Serial Entrepreneurship with Kenneth Pasternak, Executive Chairman and CEO at The KABR Group

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Transcript

AY Strauss: Hello everybody and welcome to “The Dealmakers Edge”. Today, I am really happy and excited to be joined by Kenny Pasternak who is executive chairman, CEO, and co-founder of the Kaber group. Kaber group is a value-added and opportunistic private equity real estate firm. We actually had Adam Altman, his partner on an earlier episode. Since 2008, Kenny's identified over a hundred real estate investments and raised over $500 million in discretionary funds and private equity partnerships his background was prior to the real estate business, although he's been in the real estate business for quite a long time. Back in 1995, Kenny founded Knight Capital Group, a global financial services firm responsible for the execution of equity transactions and institutional sales and trading. He served as CEO and chairman for seven years. In 1998, KCG completed its IPO. And 1999, completed one of the largest follow-on offerings. And then in 2000, subsequently completed a billion-dollar acquisition of Arbitrate under his leadership. Knight Capital Group's market cap exceeded $5 billion. Kenny is one Entrepreneur of the Year by Ernst Young for these accomplishments and other accomplishments. He began his career on Wall Street in 1979 at Spear, Leeds, and Kellogg, now part of Goldman Sachs and rising to become head of NASDAQ trading. So, Kenny, you have a unique background, not just in real estate, not on Wall Street, but you've done so many things and our goal of the next 30, 40 minutes, however long we have is to sort of get your story out for the benefit of all of our audience. So once again, really thank you for taking the time. I'm really so happy you're here.

Kenny Pasternak: Thanks. That's a very laudatory introduction. 

AY Strauss: Yeah. I think we could just jump off to the early days like we were talking about earlier, your beginning prior to working on Wall Street. Maybe we could talk about where you grew up, how you grew up, and then how you sort of made that jump to Wall Street.

Kenny Pasternak: Well, I mean probably a couple of touch points is my father owned a used car business and a repair shop, and he was a failed serial entrepreneur and I learned a lot from his failures as much as you might from successes. And spent a lot of time with him from about 12 on to go through all his machinations with his various business endeavors. So that was the first I would say inkling that I wanted to be a businessman. I used to read biographies in the library. I always read about people who are like Andrew Carnegie and those kinds of biographies interested me more than a civil war general or a politician. Today many people know me as a trader and stock trader, but I tend to view myself as an entrepreneur who can build businesses. I've done that starting out in. I actually had a car business with my father at about 14 and then basically have been involved in building businesses or part of entities building businesses for the last, I guess that's around 55 years. So I'm a serial entrepreneur who happens to pick both real estate and Wall Street equities and options as an asset class.

AY Strauss: Perfect. It's interesting how the entrepreneurs only always sort of out themselves at an early age. They're the ones hustling, selling something in their teen years, sometimes even earlier. And it's just the makings of oftentimes much greater things. But then you could talk about, maybe if you don't mind, you grew up in the Catskill area, you went to New Paltz, which you graduated in 1977. And then from there, maybe your leap towards Wall Street. I understand it wasn't easy getting a job on Wall Street back then. 

