Foster Finance Faculty Spotlight – Lukas Kremens
Get to know Lukas Kremens, Assistant Professor of Finance and Business Economics at the University of Washington’s Foster School of Business, who teaches the elective course Alternative Investments – Hedge Funds and Private Equity.
Please tell us a bit about your background.
I am from Essen, Germany. I studied in London and Milan, then worked for one year in investment banking but quit the day the first bonus hit my account (that’s a thing; not necessarily for the first bonus, but bonus day is also resignation day) and ran back to the London School of Economics for a PhD. I moved to Seattle straight out of the PhD with my partner in August 2019 (great timing to settle into a new place with 2020 around the corner …) Now I have a son, who’ll be three by the time I teach the next class. No pets, but would love a dog eventually. Hobbies? I don’t know… I guess you have to reclaim those after you have kids. For me that would be football (“soccer”, that is) and a bit of guitar here and there.
What excites you about Finance?
Economic mechanisms are pretty powerful, and in finance you can often see them playing out pretty quickly. Financial markets are quite competitive so people tend to be sharp and quick, with a reasonably low tolerance for BS.
Which factors influenced your decision to join UW Foster?
The choice was to become a professor in Paris, Milan, or Seattle. Paris made a lot of sense (wife’s French), I love Milan, but this was a now-or-never kind of opportunity to get to know somewhere very different (at least geographically).
What do you find meaningful about your time thus far at Foster?
This is a tough one. This is my first academic job so I can really only answer this as “what do I find meaningful about my job since coming to Foster?”. I love being an academic. Weekly research seminars, conferences, lots of opportunities for conversations and interactions with incredibly smart people and the freedom to spend a lot of my time on learning/figuring out new things about topics I find interesting. Teaching is quite different from what you do as a PhD student: quite exhausting but also rewarding. My class is a collection of topics I think are relevant to understanding how financial markets work, but are not necessarily textbook content. Lots of things that seem very particular to Hedge Funds or to Private Equity or Venture Capital are really just reincarnations of the same economics that play out in other parts of business or life. This means that I get to talk about stuff I think is interesting and relevant to a bunch of curious and smart people that approach it from a lot of different backgrounds and perspectives: it’s fun, and when people get insights out of it that they were unlikely to come across otherwise, that’s very rewarding.
How does your work align with Foster’s purpose? Purpose statement: Together…We Foster Leaders; We Foster Insights; We Foster Progress…To Better Humanity
Finance and economics touches a lot of really, really important big picture stuff. And better understanding of the mechanisms that drive outcomes is going to translate to better individual financial decisions, better business decisions, better policy. Research and teaching are about creating and transmitting that kind of understanding. This is incredibly vague, so here’s an example that touches both a current research paper and a topic we cover in class. After COVIDand the energy-price shock coming from the Russia-Ukraine war, lots of developing countries are currently facing problems of too much debt. Countries cannot go bankrupt, so they have to renegotiate their debt. This is (very) messy, so a lot of institutions are trying to figure out how to make this easier. For example, the NY state senate is debating a new law that would essentially create a new oversight body with the power to more or less erase debt claims it deems “unsustainable”. Is this a good idea? Well, not necessarily. Because creditors of sovereign countries cannot put the debtor in bankruptcy (which means either liquidating or in some other way taking control via the equity), sovereign creditors have a pretty hard time trusting the debtor’s promise to repay. If you as a creditor cannot do much if I choose to not repay you, that’s good for me as a borrower if I don’t want to pay you back, but it will invariably mean that you won’t lend to me in the first place (or at least not at low rates), and that’s bad for me if I want to borrow. So making it easier to get rid of excessive debt “ex-post” also means that you likely have to pay higher borrowing costs “ex-ante” (it may also mean that you are more inclined to accumulate excessive debt). The extreme outcome would be that developing countries in distress have an easier time getting out of distress *now*, but essentially can no longer borrow any new money. The ex-post benefit comes with an ex-ante cost that you want to take into account when designing these kinds of policies.
How do you maximize learning and keep students engaged?
