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Speaker 1: Hello, Welcome to the Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome Randy Schwimmer, vice

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Speaker 1: chairman at Churchill Asset Management.

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Speaker 2: How are you, Randy, James. It's great to be with you.

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Speaker 1: Thank you so much for joining us today. We're very

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Speaker 1: excited to hear your views. Also delighted to have back

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Speaker 1: on the show as a co host. Mike Holland with

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Speaker 1: Bloomberg Intelligence.

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Speaker 3: Hello, Mike, Hey, James, thanks for having me.

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Speaker 2: Welcome Randy, Mike. Great be with you.

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Speaker 1: Thank you so Just to set the scene of it here,

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Speaker 1: credit markets appear very calm and invests a long risk

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Speaker 1: going into US election that some analysts say could be

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Speaker 1: ruinous for the economy. It seems that there's a bit

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Speaker 1: of complacency plus more demand than supply. Private debt has

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Speaker 1: experienced a meteoric rise over the last few years. It's

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Speaker 1: now a one point seven trillion dollar market, but it

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Speaker 1: could well be worth tens of trillions of dollars when

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Speaker 1: you wrap in all of the asset based finance. That

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Speaker 1: looks like the next big wave rate cut expectations are

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Speaker 1: being dialed down as the US economy stays hot. That

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Speaker 1: will boost the appeal to investors of loans to companies

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Speaker 1: which are floating so they pay more if treasury yields

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Speaker 1: stay high. On the other hand, there are plenty of risks.

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Speaker 1: Private credit critics worry about extremely fast growth and lack

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Speaker 1: of transparency. Large portfolio managers like Pimco tell us that

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Speaker 1: there's just not enough of a pickup in returns to

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Speaker 1: make direct lending more appealing than public bond markets, which

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Speaker 1: are also offering very high yields, and bonds are a

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Speaker 1: lot easier to trade. At the same time, we're seeing

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Speaker 1: more signs of private credit stress in the form of amendments,

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Speaker 1: extensions and increasing number of loans being repaid with more debt,

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Speaker 1: plus a rise in defaults. Regulators are also looking at

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Speaker 1: the industry amid concerns any big blow up in private

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Speaker 1: credit would hit banks which lend to private credit managers,

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Speaker 1: and there are fears that yield chasing retail investors could

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Speaker 1: get hurt. Some fear of major reckoning as too much

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Speaker 1: money chases too few deals. As talk of the golden

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Speaker 1: age in private credit continues and in the background, we

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Speaker 1: have a lot of geopolitical risk and the threat of

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Speaker 1: inflation and recession hasn't really gone out of the narrative

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Speaker 1: at all. So a major downturn in the economy would

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Speaker 1: obviously cause more distress in credit markets. Let's start there, Randy,

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Speaker 1: what's your take? Is private credit still the place to be?

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Speaker 2: James? That is a laundry list of things. And I

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Speaker 2: will say that having been in the business for almost

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Speaker 2: forty five years now, and when I started, it didn't

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Speaker 2: have the very dignified name of private credit. It was

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Speaker 2: actually called middle market lending. And I was doing it

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Speaker 2: in the backwater of JP Morgan's sort of regional offices,

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Speaker 2: lending to medium sized companies that the regional banks and

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Speaker 2: some finance company, but mostly the regional banks were servicing.

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Speaker 2: And in those days, in the early eighties, you know,

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Speaker 2: there wasn't a lot of leverage. Leverage was a later discovery,

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Speaker 2: later invention. It was mostly these medium sized companies who

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Speaker 2: didn't necessarily have access to the big desks on Wall Street.

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Speaker 2: And but what happened over time, and by the way,

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Speaker 2: it was a great business. It was a very sleepy business.

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Speaker 2: Commercial ending was relatively low risk. You were secured by

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Speaker 2: all the assets you had. Amortization actually you know remember

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Speaker 2: those remember that term actually repaying principle over time and

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Speaker 2: in financial tests. And what happened, you know, as the

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Speaker 2: banks started to consolidate, and it wasn't just a regulatory issue,

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Speaker 2: it was actually you know, smaller banks merging with larger banks.

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Speaker 2: And so you know, the JP Morgan is actually the

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Speaker 2: Chase Manhattan part of the JP Morgan enterprise that I

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Speaker 2: was part of what got merged into for Chemical and

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Speaker 2: then JP Morgan. And this happened across the country. So

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Speaker 2: you had you know, tens of thousands of banks, you know,

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Speaker 2: now just a few thousand. And what happened during that

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Speaker 2: period is that these regional banks who were lending to

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Speaker 2: those medium sized companies kind of went away. And in

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Speaker 2: that same period, people realized that there was all of

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Speaker 2: this capital that needed somehow to be accessed by somebody,

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Speaker 2: and the private credit market was really given birth by

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Speaker 2: finance companies like ge Capital is a perfect example, or

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Speaker 2: hell Or Financial that started up businesses and Churchill had

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Speaker 2: its roots, our business had had its roots in that

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Speaker 2: back in the early two thousands, you know, as a

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Speaker 2: private equity backed business that saw an opportunity to we

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Speaker 2: were not necessarily starting something new, we were taking business

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Speaker 2: from the banks that were jettising it. And that what

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Speaker 2: I call the great migration of loans that went from

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Speaker 2: the banks regulated environment to the non regulated, the non

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Speaker 2: bank environment, which really started probably in the kind of

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Speaker 2: late eighties early nineties, definitely accelerated during the Great Recession,

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Speaker 2: and then in the last ten years has really, you know,

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Speaker 2: kind of finalized to the point where very little of

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Speaker 2: leverage loans are actually held by banks anymore, the vast

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Speaker 2: majorities in the hand of non banks, and as you recall,

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Speaker 2: in twenty twenty two and twenty three, the bank market

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Speaker 2: for lending was non existent. So what's happened has really

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Speaker 2: not been an overnight success. We've gone from private credit,

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Speaker 2: has gone from the backwater when I started to nounce

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Speaker 2: the beachfront, and it's the beachfront for many reasons which

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Speaker 2: I look forward to talking to you about. But a

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Speaker 2: lot of those reasons were really driven by many needs

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Speaker 2: won by the regulatory agencies who were saying, we want

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Speaker 2: to get this off the balance sheets of banks onto

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Speaker 2: non regulated lenders who don't aren't carrying deposits for customers

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Speaker 2: that we have to worry about, and private equity sponsors

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Speaker 2: and frankly, medium sized businesses who people forget. You know,

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Speaker 2: the middle market in the United States is a very

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Speaker 2: you know, it's a job creation engine. Half of the

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Speaker 2: jobs that are created in the United States are coming

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Speaker 2: from that middle market, and so financing those businesses is

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Speaker 2: pretty critical to the healthy of the economy. If you

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Speaker 2: took all of the say three hundred thousand companies that

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Speaker 2: are between say five million in revenues and a billion

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Speaker 2: in revenues, it would equal the it would be the

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Speaker 2: third largest GDP on the planet, Okay, behind China and

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Speaker 2: head of Japan. That's a huge market. And so what's

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Speaker 2: happening is private credit quote unquote, which is now what

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Speaker 2: this new middle market is being called, is being asked

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Speaker 2: to finance all of these opportunities because the banks aren't there.

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Speaker 2: So I think that you know, it is it's not

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Speaker 2: something that I think should be viewed with alarm, but

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Speaker 2: you know, frankly, as a constructive thing for the economy

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Speaker 2: and for the capital markets as a whole.

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Speaker 3: It's interesting you put it that way. You know, I

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Speaker 3: think as we look back over the arc of financial

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Speaker 3: innovation and what happened in the eighties with the jump

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Speaker 3: bonds and Michael Milkin and maybe in the late nineties

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Speaker 3: with market value CDOs which didn't go so well, and

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Speaker 3: then we had clos which actually really ramped up in

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Speaker 3: the early aughts. You had this increase of capital available

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Speaker 3: to companies, right, So there was an augmentation of credit

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Speaker 3: availability through the new structures of those clos which survived

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Speaker 3: really well right during the financial crisis. I mean there

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Speaker 3: was maybe one or two that had I don't think

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Speaker 3: there are any corporate clos that had a triple A

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Speaker 3: that was impaired, right.

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Speaker 2: Maybe or even double A.

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Speaker 3: Even double A, right, So, but it provided a massive

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Speaker 3: amount of capital for M and A and for acquisitions

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Speaker 3: over those years. And I wonder what your perspective is

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Speaker 3: on on this latest innovation. Will this create a more

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Speaker 3: benign credit environment because we'll have fewer defaults? Is the

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Speaker 3: is the business default cycle? The corporate default cycle? Declient

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Speaker 3: is the top of that coming down a little bit.

