure. It's not big enough for me to put all my money, but I'm gonna help put a little bit of money. And then you put 15 of these guys together, and now you launch, launch something. So, again, that feedback from the adviser and, you know, what I've learned along the way, I was on the road trip, a couple of weeks ago. I've been on the road for some time, is we get feedback from the advisers too.
Sreeni Prabhu:It's not a one way
Andres Sandate:Oh, yeah.
Sreeni Prabhu:Advisors have a lot of information that can be valuable to somebody like me because they're managing a lot more money than we are. Right? So Yeah. You know, what's going on in the market? You know, what are you doing for your clients?
Sreeni Prabhu:Where can we be value at? Not just short term, but long term. And that's important. So so, you know, that's why it this doesn't start with, hey, here's a $100,000,000 ticket. That's just how it works.
Andres Sandate:It doesn't work that way. I, you know, I wanna pick up on a piece that's on your website. Again, to all the listeners, I would encourage you to go out to angelocapital.com. There's there's really great resources, content, and get to know Srini and and and Mike, the co CEOs, through some some great content they've put out, but also just the the the the department, the research, the data, all those things. There's great articles.
Andres Sandate:And one one of the ones that I that I wanted to ask you about is you say in today's markets this is from one of the articles. This is, I think, from a few weeks ago, so it's very current. In today's markets, however, value potential is historic due to mortgages trading at steep discounts.
Sreeni Prabhu:Yeah.
Andres Sandate:There's a great chart about spreads, and the the chart talks about corporate spreads. So these would be bonds, dub double a, triple a rated bonds. They're trading pretty tight. The opportunity to add mortgage backed securities at some of the most compelling spreads and yields, again, corporate credit, tight spreads, less relative value there. If you're if you're an advisor thinking about where do I get income for my clients, my retired clients, my clients that are, you know, trying to, spend the next 15 years not grinding away, but they they wanna generate income, but also just be people that have that exposure and want that income.
Andres Sandate:And an opportunity in agency, but y'all's expertise is the nonagency Yeah. RMBS, which are trading, as you say, at wider spreads than historical averages. I said a lot. There there's a lot of terminology there. Explain that in layman's terms as if you were talking with an advisor.
Andres Sandate:You're not giving financial advice on my show, on this show, but just generally the the idea of relative value corporate versus non agency and some of the historic opportunities that you guys see at Angelo.
Sreeni Prabhu:Yeah. I mean, so in in in layman's, term, you know, when people buy credit risk in fixed income space. Right? So you can buy, basically, treasuries, and you can own your, return. And then if you want to get it a little bit more than what treasuries give you, treasuries are giving you 4, you wanna own 5, Then, historically, people went to corporate bonds.
Sreeni Prabhu:Right? That was where people invested, and the first thing you do is you buy high grade corporate bonds. These are companies where the credit rating is triple b or higher. Or you go to high yield, which is companies that went below triple b, so double b, single a. And that was, and if you go back in in the eighties, nobody in the retail side bought high yield.
Sreeni Prabhu:That was a institutional asset class then actually became more liberalized through the retail committee, and now retail, no. It's a part of the asset allocation model. Right?
Andres Sandate:That's right. Yeah.
Sreeni Prabhu:Yeah. So I think what what happens is even today, when, when you're buying when advisers are buying for their clients and they wanna buy, take on more credit risk, the first place to go is corporate bonds. That's just now we know that. That's just how it works. You go to munis, you go to high munis, but really that's what sectors are happening.
Sreeni Prabhu:So while that's happening, you have this, mortgage sector that nobody thinks about. It's one of the largest markets in the world. Right. So the question becomes, why is this sector the cheap? So that's the I saw this movie in 2008.
Sreeni Prabhu:There was a cheap for a reason because underlying, borrowers were defaulting. That's why it's cheap. Yeah. And but it's not the case today because then they look at it and there's not many delinquencies. So
Andres Sandate:No. The data is on your website. I mean, it's it's a phenomenal story. I mean, we can't talk about it, enough. You gotta dig in if you're an adviser.