Kenny Pasternak: Well, I went to New Paltz because well, to be honest, it was three girls to every guy and it was half an hour from my house in Catskill. So, while I got into a lot of other, let's say more selective universities, I chose the path of least resistance. I was an education major because it was basically a teacher's college back then. The business school actually likes to take credit for me. I'm in the business school Hall of Fame, so to speak, but they didn't start till 1982. I was long gone by then. I was there between ‘72 and ‘77. And what might be interesting is, I give this speech from time to time in New Paltz, is I actually took an ed degree and life's like a Rubik's cube is what I always say. I was a pretty good trader and I was telling the other traders there to my bosses that their attitude toward union capital was dysfunctional. Everybody was somebody's cousin, Vinnie from Long Island, and they had gone to, they basically had family connections. I didn't have any of that. So I had to like, basically harass them and they gave me a job as a librarian, where I sent away for annual reports. And I did that for about two weeks, and I have a pretty good memory. And I came in the training room, and I could have really good memorized quotes, and I would go in there when literally, there was no technological dissemination, computer dissemination of quotes. You actually have to call in and get a quote and then trade on a voice quote. Everything was done by telephone. And the long and the short is I found a guy who had a particularly inept assistant and I went in there and memorized his quotes. And then I asked him if I could sit in that it was actually a gal seat and help him with the quotes when she went out to lunch, get lunch for him. And about a week later, he said, “Let's you and her switch jobs”. And I got to be a quote boy. And then the next seminal event was I was one of the few guys who actually tried to understand stocks I would read the annual reports that I was sending away and I would take a longer viewpoint as a market maker, where I combine that with, let's say, an investing knowledge of what the stocks were inherently worth and I would build investment positions along with my trading book, and I ended up adding a lot of value to this gentleman who I was assisting. And then I had some good fortune, he went to Florida on vacation for a month, and he was calling in every day, and he got really sick, and he got laryngitis, and he couldn't call for a month. And I broke the record for the most money anybody ever made. So the CEO decided I was too valuable to be an assistant. And then maybe subsequent to that, I told them the story about everybody's cousin Vinnie when he asked me what I thought about “Why was I a good trader”. Like, “How can I make more of you?” And I said, “Well, you could create a meritocracy. And you could actually give people aptitude tests”, which I learned about as an ed major. So imagine I'm in an environment with Harvard MBAs, I'm not a guy with a BA, I was a gentleman B student at best, and I had an ed degree, but I understood this idea of both nature and nurture through aptitude tests. And training programs, sometimes called curriculum, that a teacher does. So I proposed this concept that I would actually go around to these universities that had guys with a chip on their shoulder. Kind of better universities, but not super elite. Like I'd go to Muhlenberg and Hofstra, not Princeton and Yale. And I'd give these aptitude tests. And I'd know the correlations using a simple thing I learned in college called statistics. So I knew who the best guys were and I could literally give them the test and see what tests correlated to outcomes. So I would, I could give it to Aaron Judge and I could create a metric around him and I could look for other Aaron Judges to use a sports analogy. Within three years, basically, about two-thirds of the staff were people who had come in through my training program, and other people either were working or left the business. In fact, I was a supervisor. Then I was insistent trading room manager of the guy who hired me who had 30 years of experience. But anyway, the moral of the story is which new pulse always enjoys is, you know, in the game of life, it's problem solving and you could actually be better equipped to be the trading room manager at a Wall Street firm with an ed degree. If you took some of the resources you had and just applied them to a business proposition, basically around human capital and acquiring the proper human capital and nurturing it.

AY Strauss: Very true. 

Kenny Pasternak: Maybe that's an interesting story for a lot of people who aren't fortunate enough to maybe be elitely educated and connected. 

AY Strauss: Absolutely. It's that whole moneyball concept, just getting those stars. I mean sort of a theme of your career, I think, is that undrafted basketball player, so to speak, that didn't…

Kenny Pasternak: Well, one of the guys who came through that culture, even though I didn't, he was hired with the same testing that they adopted through the university is Stu Sternberg, who's the owner of the Tampa Bay Rays. That takes a small and he uses some of those skills that were identified by. He was actually a superstar auctions trader who could know the fair value of auctions, the auctions. And then he, when they sold out to the Goldman, he had some bucks and he was a sports fan and he went to his second career at Tampa. 

AY Strauss: Amazing. So you're at Spear, Leeds, and Kellogg started as a librarian in 1979. Fast forward, all of a sudden you're a senior vice president, limited partner, trading room manager, recruiter extraordinaire, building this firm further and further, winning awards, and then 1994 comes along and you decide it's time to start a night trading group. Maybe we could talk about how you knew it was time, what was the impetus that was sort of your first entrepreneurial, leap so to speak in the professional world. Beyond just internally growing and growing and growing.