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Speaker 2: Yeah, James mentioned default rates, and that's a probably good

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Speaker 2: place to start because one of the things that's different

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Speaker 2: in the private markets than in the public markets is

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Speaker 2: that handling troubled situations. And you and I had my

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Speaker 2: co conversation before we started about the challenge of doing

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Speaker 2: that in a public environment where you have investors or

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Speaker 2: lenders or you know, vulture funds who come into these

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Speaker 2: troubled situations at a discount, right, that's their job. They

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Speaker 2: look at opportunities and they say, I'm going to buy

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Speaker 2: into forty cents on the dollar, and their job is

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Speaker 2: to get out at fifty cents on the dollar, sixty

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Speaker 2: cents or more. Their job is not necessarily to get

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Speaker 2: out of par whereas the direct lenders, the middle market

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Speaker 2: lenders such as ourselves, you know, we're not in it

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Speaker 2: to trade. We're in it to create growth and to

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Speaker 2: create financing opportunities for investors, but also support our private

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Speaker 2: equity clients. And so it's really a par market for us.

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Speaker 2: And what we seek to do with our other lending

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Speaker 2: partners is to create a situation where all the lenders

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Speaker 2: are acting in an aligned manner to maintain value and

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Speaker 2: preserve value, and if there's a problem with the company,

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Speaker 2: to extract value out of that and the beauty of

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Speaker 2: that in this in the middle market, by that, I

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Speaker 2: mean companies whose financings are say one hundred million to

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Speaker 2: five hundred million on average, that the lenders are all

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Speaker 2: there to make sure that they can get out of

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Speaker 2: this with their money back. Because in the credit market,

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Speaker 2: it's not about the you know, an equity gain. It's

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Speaker 2: not about you know, making money beyond the private the

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Speaker 2: principal and interest that you're getting back. Your your job

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Speaker 2: is to you know, get your money back with your

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Speaker 2: interest in fees and that's it. And so you're not

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Speaker 2: trying to do anything heroic. However, Mike, as you mentioned,

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Speaker 2: in a sophisticated market that has technology surrounding it, there

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Speaker 2: are many opportunities to create both kind of a syndicated

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Speaker 2: similar to the COLO market, a syndicated product that allows

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Speaker 2: investors to pick and choose among tranches depending on risk

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Speaker 2: and return. The even syndicating within a private credit context.

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Speaker 2: You know, liquidity trading within a private credit context is

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Speaker 2: probably the next generation, and I think we're seeing that developing.

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Speaker 1: It's kind of exciting, but also it's kind of assumes

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Speaker 1: that you know, you're always doing the right sort of deals,

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Speaker 1: You're always doing the diligence to pick the right sort

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Speaker 1: of companies to see that there is some value We've

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Speaker 1: had guests on this show over the last few months

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Speaker 1: talking about the massive opportunity but also flagging the potential

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Speaker 1: risks of what they have called tourists coming in who

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Speaker 1: maybe aren't so sophisticated, not have such a long track

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Speaker 1: record as you do, doing you know, quote unquote the

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Speaker 1: wrong kind of deals which can go bad. Maybe there

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Speaker 1: isn't the value there that people have ascribed to it

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Speaker 1: going in. Do you think that there's more of that

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Speaker 1: kind of activity now because there's so much demand for

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Speaker 1: this product.

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Speaker 2: Yeah, and it's so hard in this market as everyone

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Speaker 2: has scaled, you know, and you've seen that happen, and

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Speaker 2: I think commentators have talked about the growing dispersion of managers,

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Speaker 2: and I think we're going to see that going forward.

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Speaker 2: Scale really matters now. And if you come into this

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Speaker 2: market today as a new entrant with no track record,

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Speaker 2: I think it's really really hard to raise money. And

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Speaker 2: if it's hard to raise money, then what that means

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Speaker 2: is that you're probably going to be more of a

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Speaker 2: you know, small desk that's looking for very specialized opportunities

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Speaker 2: and those are really tricky. And I think that the

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Speaker 2: beauty of where we are, which is very mainstream, very

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Speaker 2: traditional middle market. These are companies that are like I say,

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Speaker 2: you know, medium sized businesses, not upper middle market, not

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Speaker 2: the broadly indicated market, and not in this in the

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Speaker 2: small cap market, but businesses where you have enough scale

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Speaker 2: so that private equity sponsors can create growth and can

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Speaker 2: start with a platform business and then add on to

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Speaker 2: create value for their shareholders, but not so large that

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Speaker 2: you get into the large market where you start to

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Speaker 2: see more of the excesses in terms of you know,

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Speaker 2: what we see in the broadly syndicated market, what we

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Speaker 2: see in the bond market, you know, covenant light, some

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Speaker 2: of the you know, idiosyncrasies with collateral packages and trading

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Speaker 2: value in and out of companies, and so it tends

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Speaker 2: to be much more of a conservative playground. And I

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Speaker 2: think if you stick to your knitting, you know, you

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Speaker 2: can avoid some of the big problems that we've seen

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Speaker 2: in other situations.

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Speaker 1: But I'd say there is that potential for access is

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Speaker 1: in the larger parts of the loan market and coding

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Speaker 1: private credit. We were hearing, you know, some time ago

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Speaker 1: that this was probably going to spread to the middle

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Speaker 1: market in terms of you know, week of covenance, West pricing,

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Speaker 1: west protections, all that stuff. Would you say right now

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Speaker 1: that that's not the case, that they still better, you know,

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Speaker 1: lenders market for the middle market than the broadly syndicator.

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Speaker 2: It hasn't, and it's been a bit of a surprise,

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Speaker 2: but in part the classic traditional middle market is inhabited

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Speaker 2: by lenders such as ourselves that have long relationships with

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Speaker 2: these private equity companies. So just to give you a

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Speaker 2: little sense we have as part of our kind of SEP.

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Speaker 2: You know, the thing that makes us different from the

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Speaker 2: competition is we have about three hundred relationships as an

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Speaker 2: LP as a limited partner and investor in three hundred

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Speaker 2: different private equity sponsors. They're probably the krem de la

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Speaker 2: creme of the middle market in North America out of

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Speaker 2: probably you know, over twenty twenty five hundred maybe overall

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Speaker 2: private equity sponsors. So we're in the sort of top

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Speaker 2: tier as an LP and on their on their advisory boards,

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Speaker 2: and so we have a special relationship really as a

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Speaker 2: client as an investor to these sponsors. And when you're

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Speaker 2: when you're in that relationship, you're getting all of their

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Speaker 2: deal flow, and then you can be selective from that

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Speaker 2: deal flow. So it's kind of like credentialed pipeline that's

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Speaker 2: coming at you. We get about a thousand deals a

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Speaker 2: year in our senior pipeline, and we end up getting

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Speaker 2: about fifty or sixty that we like. So that's a

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Speaker 2: pretty selective ratio. And so not only picking from the

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Speaker 2: best of the sponsors, we're also picking the best industries

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Speaker 2: that we like over over cycles that are going to

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Speaker 2: be you know, created with all weather portfolio. But also

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Speaker 2: then in the best industries, what are the best companies,

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Speaker 2: what are the survivors, what are the businesses that really

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Speaker 2: will be able to exist no matter what cycle or

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Speaker 2: what rate environment you're in. So you end up with

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Speaker 2: a sort of I think kind of I call it

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Speaker 2: a triple filtered portfolio, which you can't get anywhere else.

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Speaker 2: And so if you look at the way that we've

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Speaker 2: constructed our business, it's very hard to come from the

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Speaker 2: outside as a new entrant with no track record and

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Speaker 2: try to get that relationship with that private ecory sponsor,

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Speaker 2: build up the trust that you need in order to

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Speaker 2: develop that relationship. Because in this market where you're actually

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Speaker 2: financing these businesses that are hard won, I mean the

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Speaker 2: auctions and the purchase base multiples is still relatively high

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Speaker 2: for good companies. The sponsor is not going to hand

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Speaker 2: over their keys to a lender that they don't trust.

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Speaker 2: So that's why it's hard to break in.

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Speaker 3: Going to back to the regulatory side for a little

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Speaker 3: bit with the focus on the banks and you know,

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Speaker 3: having been at Credit Swiss when they were going through

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Speaker 3: leverage lending guidelines and you know, being told by the

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Speaker 3: OCC and the FED that you can't model this company

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Speaker 3: out to six times.

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Speaker 2: We had a lot of rules.

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Speaker 3: I did a lot of work that was sent to

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Speaker 3: them basically telling them about our leverage lending position, which

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Speaker 3: I thought was really interesting. Since that time, the bank

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Speaker 3: is no longer really doing that anymore. It's had its

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Speaker 3: own issues and it's you know, it's kind of progressed.

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Speaker 3: I wonder, you know, also as a healthcare analyst, looking

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Speaker 3: at what the way the regulators look at private equity

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Speaker 3: right now, you know, how does how do you envision

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Speaker 3: the regulators putting in place a regime that would monitor

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Speaker 3: and really be able to keep track of these loans

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Speaker 3: that are out there, and would they go down to

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Speaker 3: that certain level of looking at like you know, leverage,

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Speaker 3: you know, over a specific time frame, you know.