Andres Sandate:If you're a fiduciary, you gotta dig into this stuff because when you start looking at the data and the comparison of historical trends and what's defaulting and what's delinquent, I mean, there's a story there, and I wanted you to have the opportunity to tell it.
Sreeni Prabhu:Yeah. I think the way I tell people is, hopefully, this works out, is the difference between buying a corporate bond. You bought a corporate bond that, says it is going to, refinance in October of 2037. Okay? So it's a 3 year kind of a bond.
Sreeni Prabhu:You bought a 3 year bond. Okay. If rates go up, a 100 basis points, you lose 3% of the value of the bond. So you know where the up and down is. Then you bought a pool of mortgage bonds, and in 2021, the if you bought those bonds in 2021, there are thousands of mortgages online.
Sreeni Prabhu:People are refinancing 20, 25 percent a year. Right? People move. People need to jump. So if you have 20, 25 percent of people refinancing annually, what is the duration of that bond?
Sreeni Prabhu:Right? Let's just say simple math is 4 years. 20, 25 percent. But then you go to 2022, and the Fed has now increased rates to 5 a quarter, and pretty much nobody is refinancing. Now what's the you know, that bond?
Sreeni Prabhu:So that's what creates an opportunity to invest because the spreads had to widen out to reflect the fact that the duration of that bond, just like a corporate bond, you know the maturity is what it is. Yep. And what it is, they extend on you. The maturity gets wider. Now the reason we say it's the best one of the better times to buy is now you're buying those borrowers, unlike borrowers, assuming that majority will never refinance, and you're buying them at discounts.
Sreeni Prabhu:So if they don't refinance, you collect your coupon, you're in a beautiful place, no not many delinquencies, then you collect your coupon. If rates go lower over the next 2 years, and even if 10% of those borrowers are refinanced right? When they refinance, they give you 100¢ back. Let's say you bought the underlying loans at 80¢ on a dollar, you get your total return. So what we tell people is this is the unique time where the total return, which is the opportunity with income Yep.
Sreeni Prabhu:Plus price appreciation, we believe is the best in non agency mortgages relative to corporates. Right? It doesn't mean corporates is bad credit. Combination of achieving a total return is greater opportunity today in mortgages, agency and nonagency versus corporate. That's what we we people.
Andres Sandate:And that's a relative value trade, ladies and gentlemen. That's it. Go the you know, the the the, the relative value hedge fund, forget all that. You just got a master class. Srini explained it.
Andres Sandate:One other theme I wanna pick up on and talk about before we wrap up, and I appreciate, all the time today, Srini, second lien mortgage market. So I'm I'm gonna just use myself as an example. My wife and I, 3 kids, we live out, you know, suburb of Smyrna. Our mortgage when we got our house 2016, I don't know, it was 4 and a half ish, 4 3 quarters percent. I think COVID hits, there was an opportunity right before COVID maybe.
Andres Sandate:We locked in at sub 3%.
Sreeni Prabhu:Yeah.
Andres Sandate:Refinance. The idea of picking up and moving right now and shopping for a mortgage, much less shopping for a house for our growing family, it's just a nonstarter. We just don't even think about it. There are days when my wife would like to throw me out, but but there's millions of people out there. We're blessed.
Andres Sandate:We're very fortunate. I know that. And credit to my wife. I mean, she she holds it down, but there's millions of Americans that are in that same boat. They're not they're not going to go refinance for various reasons.
Andres Sandate:And yet people always need capital. Yeah. There's always a mortgage. Or there's there's always a an addition you wanna make. There's always a wedding you gotta pay for.
Andres Sandate:There's always college tuition. So the 2nd lien mortgage, the 2nd lien market, explain that opportunity. I don't know if my setup helps in terms of the story, but but this is a market that I think people need to understand and and invest potentially around. But to invest around it, if you're an advisor, you gotta understand the setup.