The class is typically not huge (less than 20 students) and, as an elective, students tend to have an intrinsic motivation for the topics. Outside of that, the obvious forces driving engagement are case-based interaction and a fast pace. Most of the time, each class is a new topic. We draw parallels to previous (and sometimes future) topics, but you’ll be thrown into a different set of issues each time. It’s also an applied class, so we usually spend some time drawing parallels to things happening right now. For instance, Elon’s Twitter takeover was an endless source of entertainment, and engagement, when we were talking about merger arbitrage; FTX (cryptocurrency exchange) also contributed its fair share.
How have your relationships with industry experts influenced what happens in your class?
I used to work in restructuring, so that of course informs the two topics about distressed debt investment (sovereigns and corporates). I have a lot of friends from my own student days that work on trading desks and we obviously talk a lot about what’s going on in markets (yes, we are very boring people). For some of the cases, I have spoken to the relevant protagonists and I think that adds a level of nuance to our case discussion that is valuable. We may be lucky enough to welcome one of them in class, but I cannot promise anything.
Are there components of your elective that can help students build their resume? E.g., Experiential learning components?
Not directly. What we do have is a project at the end of the quarter. What you’re going to do is pitch an investment strategy. This could be a buyout, or a merger arbitrage trade, or just a long-short strategy where you buy one stock and sell another to bet on their relative performance. The idea here is that you come up with everything yourself, do your own due diligence and push the idea as far as you can. Then you present it and your classmates and I will pretend to be an investment committee that grills you on the due diligence. A lot of the strategies I’ve seen presented by the students here are really high quality and would be suitable for a real investment committee.
How will students apply the knowledge and skills they gain in your classroom in their careers?
That depends. If you work for a pension fund, an insurance company, or maybe the wealth management or asset management arm of a large financial institution, what we talk about is applicable in a very immediate way. If you go to work in Private Equity or Venture Capital, some of the class will be your bread-and-butter business. If you go on to become an entrepreneur and raise Venture Capital financing, understanding what we talk about in the context of Venture Capital can quite literally be worth millions of dollars.
If you don’t do any of this, but become successful in your career, I hope the class will still bring a broader understanding of investment to your life that should serve you well in managing your well-earned spoils.
Please tell us briefly about the structure of your elective course – what can students expect to learn by the end of it?
I think mostly you will have seen and understood a lot of things that you otherwise may never have been exposed to. Things like (i) what are the common themes in pretty much every spectacular blow-up of a hedge fund (or bank, or crypto exchange for that matter)? (ii) what is, perhaps not the, but a common thread behind a lot of strategies employed by hedge funds and why do they make money? (There are obviously lots of hedge fund strategies that make money that we know nothing about… because if we did, they would no longer make money… but many of them are much more transparent.) (iii) what are the basic ways in which Private Equity generates returns and adds value? (iv) Why do Venture Capital valuations (think “unicorn”!) usually not mean much? (v) why do Venture Capital investments rarely (i.e., never) involve buying common equity (the amount that all common shareholders have invested in a company), but Private Equity almost always does? And lastly, taking a step back, (vi) how do you make use of these asset classes (hedge funds, Private Equity, Venture Capital) as an institutional investor? Are they attractive, for whom and when? And who should probably stick with a boring equity ETF (exchange-traded fund) instead?
What advice do you have for students to ace your course?
Treat every class like it’s the last before the final: if something isn’t clear, ask, and we’ll discuss it. If it’s still not clear, follow up by email. There’s a lot going on so it’s easy to let some details get left behind. Many of these details come back in different shapes, so having grasped them the first time really helps to draw connections and build a more cohesive structure of the bigger picture content in your head.
Any tips for incoming MBAs on how they can brush up on skills/knowledge over the summer?
Subscribe to the “Money Stuff” Newsletter on Bloomberg (written by a lawyer-turned-investment-banker-turned columnist called Matt Levine): a very instructive way to keep up with what’s happening and understand what’s behind it. It is very accessible and usually entertaining (although your notion of entertainment may differ from mine).