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Speaker 2: Yeah, well it's hard to predict what they will do,

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Speaker 2: but and they're certainly aware of it, right, I think

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Speaker 2: that's pretty clear. I think it's it's probably a misnomer

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Speaker 2: to say that we are in an unregulated market. I

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Speaker 2: know that, you know, we are owned by an insurance

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Speaker 2: company TIA and New Veen, who are you know, regulated

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Speaker 2: by the SEC and by the Insurance Can Mission and

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Speaker 2: so forth, So there's plenty of regulations around our business.

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Speaker 2: I think the thing that that has been the big focus,

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Speaker 2: and we saw that a year and a half ago

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Speaker 2: with the you know, failure three key banks that what

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Speaker 2: you know, the focus you know, is often on the

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Speaker 2: depository community, right, and what happens when they don't realize

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Speaker 2: that their bank is investing in or you know, playing

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Speaker 2: in leverage loans. And in the case of those failures,

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Speaker 2: you know, that was not an issue, right, Silicon Valley

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Speaker 2: Bank was not involved in playing right, So it was

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Speaker 2: a mismatch of assets and liabilities. And I think the

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Speaker 2: beauty of the non bank world and what we discovered

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Speaker 2: twenty years ago and when we started Churchill was that

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Speaker 2: if you match your your assets, your long term assets

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Speaker 2: with long term liabilities with investors in the institutional market,

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Speaker 2: where you can go out and raise tenure money that

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Speaker 2: matches the ten years of your assets, then you're locked

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Speaker 2: in for a long period time. And the beauty of

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Speaker 2: that is through the cycles we found that out going

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Speaker 2: through the Great Recession, when we survived that through COVID,

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Speaker 2: through the mini cycles that we've seen, is that having

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Speaker 2: that match on the asset and liability side really creates

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Speaker 2: real strength. And I think the issues that have come up,

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Speaker 2: so for example, having defaults in the middle market that

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Speaker 2: would migrate to the banks or migrate to the to

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Speaker 2: the banking system, all of that I think has been

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Speaker 2: really disproven. Nobody really seriously thinks that. I think that

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Speaker 2: that middle market loans that are held in our case

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Speaker 2: in a very diverse portfolio where no one name represents

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Speaker 2: more than you know, one or two percent of the

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Speaker 2: total portfolio, that if something goes wrong with one or two,

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Speaker 2: or three or five of those names, that that's going

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Speaker 2: to spread out through the system. I think the more

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Speaker 2: and this is really the focus of what we do

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Speaker 2: in our newsletter that you guys read, the Lead Left,

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Speaker 2: which I've been publishing every week since March of two

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Speaker 2: thousand and eight, we have about fifty thousand subscribers. And

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Speaker 2: the thing that people tell me about it is that,

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Speaker 2: you know, we tend to demestify and educate, which is

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Speaker 2: really the goal of private credit, and the goal of

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Speaker 2: these kinds of you know podcasts and the work that

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Speaker 2: I do with your radio team is to get the

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Speaker 2: word out for what private credit really is and what

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Speaker 2: it isn't. And the only way that you can kind

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Speaker 2: of tell is to talk to practitioners, because these are

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Speaker 2: not public entities. There's no yet, there's no Bloomberg you

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Speaker 2: know app that says, Okay, here's here's Churchill's you know portfolio.

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Speaker 2: Now one day maybe we'll get there. But I think

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Speaker 2: the understanding the differences between private markets and public markets,

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Speaker 2: between liquidity and illiquidity, between correlation and non correlation, which

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Speaker 2: is one of the things that's a real virtue of

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Speaker 2: private credit that it does not trade when the rest

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Speaker 2: of the market does. And one of the reasons that

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Speaker 2: it has grown over the last fifteen years is that

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Speaker 2: investors have seen, during periods of volatility, how the valuations

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Speaker 2: of the loans that are held by lenders like Churchill

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Speaker 2: and that they own don't move around in the same way,

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Speaker 2: and so there's some comfort there. It doesn't mean that

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Speaker 2: they're going to put all of their capital into private credit,

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Speaker 2: but it means now that it's become really a core

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Speaker 2: asset of their alternatives allocation.

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Speaker 1: You've told to me, and you know, before we started

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Speaker 1: recording this about the biggest misguided conclusions in private credit.

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Speaker 1: Hopefully not too many of them on mine. I won't

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Speaker 1: be offended if they are. But but can you expand

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Speaker 1: a bit on that. What do you mean by that?

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Speaker 2: Well, we talked about liquidity, right, and middle market loans

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Speaker 2: are not liquid, right. You can't trade them. There's no

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Speaker 2: real index, you can't call up even I mean, there

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Speaker 2: are some larger direct lenders who will make a market,

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Speaker 2: you know, in their own asset if they have the

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Speaker 2: loan on their books. You know, they will work hard

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Speaker 2: to find a buyer if you're a seller or vice versa.

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Speaker 2: But they're not liquid in the sense that you the

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Speaker 2: way the public markets are liquid. And I think it's

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Speaker 2: import to know that because you know, as we start

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Speaker 2: to go, you know, we get the retailization of private credit,

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Speaker 2: that the understanding that these are really different types of assets.

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Speaker 2: Then the public markets will help educate investors as to

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Speaker 2: the you know, what's possible and what's not possible. So

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Speaker 2: getting your money out instantly the way you can, you know,

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Speaker 2: out of your you know, checking account is just it's

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Speaker 2: not the same kind of thing. I think that. So

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Speaker 2: liquidity is really important to understand. Along with that, I

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Speaker 2: think is valuation. So one of the myths about private

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Speaker 2: credit is that you know valuations because they're not public,

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Speaker 2: are therefore suspect that is not true anymore than if

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Speaker 2: you have a public valuation out there, that it is

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Speaker 2: a real valuation. And I you know, Mike, like you've

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Speaker 2: worked on a trading desk, and I know that if

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Speaker 2: you know, I have a particular loan that's marked at

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Speaker 2: a certain price, it doesn't mean that somebody calls me

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Speaker 2: up can get it at that price. And so often

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Speaker 2: it's just a a guess, an indication, you know, well,

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Speaker 2: we think this is where it's going to trade. And

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Speaker 2: as we also know, in times of high volatility, liquidity

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Speaker 2: can evaporate, and when that happens, what you think is

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Speaker 2: worth part can be worth far less. And we've seen

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Speaker 2: in the public markets periods, and COVID was a perfect example,

401
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Speaker 2: when you had this huge what I call an emotional

402
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Speaker 2: discount in the values of loans in that period in

403
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Speaker 2: March April of twenty twenty when you couldn't get a bit,

404
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Speaker 2: and when that happens, their liquidity evaporates. And interestingly, in

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Speaker 2: that same period, the valuations of private loans were very

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Speaker 2: stable because they couldn't trade, they were sort of locked in.

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Speaker 2: I think there's suspicion though, that not being able to

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Speaker 2: trade means that there's uncertain value. And so the way

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Speaker 2: that direct lenders have combated that is they have hired

410
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Speaker 2: third party valuation experts. We have at least three separate,

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Speaker 2: independent to companies who come in and value all of

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Speaker 2: our three hundred loans every quarter. And when they do that,

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Speaker 2: they're basically applying certain methodologies regarding the fundamental performance of

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Speaker 2: those companies. They're also looking at the mark to market

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Speaker 2: in the liquid market and saying, all right, if things

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Speaker 2: are moving the liquid market, it probably will have some

417
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Speaker 2: impact on medium sized loans, and then they make a

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Speaker 2: determination based on the formula as to what that value is.

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Speaker 2: And if you have three independent including your own Churchill

420
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Speaker 2: led group that's doing those valuations, you're probably going to

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Speaker 2: get a pretty good assessment of what that real value is.

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Speaker 2: But if you're not an investor and you don't have

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Speaker 2: access to that information, it's a little bit like you know,

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Speaker 2: a helicopter above a factory. You don't really know what's

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Speaker 2: going on to go inside.

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Speaker 1: Right, So sort of underlying hard assets that what they're

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Speaker 1: valued at, and all of that contributes to what the

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Speaker 1: ultimate value of the loan is. It's not just like.

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Speaker 2: The well it's it's in our case it's mostly cash flows.

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Speaker 2: Cash flows repay debt because you know, they're not the assets.