Sreeni Prabhu:Yeah. You know, we we it's funny. We talked to, a group of advisors. They were friends, and we talked talked to them in my trip to California, and they immediately got it because 2
Andres Sandate:of them
Sreeni Prabhu:their their wives were real estate agents, and they obviously were in sub 3% mortgages, and they got they got what this is about. So, you know, historically, you know, people use, second liens or they call it HELOCs, home equity, private, to get more, equity out of the house. Right? Yeah. And the financial crisis, that was used to just lever up more and more and more.
Sreeni Prabhu:So it was really a not the best product and probably added to the financial crisis. Right. So people get into the paint today that the only guys taking out these are the guys that are desperate for money, and that is not true.
Andres Sandate:No.
Sreeni Prabhu:What has happened after the financial crisis, if you think about it, mortgage credit delevered. Right? So these borrowers a lot of these borrowers are sitting on not only lower interest payments, but 2016, I can do the math. Your property is appreciated pretty decently. Oh, yeah.
Sreeni Prabhu:Very nicely. And so you're sitting on 50% loan to value, 60% loan to value. Now Right. I'm guessing you're operating from your house and took down a part of your house, and your wife loves you. They are no mortgage, but she may say, you know what?
Sreeni Prabhu:You need to get out of that room because I need that room for myself, and go make Yeah. Into the house. Yeah. Yeah. Yeah.
Sreeni Prabhu:Talk to you about that. Yeah. Yeah. Oh, yeah. So so you're doing so or you or you may need a pool, or you may, put an addition to a garage, or pay for kids' food.
Sreeni Prabhu:So you're using the equity, whether it's just like whether you want to sell a piece of your stock portfolio, for example. Right? It's the same That's right. Same thing. So what we, what we think is addressable market.
Sreeni Prabhu:Right? The I think the equity all in US housing is somewhere north of 20,000,000,000 20,000,000,000,000.
Andres Sandate:Sorry. Trillion. Yeah. Yeah. 20,000,000,000,000.
Sreeni Prabhu:The equity. But what we call tappable equity, this is not like people going to a 100% loan to value. What we call it tappable equity, which is taking a a person from 50 to 70, 60 to 80, 40 to 60, is probably 2 +1000000 asset class right now. Annually? And, overall.
Sreeni Prabhu:Right? I mean, annually. Couple
Andres Sandate:so let's call it 2 2 to $3,000,000,000,000.
Sreeni Prabhu:And not all of that is gonna be TAP, but that's the TAP market. But this
Andres Sandate:is a big market.
Sreeni Prabhu:Yeah. This is 100 of 1,000,000,000 of, eventual annual issuance.
Andres Sandate:Oh, yeah.
Sreeni Prabhu:And and that market is just beginning. There's few players in that. Again, private investors. And we feel as if we're already doing it. We're already, originating and purchasing it in our funds.
Sreeni Prabhu:We are we will look to launch new funds around that in the private private side. But, again, this is good, healthy borrowers. You're still doing underwriting on these borrowers. And because we have data from we're not lending to the same borrowers that you became a 1st mortgage to, but we we have the data on what this looks like. We have data on home prices because we're originating in almost every state every day.
Sreeni Prabhu:So the data helps you in this, in this, in this environment. So, in an interesting way also, this may have allowed the Fed to keep the brakes on for a longer period of time because if you go in any weakness, you have all the housing well. What what caused the financial crisis was the housing?
Andres Sandate:Yeah.
Sreeni Prabhu:What is the safety this time is the housing. Right? Or how That's right. So so we we think this is a tremendously addressable market. People are gonna use it to do additions on their house.
Sreeni Prabhu:People are gonna use it to balance payments. People are gonna it's a relative value in the household. Right? What do I do? Should I, dip into my 4 zero k?
Sreeni Prabhu:Do I sell my stock portfolio? Do I borrow on my house? And those are the decisions that are being done done on a daily basis.