Kenny Pasternak: Well, I was building businesses internally and they give credit to the Spearleaf culture. They recognized that I had business-building talents and they gave me real-time assignments that hold my skills. I don't want to make it seem like it was an overnight success I was there for 17 years learning a heck of a lot about running a business. But around 1992, and I'll take people back because some of your audience may be younger than that. As far as being born, the only way you could get on the Internet was through a dial-up modem. It took literally maybe one or two minutes to even create a page, but that was the first time individual investors had the same information and the same connectivity that an institutional investor had before that to both understand, get information in real-time about stocks, and that includes both like 10 K's and 10 Q's and annual reports. But also even real-time quotes, believe it or not, weren't available. You have to actually call a broker and ask them what the price was on a stock. Talk about a weird concept. And I saw how the behaviors changed when people had their trading behaviors. And they became very, very empowered. And their volume increased, in many cases, a hundredfold. And then I went and talked to a relative who was a technologist. And he talked to me about this thing called broadband. Where you'd have the kind of speed you have today and how ubiquitous would be. And I quit in ‘19. I actually wrote a business plan for Spear Leeds. They just did a spin-off and they more or less rejected it for a number of reasons, mainly because they were the status quo was too profitable for them, and building a next-generation entity that took advantage of that empowered self-directed investor was not that attractive because my prediction, which was correct was the margins would get destroyed, but the volume would grow exponentially. And you'd have to automate everything and really drive a lot of value to the customer and be able to make money in a revenue-capture compressed environment. In fact, retail commissions today are zero. They were $59 in 1994 for trade and a guy named Martin Contos went to it, he had lowered it to the fixed commission. He was at a firm called National Discount Broker at 29 95. And that was considered revolutionary for a trade. So anyway, the moral of the story is I saw the power of the Internet. Walter Raquet and I wrote a white paper, and we quit our jobs in 1994 to create Knight Trading Group, which started in 1995. And it was a year before the first internet trade. So we were somewhat, people say we were really lucky, but I prefer to say we were both really lucky and somewhat pressing. 

AY Strauss: Absolutely. And that certainly took off. It only took a couple of years, a few years to go public market cap $7 billion, and then you were CEO for quite a while. And I guess technically you retired over 20 years ago, on January 31st, 2002. But maybe you could talk about that electrifying period, you know, it's kind of the dawn of the Internet. You have the dot com boom and then sort of rash almost on the tail end of that period. Obviously, the business was exploding and caught on. But maybe talk about the excitement, the growth. What was your headcount like? It was certainly uber-stressful, I imagine. 

Kenny Pasternak: Well, it was fast-paced. I wouldn't say it was stressful. I guess one of my saving graces is I process stress into an energy-creating force. So I wouldn't say it was stressful, but it was tiring and it was, you know, I was working 80-hour weeks. But we basically went from two employees creating an entity Walter at K and myself in seven years to 1600 employees. We went from zero to about a billion foreign revenues. We earned $500 million pre-tax in 1999. And we had 40 percent pre-tax margins and a 100 percent trailing five-year compounded annual growth rate. So all those were benchmarks that created the credibility if you want to call it that, where I won the emerging technologist, CEO, entrepreneur of the year for the whole United States. It's a very prestigious kind of academy award, if one wants to call it for CEOs, and founders of companies. That year, some other categories, people like Mark Cuban and Pierre Omidyar, the founder of eBay and the founder of E-Trade were all winners in that year in different categories, just to give you, the kind of, let's say honor it was and privileges. Privilege I was to be to be in that group. 

AY Strauss: Sure. What an illustrious group to be a part of and also to be, you know, everyone has these ideas, and timing certainly plays a part, but to execute what another level to execute to become the leading wholesale market maker, the U.S. securities market, that is quite a feat. And then I guess, at a certain point, you decided that It was time to focus on commercial real estate. You'd been investing, I understand, for quite a while, pre-Caber days, maybe not in the same organized passion you are today. But I think real estate's always been a passion of yours. And maybe you could talk about that transition, from doing solely, you know, running the big, big company and then sort of maneuvering to the real estate game more fully. 

Kenny Pasternak: Well, so between 2002 and kind of 2008, I had some health issues. I actually was grossly overweight, and I don't mind sharing this, I had a gastric bypass, which in many ways saved my life. I lost about 150 pounds through the positive of that. And then I was running a non-marketed hedge fund. Just had myself, maybe my money, and a couple of other investors. And I was allocating out money along with trading my own money or investing my own money. And I was short. A lot of credit stocks, similar to the big short, but I didn't use credit default, 2 or 3, 50 percent years in a row. And so as that broke apart, and then I was saying to myself, this is the perfect time for you to go, let's say, all in and real estate as an asset class. So while I was investing situationally in real estate, the difference here is I wanted to be in with more than 50 percent of my network at the bottom of a market dislocation. And I wanted to be the GPM LP. 

AY Strauss: Yeah, and you really were active, if I remember correctly, from the bottom. I mean, I remember 2009 and 2008, when nothing was done, you were buying. And it was exciting to see. It was exciting to watch. I remember those days where no liquidity, everything was frozen. And you seemed to have a knack for just sort of seeing bottoms and seeing patterns. And timing. Timing is a gift.