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Speaker 2: But and really what happens in the real world is

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Speaker 2: that as these companies perform, you keep track and all

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Speaker 2: the good direct lenders have teams dozens of people in

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Speaker 2: our case who track these loans on a monthly basis,

435
00:24:22,440 --> 00:24:25,760
Speaker 2: and and if they go off their budget, you you know,

436
00:24:25,880 --> 00:24:28,320
Speaker 2: rate them lower. If they're higher than budget, you rate

437
00:24:28,359 --> 00:24:30,560
Speaker 2: them higher, and you track them and if they're if

438
00:24:30,600 --> 00:24:33,160
Speaker 2: they go off performance. And this goes back to sort

439
00:24:33,200 --> 00:24:36,560
Speaker 2: of the the third myth, which is defaults. You know,

440
00:24:36,640 --> 00:24:40,320
Speaker 2: the the the idea of having a default in a

441
00:24:40,400 --> 00:24:44,119
Speaker 2: private credit deal is very, very different than in the

442
00:24:44,200 --> 00:24:46,400
Speaker 2: large cap market. The large cat market. As we've talked about,

443
00:24:46,400 --> 00:24:50,120
Speaker 2: there are no financial tests in the sense of being

444
00:24:50,200 --> 00:24:53,400
Speaker 2: maintenance tests. They're in currence tests, which means that they're

445
00:24:53,440 --> 00:24:56,440
Speaker 2: not measured until you actually, as a bar or, try

446
00:24:56,440 --> 00:24:58,360
Speaker 2: to get more debt, and then they say, okay, what's

447
00:24:58,400 --> 00:25:01,200
Speaker 2: the leverage. So if you don't raise me more debt,

448
00:25:01,320 --> 00:25:04,639
Speaker 2: the performance of the company could deteriorate to zero and

449
00:25:04,720 --> 00:25:07,919
Speaker 2: you wouldn't know it until your interest payment to faults.

450
00:25:08,720 --> 00:25:11,720
Speaker 2: It's typically not the case in the market their financial tests,

451
00:25:12,240 --> 00:25:15,640
Speaker 2: and so what happens is there are stops along the way.

452
00:25:15,680 --> 00:25:19,160
Speaker 2: There's elevator stops along the way where you can assess, okay,

453
00:25:19,160 --> 00:25:21,840
Speaker 2: how's the company doing now? And if you trigger those stops,

454
00:25:22,400 --> 00:25:24,440
Speaker 2: then everybody gets to gather around the table and say,

455
00:25:24,440 --> 00:25:27,600
Speaker 2: all right, what's going on to the private equity sponsor,

456
00:25:27,640 --> 00:25:29,560
Speaker 2: what are you doing about it? How can we help you?

457
00:25:30,160 --> 00:25:34,120
Speaker 2: And the stops along the way allow you to take

458
00:25:34,160 --> 00:25:38,399
Speaker 2: steps that will modify or mitigate whatever's going on with

459
00:25:38,480 --> 00:25:42,040
Speaker 2: these businesses. So the result of that historically has been,

460
00:25:42,119 --> 00:25:44,720
Speaker 2: and there's long data that supports this, that defaults and

461
00:25:44,840 --> 00:25:49,240
Speaker 2: losses in smaller companies is better than in the larger companies.

462
00:25:49,480 --> 00:25:52,480
Speaker 2: For that very reason, lenders tend to cooperate in these

463
00:25:52,480 --> 00:25:56,920
Speaker 2: medium sized businesses. And as I mentioned earlier, the desk

464
00:25:57,000 --> 00:25:59,280
Speaker 2: mike that you were on, where you might take advantage

465
00:25:59,320 --> 00:26:02,439
Speaker 2: of an opportunity. If you get out and force everybody

466
00:26:02,480 --> 00:26:04,560
Speaker 2: else to get out seventy cents, then those people who

467
00:26:04,560 --> 00:26:07,080
Speaker 2: got in at par kind of stuck. And so I

468
00:26:07,080 --> 00:26:13,159
Speaker 2: think defaults have a very different dynamic in the middle market.

469
00:26:13,680 --> 00:26:17,680
Speaker 2: And what we've seen in the last nine months has

470
00:26:17,760 --> 00:26:21,120
Speaker 2: been the defaults for middle market companies have actually gone

471
00:26:21,200 --> 00:26:26,040
Speaker 2: down this year, which is surprising given the high rate

472
00:26:26,160 --> 00:26:30,200
Speaker 2: environment that we're in, but it's an indication that for

473
00:26:30,480 --> 00:26:33,880
Speaker 2: experienced investors and lenders like ourselves, we have a playbook

474
00:26:33,880 --> 00:26:35,240
Speaker 2: that we've been using for a long time.

475
00:26:35,480 --> 00:26:38,639
Speaker 1: And do you think that holds despite all of this competition,

476
00:26:38,760 --> 00:26:41,240
Speaker 1: all of this money coming in, all this new money

477
00:26:41,280 --> 00:26:43,800
Speaker 1: coming in, that you think these god rails, these stuffs

478
00:26:44,200 --> 00:26:46,240
Speaker 1: will not be eroded.

479
00:26:46,680 --> 00:26:48,920
Speaker 2: So there's two issues. One is and we'll talk about

480
00:26:48,960 --> 00:26:51,960
Speaker 2: the money coming in separately, but one is the hot

481
00:26:52,040 --> 00:26:54,320
Speaker 2: Let's take the high rate environment that we're in. I

482
00:26:54,320 --> 00:26:56,320
Speaker 2: don't think that rates are going to be going down

483
00:26:56,760 --> 00:27:00,080
Speaker 2: as swiftly as some I think that the strength in

484
00:27:00,200 --> 00:27:01,760
Speaker 2: the economy, which I don't know about you two, but

485
00:27:01,960 --> 00:27:06,280
Speaker 2: has really surprised me that, in light of the fact

486
00:27:06,320 --> 00:27:09,960
Speaker 2: that rates are so high and the FED is determined

487
00:27:10,040 --> 00:27:12,560
Speaker 2: to keep inflation at bay, that the economy seems to

488
00:27:12,560 --> 00:27:15,040
Speaker 2: be humme and along at a two and a half

489
00:27:15,080 --> 00:27:20,240
Speaker 2: three percent clip. So they may be a little more

490
00:27:20,280 --> 00:27:24,040
Speaker 2: careful about dropping rates quickly to not ignite inflation. And

491
00:27:24,080 --> 00:27:25,600
Speaker 2: if that happens, we're going to be in a high

492
00:27:25,680 --> 00:27:28,719
Speaker 2: rate regime longer than we think, which means that the

493
00:27:28,760 --> 00:27:33,080
Speaker 2: portfolios that people have out there with benchmarks that are

494
00:27:33,119 --> 00:27:35,840
Speaker 2: at five percent are going to have to endure that

495
00:27:35,880 --> 00:27:39,560
Speaker 2: because that's if you add this loan spreads on top

496
00:27:39,560 --> 00:27:42,320
Speaker 2: of that, that's a you know, ten eleven, twelve percent

497
00:27:42,480 --> 00:27:46,440
Speaker 2: cost of capital. Now, if you've already, as we do,

498
00:27:46,560 --> 00:27:48,879
Speaker 2: you know, assume that those rates are going to be

499
00:27:48,960 --> 00:27:53,840
Speaker 2: higher for longer, you've probably inoculated your portfolio against trouble.

500
00:27:54,600 --> 00:27:58,720
Speaker 2: But for those who have not, or have overlevered companies

501
00:27:58,760 --> 00:28:02,679
Speaker 2: and now suffering from result, that's where you're going to

502
00:28:02,680 --> 00:28:06,200
Speaker 2: see the issue, not from necessarily competition come in coming in.

503
00:28:06,320 --> 00:28:11,080
Speaker 2: I think where the competition element, which is I think

504
00:28:11,080 --> 00:28:15,000
Speaker 2: a really good one, because it's always coming up as

505
00:28:15,040 --> 00:28:18,000
Speaker 2: an issue in private credit. But if you look overall,

506
00:28:18,359 --> 00:28:21,920
Speaker 2: there are plenty of people who are doing different things,

507
00:28:22,280 --> 00:28:24,920
Speaker 2: and that's really I think part of the understanding that

508
00:28:25,520 --> 00:28:28,840
Speaker 2: hopefully I can get across here in our newsletters is

509
00:28:28,880 --> 00:28:31,679
Speaker 2: that private credit is a big tent. And in fact,

510
00:28:32,320 --> 00:28:36,040
Speaker 2: direct lending, which is really the sub specialty that we inhabit,

511
00:28:36,800 --> 00:28:40,520
Speaker 2: is maybe fifty percent of the trillion and seven that's

512
00:28:40,800 --> 00:28:44,880
Speaker 2: in the asset class. The rest is comprised of special situations,

513
00:28:45,840 --> 00:28:51,560
Speaker 2: you know, it's subdebt, junior capital workout, asset based lending,

514
00:28:51,720 --> 00:28:52,400
Speaker 2: venture debt.