Andres Sandate:And that's that's a great segue. You know, going back to talking about the advisers, the big focus here about education, awareness, bringing them, expertise and guidance. You know, we're not selling anything here. I think, you know, there's a real opportunity for the adviser community to sit back, step back, and look and say, how do I help bring solutions to my clients? Yeah.
Andres Sandate:And you just described one. You know? If I if I have a a $50,000 expense coming up, you know, or, you know, my my kid's 7th grade, 4th grade, 2nd grade. You know, college one day, hopefully, if we're blessed. Those expenses, you know, are are out there, and we know the cost of college.
Andres Sandate:We know the cost of health care. We know the cost of, you know, parents moving into assisted living. Those are out there, and and yet one of the single biggest, if not the biggest asset most of these advisers clients probably have is the home.
Sreeni Prabhu:Is the home.
Andres Sandate:And and and the idea of saying, taking on debt for some people is, like, I wouldn't do that. Why would I do that? And yet there's an opportunity. And I think it's just about educating and becoming aware as advisors, and then knowing who are who are some of the folks out there in the market. If maybe I don't wanna go recommend my client borrow, I wanna invest in that market because I understand it.
Andres Sandate:Yeah. I agree. You know? Very compelling. Yeah.
Andres Sandate:Very interesting. Yeah. So I wanna wrap up with 2 final questions, Srini, because I know that we could go, on and on. But, out of respect, you're running a a large organization. You give examples of innovating and continue to reinvest in the business.
Andres Sandate:You know, Fed Chair Jay Powell announced last week at Jackson Hole, you know, the annual symposium sponsored by the KC Fed. And I have to say that because I'm that's my hometown. Yeah. Go Chiefs. It's he I think his quote was something to the effect of it's time it's time to start thinking about rates, you know, or cutting rates.
Andres Sandate:So more of a macro question. You know, when you hear that and you guys are paying attention to this, it's it's part of the the core DNA of the business is understanding what's going on in the housing market, the mortgage market. What's your posture now when you think about the the macro as it relates to Angelo, your big team, and kinda growing and building these relationships. What's the setup looking for?
Sreeni Prabhu:So, you know, look, we, you know, in fixed income land, but we had a honeymoon, and I tell this to my guys all the time. We after financial crisis, you know, 1st 2 years were difficult, but when rates are at 0, anything in fixed income was working. Right? Nothing nothing is not working in fixed income. So part of the growth of angel loan is also the timing and and, you know, you gotta be lucky sometimes.
Sreeni Prabhu:So you cannot say everything Absolutely. You know, our our amazing, work and, and smartness. The timing was great. And, the Fed allowed a lot of the fixed income community to grow. Right?
Sreeni Prabhu:People could just buy credit because Fed was a backstop. I think we are, adding 2022 was probably the toughest year for Angel because rates went up. People pulled out of fixed income funds to go into money market funds. Spreads widened down. We probably had our toughest year, as a firm, but it also allowed us to grow and and and build out new new solutions.
Sreeni Prabhu:So that's the business side of it. But where we are in the fixed income, what I tell guys is, yes. Fed us, macro, we are going in a slowdown. You know, none of us knows a soft landing
Andres Sandate:Right.
Sreeni Prabhu:We we don't know that. But if you had to ask a my most likely we are in a soft landing. Our team actually thinks we are more in a hard landing, but maybe we have fixed income, so we're all listing hard landing.
Andres Sandate:Yeah. What
Sreeni Prabhu:we tell our clients is that expect the worst. So if you're buying an asset today, look at the total return, you're getting paid a lot more to be wrong. So if you go into hard landing and credit spreads widen out, obviously, Fed is there to lower rates, but your coupon is offsetting your price loss. And that's what people have seen over the last 9 months. So from a risk management, I think we have to manage to a hard landing.