Kenny Pasternak: We were really good. I mean the timing was we weren't encumbered with any pre-cash real estate and protected differently than this cycle, by the way, where we still have 40 plus assets on our books. So we're trying to take advantage of the market cycle bottom but also we do have an existing portfolio on this cycle bottom, but that cycle bottom we were really conveniently unencumbered with any legacy real estate. And we had committed discretionary capital to be a first-time fund manager. And even the 1st asset we bought was a completely empty building. We paid $40 a square foot for about $10 million. We were lucky enough to rent it to Samsung in North America. And 12 years later, sell it for $60 million. 

AY Strauss: Fantastic. And maybe that's a good segue. Obviously, we're skipping some years and there's plenty of deals on a lot of activity in the meantime, but maybe to bring it to the present day, you've seen markets. You've got a specialization, not only capital markets and real estate markets, private markets, and public, maybe you can give us a general understanding for listeners about where you see things today. Obviously, everyone has their legacy assets and no one's predicting there are so many factors and I'm not saying that there's one answer to a multifaceted dynamic involving every different state asset class and whatnot. But do you think at this point in time, where there's surely a lot of pain coming for debt maturity and whatnot? That the next year or two or three will be a wonderful sort of long-term opportunity as some people are just getting out of the market. 

Kenny Pasternak: Well, I think there's a lot of real estate that needs to be recapitalized and where the real estate's worth is significantly lower than the debt. I don't think you're going to see anywhere as near as much real estate as you did in the last crash. And certain asset classes are pretty strong hands like multifamily and industrial, for instance. And even hotels and select retail are pretty good hands. But there are a lot of other assets that need to be worked through and I'll stay away from the office right now. That's a whole other podcast if you want to do that. There's a secular change there that's maybe making the whole office market somewhat obsolete and it's historic, both where it is and what it is. Again, a whole podcast. There'll be a lot of real estate that needs to be recapitalized where there's not enough equity to renew a loan or the numbers have deteriorated or has a floating rate mortgage. And it's probably you know, it might even be as much as a trillion dollars’ worth of value in a $20 trillion asset class. So to put it in perspective, that's a lot of real estate that needs to be traded. But on the other hand, there's a lot of real estate that doesn't need to trade. So, not to be confused, we're starting our sixth fund right now. And we call it a dry powder opportunity fund. And we're already starting to buy. We're buying an asset right now at 15%. We're in contract. I can't reveal the specifics and say it was valued at about $250 million 10 years ago. And we're buying it for about somewhere in the ‘40s. 

AY Strauss: Fantastic. There always seems to be an act of defying the deal, Kenny, in any given market, right? One of the things I want to go back to is, you know, I alluded to the fact that your night trainings were stressful and you didn't describe them as stressful. You obviously worked 80 hours a week and that's not easy. I'm not saying that's to make light of anything, but this podcast is called "The Dealmakers Edge". And a lot of people listening to this are up-and-coming dealmakers or more established dealmakers. And one of the things, everyone struggles with is sort of packaging and managing that energy. You've always had a way of sort of embracing all of that uncertainty sort of channeling it into problem-solving and sort of packaging it into activity but maybe you can describe how you do that. I think that's a very interesting thing to touch on here.

Kenny Pasternak: Well people, you know, they always like to I get a lot of reachouts to venture people. It's amazing how many people on LinkedIn want to have a cup of coffee with me. Like I'm sitting, I'll travel to the village and have a cup of coffee and be their mentor. I probably get three or four hundred of those a year. But to make a long story short, I'm going to be 70 years old in February. If you have two things going for you, if you're going where you have a natural talent and your vocation and your avocation of the same thing. You're probably almost guaranteed to have success. So I always tell people to be aware, like the worst thing in the world is when somebody's father asks me if I could interview their son and he comes to the interview and he doesn't want to be there. He thinks he's a comedian and wants to be Chris Rock. He doesn't want to be me. And you know, the right guy is the guy who wants to be me. There's actually a young guy here who has a $10 million a year business right now, who at 16 wanted to be me. That's the right attitude to have in your profession. So if I was just success in general, or you say dealmakers. When you have some aptitude your avocation is your vocation. And the secret is you do it for free, you don't have a lot of stress going to work every day. But if you hate what you do, that's not destined to be either mediocrity or lack of success. And I always tell people, like, if you think you have some talent, I mean, I know because I recorded myself that I could never be a singer on the voice. Even though I might even have a little enthusiasm for that. So you have to have some talent and that kind of enthusiasm where work is really so enjoyable that you do it over almost anything else. And I think yeah, and most deal makers I see who are really at the pinnacle share that in common. They have talent but the talent without that kind of passion for the industry or whatever they do, that together is what I think, you know is a difference maker.