515
00:28:53,200 --> 00:28:55,000
Speaker 3: I had a question just you know, you're talking about

516
00:28:55,080 --> 00:28:57,560
Speaker 3: rates for higher for longer. There's been a pivot in

517
00:28:57,600 --> 00:28:59,440
Speaker 3: the last couple of weeks, pretty hard, right, So since

518
00:28:59,600 --> 00:29:03,120
Speaker 3: since the eighteenth of September the fifty a half point cut,

519
00:29:03,280 --> 00:29:05,160
Speaker 3: you know, treasuries have kind of gapped out by about

520
00:29:05,160 --> 00:29:08,000
Speaker 3: seventy seventy basis points across the curve except for the

521
00:29:08,000 --> 00:29:10,320
Speaker 3: front end, and the front end obviously is inverted, but

522
00:29:10,360 --> 00:29:13,360
Speaker 3: you've seen the frontend come in a little bit. I

523
00:29:13,400 --> 00:29:16,600
Speaker 3: think going forward, what's your expectation on SOFA how that

524
00:29:16,640 --> 00:29:19,680
Speaker 3: impacts your portfolio companies. You know, if they're getting sofa

525
00:29:19,680 --> 00:29:22,240
Speaker 3: plus five hundred plus four hundred, you getting eleven percent?

526
00:29:22,280 --> 00:29:25,600
Speaker 3: Are you modeling twelve thirteen percent? Are you keeping it static?

527
00:29:25,880 --> 00:29:29,200
Speaker 3: And the other question too, I would have is follow

528
00:29:29,240 --> 00:29:32,920
Speaker 3: on that is, if rates do continue to elevate, can

529
00:29:32,960 --> 00:29:37,480
Speaker 3: you singularly modify your agreement? So could you change the

530
00:29:37,480 --> 00:29:39,160
Speaker 3: margin on one of your loans who won the companies

531
00:29:39,160 --> 00:29:40,680
Speaker 3: you're in your direct lending portfolio?

532
00:29:40,680 --> 00:29:44,040
Speaker 2: So that's an easy one, typically not in a normal situation.

533
00:29:44,280 --> 00:29:47,480
Speaker 2: Pricing is one of those things that you know you

534
00:29:47,560 --> 00:29:50,320
Speaker 2: need the cooperation of the bar and the other lenders.

535
00:29:51,040 --> 00:29:53,760
Speaker 2: But your other question is a good one because we're

536
00:29:53,760 --> 00:29:57,560
Speaker 2: in a very interesting rate environment right now. And I

537
00:29:57,680 --> 00:30:01,000
Speaker 2: like to say that, and Mike, you being on the

538
00:30:01,040 --> 00:30:05,800
Speaker 2: trading floor, you know this just as a regular thing

539
00:30:06,200 --> 00:30:09,880
Speaker 2: of being a trader, that inflection points is where it's

540
00:30:09,920 --> 00:30:13,080
Speaker 2: all at, right, because you can go along when rates

541
00:30:13,080 --> 00:30:16,600
Speaker 2: are stable, the economy stable, expectations are stable. But when

542
00:30:16,600 --> 00:30:18,480
Speaker 2: you come to the point you can kind of census

543
00:30:18,560 --> 00:30:20,920
Speaker 2: if you've been around long enough, when things are going

544
00:30:20,960 --> 00:30:22,880
Speaker 2: to change, right, rates are going to go uprates are

545
00:30:22,880 --> 00:30:25,320
Speaker 2: going to go down. Something different is going to happen

546
00:30:25,880 --> 00:30:28,920
Speaker 2: and what you do when that happens is, if you've

547
00:30:28,920 --> 00:30:31,560
Speaker 2: had enough experience, is you look at look around you,

548
00:30:31,560 --> 00:30:33,360
Speaker 2: and you say, what do I need to do, if anything,

549
00:30:33,360 --> 00:30:36,600
Speaker 2: to change what I'm doing. The beautiful part about private credit,

550
00:30:36,640 --> 00:30:38,600
Speaker 2: if you've been doing it long enough, is that you

551
00:30:38,800 --> 00:30:44,160
Speaker 2: expect inflection points at any time. So for example, in

552
00:30:44,320 --> 00:30:48,320
Speaker 2: twenty twenty, actually in late twenty nineteen, you remember that

553
00:30:48,440 --> 00:30:53,200
Speaker 2: everybody was calling for some sort of recession, right, nobody

554
00:30:53,280 --> 00:30:54,840
Speaker 2: knew when it was going to happen, And I was

555
00:30:54,880 --> 00:30:57,800
Speaker 2: asked it may have been on Bloomberg, you know, whether

556
00:30:57,880 --> 00:30:59,880
Speaker 2: I thought that we were going to head into or

557
00:31:00,480 --> 00:31:03,160
Speaker 2: and I had been I was always wrong. I was

558
00:31:03,160 --> 00:31:05,040
Speaker 2: to think we were. Yes, I said, you know, I'm

559
00:31:05,040 --> 00:31:07,560
Speaker 2: always wrong, but maybe this time I'm right, and maybe

560
00:31:07,600 --> 00:31:10,760
Speaker 2: maybe we will head into recession. Well I was right,

561
00:31:10,800 --> 00:31:12,760
Speaker 2: but for the wrong reasons, because three months later we

562
00:31:12,800 --> 00:31:16,840
Speaker 2: had COVID. But what we in our portfolio had done

563
00:31:16,920 --> 00:31:20,000
Speaker 2: and have been doing since two thousand and six is

564
00:31:20,120 --> 00:31:22,960
Speaker 2: expect a recession in the next twelve months. So when

565
00:31:23,000 --> 00:31:27,520
Speaker 2: we look at alone, we assume that the performance of

566
00:31:27,560 --> 00:31:29,760
Speaker 2: that company is going to go down twenty percent. Revenues

567
00:31:29,800 --> 00:31:33,280
Speaker 2: and cash flow. The following year, and let's see how

568
00:31:33,320 --> 00:31:37,080
Speaker 2: the company does in that environment. We also with rates,

569
00:31:37,160 --> 00:31:40,800
Speaker 2: expect rates to be generally in the forward curve, except

570
00:31:40,800 --> 00:31:42,880
Speaker 2: recently we basically said, okay, we just think it's going

571
00:31:42,920 --> 00:31:45,320
Speaker 2: to be five percent flat. We don't think it's going

572
00:31:45,360 --> 00:31:48,040
Speaker 2: to come down, because what if it doesn't. And so

573
00:31:48,120 --> 00:31:49,920
Speaker 2: what we do is we model those two things a

574
00:31:49,960 --> 00:31:53,360
Speaker 2: recession and a high rate environment, and if the company's

575
00:31:53,520 --> 00:31:57,400
Speaker 2: performance in that projection doesn't cover interest with a cushion,

576
00:31:57,440 --> 00:32:00,000
Speaker 2: we're not going to do the deal. So we actually

577
00:32:00,120 --> 00:32:03,479
Speaker 2: don't care where rates go or whether they're you know,

578
00:32:03,520 --> 00:32:06,000
Speaker 2: what's going to happen with the economy when we pick

579
00:32:06,040 --> 00:32:09,160
Speaker 2: a company. And I talked about the private equity sponsors

580
00:32:09,160 --> 00:32:14,680
Speaker 2: who are trafficking in business services or healthcare or defensive

581
00:32:14,760 --> 00:32:19,680
Speaker 2: sectors that we've learned over time to be playing in

582
00:32:19,720 --> 00:32:24,360
Speaker 2: and not to do more cyclical consumer facing commodity, gaming,

583
00:32:24,440 --> 00:32:27,360
Speaker 2: real estate, and energy, because then if you do hit

584
00:32:27,360 --> 00:32:31,040
Speaker 2: a cycle, those industries tend to do worse. So in

585
00:32:31,080 --> 00:32:33,640
Speaker 2: the more defensive sectors, we feel more comfortable that no

586
00:32:33,720 --> 00:32:36,920
Speaker 2: matter what happens, we're going to be okay. And over

587
00:32:37,000 --> 00:32:42,480
Speaker 2: time we've actually learned to be alert to some private

588
00:32:42,480 --> 00:32:46,240
Speaker 2: equity sponsors who are picking areas. So for example, right now,

589
00:32:46,280 --> 00:32:51,400
Speaker 2: just to pick some interesting ones. Measuring equipment, which is,

590
00:32:52,320 --> 00:32:54,520
Speaker 2: you know, when you have an economy which is generally flat,

591
00:32:54,560 --> 00:32:58,000
Speaker 2: maybe slight growth, companies are looking to improve their performance

592
00:32:58,040 --> 00:33:02,600
Speaker 2: and production lines and so forth. Manufacturaturing facilities, measuring equipment

593
00:33:02,640 --> 00:33:05,880
Speaker 2: all of a sudden has become super important, particularly with

594
00:33:06,040 --> 00:33:09,959
Speaker 2: AI as a guiding technological factor, which help companies do

595
00:33:10,040 --> 00:33:15,160
Speaker 2: things that they couldn't do before. Environmental consulting and engineering companies.