Sreeni Prabhu:That's what we are paid to do. We're not paid to manage to a soft landing. I think the fed is you know, we can say they're late or not. I'm not gonna debate that. But it looks like trending towards either way, the way, I'd say it is, if you keep rates high enough and look, we are in housing and housing is in a different place.
Sreeni Prabhu:Right? But if you keep rates high enough, you cannot shock corporate borrowers, commercial real estate borrowers, small business borrowers who are borrowing at 0%. They build their businesses based on 0%. And you cannot shock them at 8% and keep it there for 7, 8 years. You just can't do that.
Andres Sandate:No. Yeah.
Sreeni Prabhu:Yeah. It has to be methodical. Right? And you cannot say weak borrowers should default. No.
Sreeni Prabhu:You built the you built the whole cycle around 0 interest rate where people build their businesses, hire people. So you have to give people an opportunity. If you have if you have a 100 people, you can lay off 20 people. If you go
Andres Sandate:Yeah. They gotta delever and, yeah, they gotta manage that. Yeah.
Sreeni Prabhu:I think the Fed, I I believe, you know, these are sophisticated people out there. So I think the Fed, understands that. So I think we're going to an environment still on delevering even if rates are going down as bid ask us. So commercial real estate will start moving around. People just just have to take losses, but maybe not significant losses.
Sreeni Prabhu:And there'll be a movement of of of of this. So we feel we're entering a healthy environment, but selection of credit is gonna become important. And that's the main thing that we tell people. Unless the fed goes back to 0, which I don't believe, and if a if a if a, high net worth individual or a adviser is making a healthy return on his core bond fund, what is the value proposition? And it has to be relative.
Sreeni Prabhu:So I think fixed income will have a, you know, a a a great, you know, 5, 10 year run at this point across the board, but we have to prove ourselves. We don't have the fed backstop anymore, and we have to deliver, risk adjusted returns to our clients. I mean, that's just the practice environment we and I think this is a healthy environment because we have been in an unhealthy environment where anytime when there was a weakness, Fed would just buy assets. So why would you you want the worst asset because Fed used to backstop. And I think that environment is gone.
Sreeni Prabhu:So, you know, I think it's it's great. You know, when we look at underlying borrowers, we have to look at them, but we have to also look at how we finance, on a private side. But on the mutual fund side, it's relative value. I think, and so I think I think we're going into an environment where, I believe there's a slowdown happening. I don't know how fast or furious it will be.
Sreeni Prabhu:We're not talking about 2,008 here. That's not what we're entering. But weaknesses can exaggerate very quickly or exasperate very quickly. Yeah. So that's what Well,
Andres Sandate:that's helpful. That's helpful. And and I, you know, I'd like I said, I I've said it before, but, I mean, I I've gotten some great updates over the last several years, through through you guys, the website, the content that you put out. You've really leaned into that education, which is which is critical. I mean, you know, education, information, inspiration.
Andres Sandate:That's my tagline here. And and so there's always an end to these podcasts where they ask, what are you reading, and what do you do in your free time? I'm not gonna do that. I don't like to do that. Nothing against I like to ask more the question for I like to leave with that inspiration.
Andres Sandate:If you were asked to come back, maybe you have been, and talk to the students that are, at Georgia State College, and University in Milledgeville. You're talking to a a finance undergrad class, let's just say. And and they're they're wondering, how do I do that? When you think back on your journey so far, and I'm not dating you and saying, okay. He's he's he's he's going off into the sunset.
Andres Sandate:You seem you seem like there's a lot to do, and I look forward to watching that journey selfishly because you're here in Atlanta where I'm based. But what what would you say to those folks? What are the what are the things maybe you're saying to your younger employees as you grow the business that, that matter?
Sreeni Prabhu:Yeah. I mean, we have, you know, we have a very and I I love it because, you know, that's a part of what I wanted to do because I knew we knew how hard it was to get an internship when I was at, I was at Georgia State University. So we do a pretty decent sized, internship program. And what I tell them is you know, what I would tell everybody in school is, hey, you know, you know, life is long, and and you don't have to peak in your twenties. That's not how it works.