AY Strauss: Well said and I think we just maybe save you a few cups of coffee during the year if people just listen to this podcast recording now, but that's terrific, and really that resonates a lot with me. I'm sure resonates with a lot of listeners too. What else out there is sort of on your achievement list, I mean is next year or two or three going to be focused on buying more? Is it going to be mentoring more? Is it going to be positioning your firm for the long haul? Is it a mix of everything? You're going to be able to…

Kenny Pasternak: Well, I think, you always have a legacy. It's not just economic. And maybe this helps you a little bit. I try to be involved in charitable and nonprofit entities on both a talent treasury and time basis. As I told you, I went to SUNY New Paltz, and in 1982, they started a business school and I would go and give speeches and even give a talk about entrepreneurship, maybe in a class. And people would try to engage with me. And I realized that I didn't have enough bandwidth. They have around about 20 percent of the student body in the business school. So that's 20 percent of 8,000. That's a lot of people who would like to engage with me. So I put together this plan about six or eight years ago with Chris Bacchus, the Dean of the business school. She wanted me to give money to endow a professorship or build a building. I said, now, if you help me, let's build an ecosystem for entrepreneurs. And we built an entrepreneur and resident program with all kinds of resources. We have a like a convention once a year. Before COVID, we got up to almost 1,000 people attending where we had panels with lawyers. How do you incorporate business angel investors? How do you write a business plan, chief marketing officers from tech companies, and so on, and we're all providing knowledge and resources to an ecosystem. So, I like to think of a person who has skills, but maybe not that rationalized at SUNY New Paltz. And use them to become an entrepreneur, that there's more support through resources programs and networking today in this ecosystem. So I'm particularly proud of, you know, being a part of an ecosystem at SUNY New Paltz that might last for a long period of time and be involved, maybe up to 1,000 people per year. I mean, certainly, I want my fund to survive me intergenerationally. A few of my nephews are involved in the business. My daughter works in the business for a competitor. She wants to show me how she can be a stellar performer and then maybe work for me. I hope that she will join us. And our company is built to be an intergenerational survivor and to keep growing. It's a partnership with five other partners who own the majority of the company and who are all under 50, between 37 and 50. So part of the legacy is to leave a private equity real estate fund that can survive intergenerationally thrive and serve our investment goals, but also presently about 187 other investors. 

AY Strauss: Outstanding. Really well articulated. I took away a lot from this conversation And I know others will as well anything I should have asked you but I didn't. Anything else you'd like to you know chime in on while we're still on the In the interview here that I may have forgotten to ask or didn't ask that you'd love to share some thoughts on?

Kenny Pasternak: Well, I think real estate is a, I mean, there are lots of different asset classes and you can find many of them that would provide a really interesting journey. I've had 2 journeys and 2 asset classes, you know, equities. And now real estate and I would just say the thing that's interesting about real estate is I don't unless they figure out how to, you know, at Facebook, give you a house that you can actually sleep in at night. As a physical asset, it's probably not going to become obsolete, at least in the conventional sense. It's about 20 percent of the economy. And I personally think between the economic activity and the fact that you're producing great housing for people at all different levels, it's a great way to participate in your community and be a legacy of accomplishment that I think gives a lot more than it takes. So I'm particularly proud of being in being a capitalist in two asset classes. And I think as a legacy producer, having produced value for society, had a great time and got paid pretty well. So to sum up, kind of, the asset class and my own personal journey.

AY Strauss: It's a really, really fabulous journey you've had and will continue to have for many years. And again, Kenny, I just really want to thank you for spending the time. I learned a lot. I took away a lot. I'm sure our listeners will as well. And with that, I guess we'll wrap it up. But again, thank you again for taking the time and hopefully, we'll be continuing this conversation to see even further successes over the coming months and years as well. So I guess we'll wrap here and Kenny, thank you so, so much again. 

Kenny Pasternak: Well, thanks for having me.