596
00:33:15,680 --> 00:33:18,280
Speaker 2: It's a big area of concern. People are very focused

597
00:33:18,320 --> 00:33:22,880
Speaker 2: on it, big area of growth. Accounting services sounds pretty mundane,

598
00:33:22,880 --> 00:33:26,040
Speaker 2: pretty simple, but we've seen with even some very large

599
00:33:26,040 --> 00:33:29,560
Speaker 2: private equity firms who have been buying large accounting services. Again,

600
00:33:29,640 --> 00:33:32,640
Speaker 2: these are businesses that tend to do well. You owe

601
00:33:32,720 --> 00:33:35,520
Speaker 2: taxes no matter what the rate cycle is, and so

602
00:33:36,000 --> 00:33:39,720
Speaker 2: these are the kinds of areas that sponsors are buying

603
00:33:39,760 --> 00:33:42,880
Speaker 2: and selling. And we find that if we play in

604
00:33:42,920 --> 00:33:46,760
Speaker 2: those areas, regardless of where the rate cycle the economics

605
00:33:46,800 --> 00:33:48,840
Speaker 2: app is going to be, we're going to be okay.

606
00:33:48,960 --> 00:33:51,840
Speaker 2: So at the end of the day, looking at your

607
00:33:52,280 --> 00:33:57,400
Speaker 2: rate scenario, mic, I think we're probably you know, indefferent,

608
00:33:57,440 --> 00:33:59,680
Speaker 2: but we do think that we're going to be higher

609
00:33:59,680 --> 00:34:02,240
Speaker 2: for a lot longer, more than most people think.

610
00:34:02,720 --> 00:34:05,760
Speaker 3: You're on the funding side of the BDCSS permanent capital, right,

611
00:34:05,800 --> 00:34:07,920
Speaker 3: but you know with celos, you have got you've got

612
00:34:08,480 --> 00:34:10,600
Speaker 3: you know so far on both sides, and it kind

613
00:34:10,600 --> 00:34:13,920
Speaker 3: of passes through. How does the how does middle market lending?

614
00:34:13,960 --> 00:34:18,160
Speaker 3: How do BDC's what's their exposure to changes in rates?

615
00:34:18,360 --> 00:34:22,200
Speaker 2: So, yeah, one of the lessons that we and other

616
00:34:22,239 --> 00:34:25,719
Speaker 2: direct lenders learned a long time ago, particularly through the

617
00:34:25,719 --> 00:34:29,600
Speaker 2: Great Recession, was to have a multitude and a variety

618
00:34:29,680 --> 00:34:31,960
Speaker 2: of financing sources, So don't just have one line of

619
00:34:32,040 --> 00:34:37,319
Speaker 2: credit with a bank, but have multiple financing sources and

620
00:34:37,360 --> 00:34:41,600
Speaker 2: also frankly in the form of structures of funds. So

621
00:34:41,640 --> 00:34:45,720
Speaker 2: you mentioned BDC's. We have I think over fifty types

622
00:34:45,800 --> 00:34:50,520
Speaker 2: of fund structures at Churchill, both from our senior and

623
00:34:50,600 --> 00:34:54,520
Speaker 2: junior capital businesses. We have an entire group a team

624
00:34:54,600 --> 00:34:58,080
Speaker 2: that does fund finance, that is responsible for the care

625
00:34:58,120 --> 00:35:01,520
Speaker 2: and feeding of those vehicles for or leverage in those vehicles.

626
00:35:01,560 --> 00:35:04,880
Speaker 2: We utilize and I think you mentioned this earlier. You know,

627
00:35:05,000 --> 00:35:08,920
Speaker 2: we utilize banks to help us with our capital and

628
00:35:08,960 --> 00:35:12,080
Speaker 2: our leverage, so we make sure and all those are

629
00:35:12,520 --> 00:35:15,959
Speaker 2: typically match funded to our assets. And I was asked

630
00:35:15,960 --> 00:35:17,760
Speaker 2: this question by an investor. I didn't know the answer.

631
00:35:17,800 --> 00:35:21,320
Speaker 2: I thought, I, did you know, do your your assets

632
00:35:21,280 --> 00:35:23,640
Speaker 2: that flowers? Do your liabilities have flowers? The answers yes,

633
00:35:23,719 --> 00:35:26,759
Speaker 2: So we're really match funded from that perspective, And that's

634
00:35:27,160 --> 00:35:29,520
Speaker 2: a lesson learned and I think all the large scaled

635
00:35:30,160 --> 00:35:31,120
Speaker 2: direct lenders have that.

636
00:35:32,000 --> 00:35:33,600
Speaker 1: Let me ask you a really basic question, ready, what

637
00:35:33,640 --> 00:35:35,600
Speaker 1: does middle market actually mean? And what does it mean

638
00:35:35,640 --> 00:35:38,200
Speaker 1: in terms of deals? I mean a deal size deal

639
00:35:38,239 --> 00:35:40,600
Speaker 1: ten of that's sort of thing that average you know, that's.

640
00:35:40,440 --> 00:35:43,239
Speaker 2: A great question. So there's three middle markets. There's the

641
00:35:43,280 --> 00:35:46,480
Speaker 2: lower middle market with companies that are say ten to

642
00:35:46,600 --> 00:35:51,000
Speaker 2: fifteen million of cash flow and lower. There's the upper

643
00:35:51,040 --> 00:35:54,200
Speaker 2: middle market there are one hundred million of yabadah and higher,

644
00:35:54,840 --> 00:35:58,080
Speaker 2: and the traditional middle market, the middle middle market, which

645
00:35:58,120 --> 00:35:59,880
Speaker 2: is between kind of twenty and one hundred of you.

646
00:36:00,440 --> 00:36:03,719
Speaker 2: So those that translates to about one hundred million of

647
00:36:03,760 --> 00:36:06,239
Speaker 2: financing to five hundred maybe a billion of financing an

648
00:36:06,320 --> 00:36:09,880
Speaker 2: the average five years, five to seven year. It usually

649
00:36:09,920 --> 00:36:13,560
Speaker 2: doesn't last that long. They usually get refinanced out. These

650
00:36:13,600 --> 00:36:20,360
Speaker 2: are medium sized companies and the in general. These businesses

651
00:36:20,360 --> 00:36:24,080
Speaker 2: are sourced by private equity firms. Not always there, they're

652
00:36:24,200 --> 00:36:27,080
Speaker 2: lenders who have non sponsored and then they have their

653
00:36:27,120 --> 00:36:33,279
Speaker 2: own sourcing mechanisms. But the beauty that we found of

654
00:36:33,440 --> 00:36:37,680
Speaker 2: having private equities doing the sourcing for you is that

655
00:36:37,800 --> 00:36:40,480
Speaker 2: they first of all, you only have to call on

656
00:36:40,520 --> 00:36:44,400
Speaker 2: the private equity sponsors, not actually having hundreds of people

657
00:36:44,440 --> 00:36:48,120
Speaker 2: in branches to actually traffic the United States. And you know,

658
00:36:48,560 --> 00:36:51,360
Speaker 2: that's what I did when I was first in business,

659
00:36:51,440 --> 00:36:54,200
Speaker 2: and it's a lot more efficient this way. So the

660
00:36:54,239 --> 00:36:56,080
Speaker 2: other thing when you have a private equty sponsor that's

661
00:36:56,080 --> 00:36:58,600
Speaker 2: sourcing deals for you, if you're investing in their funds

662
00:36:58,680 --> 00:37:02,480
Speaker 2: is we are you kind of know what they're looking for,

663
00:37:02,560 --> 00:37:05,160
Speaker 2: and they will tell you what their edge is, what

664
00:37:05,280 --> 00:37:08,560
Speaker 2: is their angle, what do they like about this business

665
00:37:09,640 --> 00:37:11,799
Speaker 2: that makes them think it's a good investment. And I

666
00:37:11,840 --> 00:37:14,759
Speaker 2: mentioned some of the sectors that are attractive. One of

667
00:37:14,760 --> 00:37:17,640
Speaker 2: the things that you learn by partnering with these private

668
00:37:17,640 --> 00:37:20,840
Speaker 2: equity sponsors is that there are certain industries in the

669
00:37:20,880 --> 00:37:25,160
Speaker 2: middle market, in these small regional areas where they can

670
00:37:25,239 --> 00:37:29,480
Speaker 2: find a niche and build a platform, buy a business

671
00:37:29,560 --> 00:37:33,879
Speaker 2: and then create acquisitions around it. Car washes, which sound

672
00:37:34,080 --> 00:37:38,600
Speaker 2: very mundane, are opportunities like that for sponsors to be

673
00:37:38,680 --> 00:37:42,200
Speaker 2: able to go into a local market find a car

674
00:37:42,400 --> 00:37:46,120
Speaker 2: wash that's actually automated, right because they are now I

675
00:37:46,120 --> 00:37:49,480
Speaker 2: mean literally there's only a couple of people working there automated.