Sreeni Prabhu:And so, you know, sometimes there's this nervousness when you look across and you see maybe some of your peers, you know, growing faster in their career or being it's all about who you are. A lot of my friends went into IT industry because that was the immediate way of making more money. And I, you know, I have to be honest, I stuck with finance because it was easy to go into IT because that's where the money was. That's where visas used to be given to non US students. I said, no.
Sreeni Prabhu:I like finance. I'm I wanted to be I enjoy finance, and so you have to be patient. 2, one of the mistakes I made is, you know, you have to network and talk to professors. It's never the best the worst thing you can get is a no, and you have to ask. You have to send out hundreds of, resumes out there and network because it's hard to get a job unless you come from prestige.
Sreeni Prabhu:And even they would tell you it's difficult. Right? Yeah. They they also want to compete just like we wanna compete. But then, you know, just, you know, work hard and learn because, you know, when when when you and I were starting, you know, like, we used to have one Bloomberg for 20 people in a firm.
Sreeni Prabhu:That's right. Even to college students, I think I think they have Bloomberg for university students now that
Andres Sandate:they get Yeah.
Sreeni Prabhu:The amount of information you get today, even while you're in college, if the kids can just spend 2 hours in the morning on a weekend, cup of coffee, and just absorb. The the more knowledge you absorb, the better off you're going to be. And then you're just going. And like I said, you don't have to peak in your twenties. With modern medicine, I think we all will live longer anyway, so he might Yeah.
Sreeni Prabhu:Yeah. Yeah. So and I said people, look, you can used to be careers used to be by 40, you have made your progress, and then you go towards that. That's not how it works anymore.
Andres Sandate:No. No. You're at it. That's that's amazing advice. That's great.
Andres Sandate:I appreciate you. I I have one extra credit question. You're a tennis player. The US Open just got underway, not without scandal. Our number 1 ranked player's The scandal about did he use the enhancement drugs or not?
Andres Sandate:Yeah. Wanna ask you more. Are you gonna go to the US Open? Have you been? And do you still play the game?
Andres Sandate:Because tennis is huge in Atlanta. I'm just curious if you get out and still, hit the corners.
Sreeni Prabhu:I've seen my, all my boys play, so I play with them. I cannot keep up with them anymore. They're 17, 14, and 13. I think I can manage my 13 year old, still not 17 and my 14 year old. I don't play much outside, but I love playing with them.
Sreeni Prabhu:That's a part of what we do as, as soon as we go ahead on the weekends. I I mean, I'm very regular at US Open. I'm not going this year. Just one of the years when I'm not going. I'm excited.
Sreeni Prabhu:It's gonna be a good comment. Yeah. So we'll see. I will see
Andres Sandate:how That's great. Well, this has been, I thought, just a fascinating conversation, like, a whole tour and history of of Angel Oak. And I really do appreciate the extra time, Srini. 1, because I wanted you to have the opportunity to tell a story of Angel Oak, but also to offer some some insights advisers that are very practical, timely, and also to managers and and even younger professionals that are out there inspiring to to, to enter the industry or to work with, you know, with with with managers that are growing. You know?
Andres Sandate:20,000,000,000 is certainly big. And I I expect in a year or 2, it's gonna be a much bigger number. So congratulations to you and Mike and the rest of the team, over there at Angel Oak.
Sreeni Prabhu:Thank you, Andres. And I really I appreciate the opportunity you you gave me. So thank
Andres Sandate:you. Well, ladies and gentlemen, Srini Prabhu, cofounder, managing partner, co CEO, Angel Oak Capital Advisors. To learn more, you can go to their website, www.angeloak, capital.com. And with that, we'll sign off. Srini, thank you so much for joining me today on ATLLs.
Sreeni Prabhu:Thank you so much. I appreciate it. All the best.
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