676
00:37:49,520 --> 00:37:53,440
Speaker 2: So you have high efficiencies, high cash lows. They're buying

677
00:37:53,560 --> 00:37:57,680
Speaker 2: from the same vendors for their their soap and whatever

678
00:37:57,719 --> 00:38:01,279
Speaker 2: else they're buying. And if you combine one, two, three, five,

679
00:38:01,400 --> 00:38:03,279
Speaker 2: twelve in the region, all of a sudden, now you've

680
00:38:03,280 --> 00:38:05,919
Speaker 2: got real scale in the business. The same is true

681
00:38:05,920 --> 00:38:10,600
Speaker 2: of things like commercial landscapers. Guess what during COVID, commercial

682
00:38:10,680 --> 00:38:13,920
Speaker 2: landscapers actually did okay. Why because even though the buildings

683
00:38:13,960 --> 00:38:17,200
Speaker 2: were empty, the owners of the buildings wanted to keep

684
00:38:18,280 --> 00:38:21,680
Speaker 2: things going right, and so they had to mow the lawn,

685
00:38:21,760 --> 00:38:25,680
Speaker 2: trim the hedges, you know, plow the snow, and so

686
00:38:25,719 --> 00:38:29,000
Speaker 2: commercial landscaping companies turned out to be very good defensive bets.

687
00:38:29,520 --> 00:38:33,280
Speaker 2: So all of these areas in the middle market become

688
00:38:34,560 --> 00:38:38,799
Speaker 2: have these niche leaders in businesses that tend to be

689
00:38:38,960 --> 00:38:42,719
Speaker 2: very stable through economic cycles, and the beauty of what

690
00:38:42,760 --> 00:38:45,960
Speaker 2: we're doing and what others are doing as well, is

691
00:38:46,000 --> 00:38:49,880
Speaker 2: that being in the ground almost literally with these businesses

692
00:38:50,280 --> 00:38:53,560
Speaker 2: tends to insulate us from the outside world. Meaning when

693
00:38:54,160 --> 00:38:56,120
Speaker 2: you know, even though think about it, we've got two

694
00:38:56,239 --> 00:38:59,960
Speaker 2: kind of rather global wars going on right now, America

695
00:39:00,200 --> 00:39:04,399
Speaker 2: itself has been relatively unaffected by that, and so when

696
00:39:04,440 --> 00:39:07,840
Speaker 2: investors look at a safe haven in the United States,

697
00:39:07,840 --> 00:39:11,040
Speaker 2: they're looking for businesses that are not going to be impacted. Now,

698
00:39:11,040 --> 00:39:15,080
Speaker 2: it's not to say that with three hundred thousand companies

699
00:39:15,080 --> 00:39:16,879
Speaker 2: in the United States that somebody is not going to have,

700
00:39:17,280 --> 00:39:22,560
Speaker 2: you know, some buying buying material from overseas or having

701
00:39:23,600 --> 00:39:27,080
Speaker 2: sales center somewhere where you may be impacted by a war.

702
00:39:27,360 --> 00:39:31,160
Speaker 2: But generally speaking, it's much more of a of a

703
00:39:31,239 --> 00:39:33,760
Speaker 2: less correlated asset class as a result.

704
00:39:33,960 --> 00:39:35,919
Speaker 1: But can you tell us about the price and about

705
00:39:35,920 --> 00:39:38,760
Speaker 1: the returns? I mean, generally the investors like private credit

706
00:39:38,800 --> 00:39:41,120
Speaker 1: because the returns are higher than in public markets because

707
00:39:41,120 --> 00:39:44,520
Speaker 1: you're getting paid for you know, presumably more risk and

708
00:39:44,719 --> 00:39:47,480
Speaker 1: less liquidity. Those are the least that's the perception. I

709
00:39:47,480 --> 00:39:50,440
Speaker 1: know you've debunked some of those myths, But where is

710
00:39:50,440 --> 00:39:52,400
Speaker 1: the price right now? How does it compare to broadly

711
00:39:52,400 --> 00:39:54,920
Speaker 1: syndicates where we're seeing a huge amount of repricing all

712
00:39:54,920 --> 00:39:56,759
Speaker 1: of the issues. You know, they're coming back even a

713
00:39:56,800 --> 00:39:58,520
Speaker 1: month after doing a deal saying we want to reprice

714
00:39:58,560 --> 00:40:03,040
Speaker 1: it lower. Everyone's going to cut. Where is the price

715
00:40:03,080 --> 00:40:03,839
Speaker 1: and where is it going?

716
00:40:04,239 --> 00:40:08,080
Speaker 2: In the private markets, it's not so much price as

717
00:40:08,080 --> 00:40:11,320
Speaker 2: it is as valuation, right of lolans what are they worth?

718
00:40:11,800 --> 00:40:14,759
Speaker 2: But also if you think about from an investor's perspective,

719
00:40:14,800 --> 00:40:17,879
Speaker 2: what is the yield? What's the overall yield of this asset? Right?

720
00:40:18,400 --> 00:40:22,360
Speaker 2: And so Mike's point about the benchmark, So with the

721
00:40:22,360 --> 00:40:25,400
Speaker 2: benchmark being five percent, it's a lot different yield than

722
00:40:25,440 --> 00:40:26,879
Speaker 2: it was when the benchmark was zero.

723
00:40:27,040 --> 00:40:27,200
Speaker 1: Right.

724
00:40:27,239 --> 00:40:29,880
Speaker 2: And what we've seen in this quote golden Age of

725
00:40:29,920 --> 00:40:32,360
Speaker 2: credit is that the benchmark has gone from zero to

726
00:40:32,400 --> 00:40:35,440
Speaker 2: five percent. Right, that's great, And the overall yield now

727
00:40:35,520 --> 00:40:38,600
Speaker 2: is up to almost twelve percent for a middle market, Right,

728
00:40:39,360 --> 00:40:41,360
Speaker 2: It's come back a little bit. And so when you

729
00:40:41,360 --> 00:40:45,680
Speaker 2: see these headlines that say, oh, middle market spreads are compressing, okay,

730
00:40:45,760 --> 00:40:49,600
Speaker 2: there's compressing from all time record highs of maybe six

731
00:40:49,680 --> 00:40:53,000
Speaker 2: hundred and fifty bases points two more in line with

732
00:40:53,120 --> 00:40:55,560
Speaker 2: historic averages kind of five to five fifty. That's been

733
00:40:55,600 --> 00:40:57,319
Speaker 2: what they've been. You know, if you go back for

734
00:40:57,400 --> 00:41:01,520
Speaker 2: twenty years, you need a little perspective. So will the

735
00:41:01,680 --> 00:41:04,600
Speaker 2: yield start to come down as the benchmark comes down? Yes,

736
00:41:04,920 --> 00:41:06,839
Speaker 2: will they come down, maybe a little bit slower than

737
00:41:06,880 --> 00:41:10,600
Speaker 2: we think, That's that's my view, But they will come down.

738
00:41:10,600 --> 00:41:13,040
Speaker 2: And whether they'll come down, whether the benchmark will come

739
00:41:13,080 --> 00:41:17,200
Speaker 2: down to zero, you tell me. I don't know whether

740
00:41:17,360 --> 00:41:19,759
Speaker 2: or not will end up or may ever end up

741
00:41:19,800 --> 00:41:23,320
Speaker 2: with that situation. It feels like with so many things

742
00:41:23,360 --> 00:41:25,359
Speaker 2: going on, we haven't even talked about that, you know,

743
00:41:25,440 --> 00:41:28,400
Speaker 2: the federal deficit, yet, with so many things going on

744
00:41:28,480 --> 00:41:32,160
Speaker 2: that could potentially create inflation down the road, it's very

745
00:41:32,200 --> 00:41:34,600
Speaker 2: possible that we may be in a position where the

746
00:41:34,600 --> 00:41:37,600
Speaker 2: benchmark is going to kind of be in that three

747
00:41:37,719 --> 00:41:41,480
Speaker 2: ish percent longer than anybody thinks, in which case the

748
00:41:41,640 --> 00:41:46,080
Speaker 2: yields on private credit will will stay higher for longer.

749
00:41:46,800 --> 00:41:50,319
Speaker 2: But nevertheless, over many, many years, we've seen what has

750
00:41:50,360 --> 00:41:53,440
Speaker 2: been called, and I think it's a misnomer, but has

751
00:41:53,480 --> 00:41:57,239
Speaker 2: been called an ill liquidity premium. So you, Mike, as

752
00:41:57,320 --> 00:41:59,200
Speaker 2: a public buyer, are going to say, you know what

753
00:41:59,280 --> 00:42:03,960
Speaker 2: I can train and get, you know, a single bo

754
00:42:04,040 --> 00:42:07,520
Speaker 2: fifty over okay, maybe a week single be a three

755
00:42:07,600 --> 00:42:10,480
Speaker 2: fifty over all, right, well, okay, great. If I'm going

756
00:42:10,520 --> 00:42:12,600
Speaker 2: to own a middle market asset, then I want to

757
00:42:12,640 --> 00:42:15,200
Speaker 2: have at least a couple hundred basis points because I

758
00:42:15,239 --> 00:42:17,040
Speaker 2: can't trade it, so I want a premium to that.

759
00:42:17,640 --> 00:42:21,399
Speaker 2: What investors are realizing slowly is that having that two

760
00:42:21,400 --> 00:42:24,920
Speaker 2: fifty or three fifty, you know, as a cheaper version

761
00:42:25,040 --> 00:42:28,360
Speaker 2: when it may go south quickly on, you may not

762
00:42:28,480 --> 00:42:30,479
Speaker 2: be as great a trade as they as they think.

763
00:42:30,520 --> 00:42:34,680
Speaker 2: And so actually having a premium which is called an

764
00:42:34,680 --> 00:42:38,680
Speaker 2: illiquidity premium, which I might call a liquidity rather than

765
00:42:38,680 --> 00:42:44,640
Speaker 2: an inliquidity, but a liquidity premium because by having less

766
00:42:44,640 --> 00:42:49,360
Speaker 2: correlation and being more stable, you know, I'm also getting

767
00:42:49,440 --> 00:42:53,120
Speaker 2: a two hundred basis point premium for that. That's pretty attractive,

768
00:42:53,160 --> 00:42:57,560
Speaker 2: and so over time, if you know, all things being fair,

769
00:42:57,600 --> 00:43:00,520
Speaker 2: you would think that the markets would would us a

770
00:43:00,560 --> 00:43:04,440
Speaker 2: little bit. But it's very hard to shake this feeling

771
00:43:04,560 --> 00:43:09,080
Speaker 2: from the public view that these ill liquid assets are

772
00:43:09,200 --> 00:43:12,840
Speaker 2: somehow trickier to value and therefore I'm just going to

773
00:43:12,920 --> 00:43:13,960
Speaker 2: demand more of a yield.

774
00:43:14,120 --> 00:43:16,800
Speaker 1: And you think the margin on private credit middle market

775
00:43:16,800 --> 00:43:19,200
Speaker 1: stays around five point fifty well.

776
00:43:19,360 --> 00:43:22,959
Speaker 2: Yeah, there's nothing right now to suggest that it's going

777
00:43:23,040 --> 00:43:26,120
Speaker 2: to approach anything close to where the public market is.

778
00:43:26,160 --> 00:43:30,840
Speaker 2: We think that a lot of what happens with spreads

779
00:43:30,920 --> 00:43:34,680
Speaker 2: is more supply demand. And what's interesting now is that

780
00:43:34,719 --> 00:43:39,720
Speaker 2: even though there's supposedly more competition coming into the space

781
00:43:39,760 --> 00:43:44,319
Speaker 2: and more lenders, there's now more which would be more demand, right,

782
00:43:44,600 --> 00:43:45,600
Speaker 2: there's now more supply.

783
00:43:45,960 --> 00:43:46,080
Speaker 1: Right.

784
00:43:46,200 --> 00:43:50,080
Speaker 2: So you can look at some of our favorite content

785
00:43:50,120 --> 00:43:53,560
Speaker 2: providers who on the lead left and elsewhere that are

786
00:43:53,560 --> 00:43:56,040
Speaker 2: showing that the M and A market is actually picking up.

787
00:43:56,440 --> 00:43:59,160
Speaker 2: Effect of the end of the third quarter, we're starting

788
00:43:59,160 --> 00:44:02,240
Speaker 2: to see more deal flow that's being triggered by lower

789
00:44:02,239 --> 00:44:05,600
Speaker 2: financing costs. We think as more deal flow comes into

790
00:44:05,640 --> 00:44:08,360
Speaker 2: the market, that will have a stabilizing effect on spreads.

791
00:44:09,000 --> 00:44:12,000
Speaker 1: But five hundred is set of your expectations for how

792
00:44:12,000 --> 00:44:13,520
Speaker 1: it shakes out at the end of the year and

793
00:44:13,600 --> 00:44:14,640
Speaker 1: keeps going into next year.

794
00:44:14,719 --> 00:44:17,080
Speaker 2: Yeah, I mean, I think there's always particularly for some

795
00:44:17,120 --> 00:44:20,760
Speaker 2: of the larger issuers again close to that upper middle

796
00:44:20,800 --> 00:44:23,520
Speaker 2: market range one hundred million epit done so forth will

797
00:44:23,560 --> 00:44:28,440
Speaker 2: always be subject to poaching, if that's the word from

798
00:44:28,480 --> 00:44:31,080
Speaker 2: the banks, or frankly even from some of the larger

799
00:44:31,120 --> 00:44:33,960
Speaker 2: direct lenders in order to stay competitive because remember they're

800
00:44:33,960 --> 00:44:35,319
Speaker 2: also raising a lot of money and they got to

801
00:44:35,320 --> 00:44:38,200
Speaker 2: put money to work. So you could see a little

802
00:44:38,200 --> 00:44:41,399
Speaker 2: bit of a ragged edge at that lower price point.

803
00:44:41,440 --> 00:44:43,480
Speaker 2: But again, the beauty of our model is that we

804
00:44:43,560 --> 00:44:46,319
Speaker 2: don't have to stretch. You know, we have plenty of

805
00:44:46,320 --> 00:44:48,640
Speaker 2: deal flow coming in to spreads that we like.

806
00:44:48,800 --> 00:44:50,640
Speaker 3: So when I said two fifty over, I was referring

807
00:44:50,680 --> 00:44:54,480
Speaker 3: to unsecured bonds, right, okay, in my head thinking about

808
00:44:54,520 --> 00:44:56,160
Speaker 3: Tavita and some of these names out there in the

809
00:44:56,200 --> 00:45:01,279
Speaker 3: public domain. But your loans are an LTV that's got

810
00:45:01,280 --> 00:45:03,640
Speaker 3: it's a senior secured loan. But what may be the

811
00:45:03,719 --> 00:45:06,080
Speaker 3: sort of Paul Park LTV, you know when we're talking

812
00:45:06,120 --> 00:45:10,760
Speaker 3: about that, So compare that gas the unsecured great question.

813
00:45:10,920 --> 00:45:14,040
Speaker 2: So the dynamic, and this goes back to some of

814
00:45:14,080 --> 00:45:19,480
Speaker 2: the things about purchase price multiples and competition. So as

815
00:45:19,760 --> 00:45:20,920
Speaker 2: by the way, I'll give a shout out to my

816
00:45:20,960 --> 00:45:24,000
Speaker 2: friends at Lincoln International. They do a great job of

817
00:45:25,600 --> 00:45:28,960
Speaker 2: both valuations but also keeping track of purchase price multiple

818
00:45:29,080 --> 00:45:32,880
Speaker 2: So because they're valuing all the loans in private credit

819
00:45:32,880 --> 00:45:35,520
Speaker 2: portfolios BDCs and so forth, so they've got thousands of

820
00:45:35,560 --> 00:45:37,759
Speaker 2: loans that they value, and they also keep track of

821
00:45:37,760 --> 00:45:41,280
Speaker 2: the purchase price multiples that private equity sponsors are paying.

822
00:45:41,760 --> 00:45:45,000
Speaker 2: And even though over the last several years, since twenty

823
00:45:45,040 --> 00:45:47,000
Speaker 2: one twenty twenty one, which was kind of a high

824
00:45:47,040 --> 00:45:49,520
Speaker 2: water mark in terms of M and A, the number

825
00:45:49,560 --> 00:45:52,400
Speaker 2: of M and A deals has come down, the deals

826
00:45:52,440 --> 00:45:55,920
Speaker 2: that are getting done are getting done in sectors that

827
00:45:55,960 --> 00:46:00,280
Speaker 2: are actually more growthy, so the business sector, business service

828
00:46:00,320 --> 00:46:04,720
Speaker 2: sectors that I mentioned earlier, healthcare, software and so forth.

829
00:46:05,400 --> 00:46:09,239
Speaker 2: And the purchase price multiples therefore, of these businesses that

830
00:46:09,320 --> 00:46:13,160
Speaker 2: have tended to do well through cycles has actually been

831
00:46:13,200 --> 00:46:17,520
Speaker 2: sustained more than I would have thought. So it peaked

832
00:46:17,520 --> 00:46:19,279
Speaker 2: at I'm going to say somewhere in the twelfth to

833
00:46:19,320 --> 00:46:22,319
Speaker 2: twelve and a half times cash flow level for these

834
00:46:22,320 --> 00:46:26,400
Speaker 2: businesses back in twenty one, it's come down to maybe

835
00:46:26,480 --> 00:46:30,640
Speaker 2: eleven and a half ish eleven, low eleven, something like that.

836
00:46:32,000 --> 00:46:35,719
Speaker 2: So it's not actually deteriorated that much. But because of

837
00:46:35,760 --> 00:46:39,960
Speaker 2: the high cost of debt capital, the leverage that is

838
00:46:39,960 --> 00:46:42,960
Speaker 2: being applied to these businesses had to be lower. So

839
00:46:43,080 --> 00:46:45,319
Speaker 2: what was you know, like a five or six times

840
00:46:45,480 --> 00:46:47,480
Speaker 2: multiple now is more like four times four to four

841
00:46:47,480 --> 00:46:50,440
Speaker 2: and a half, four to maybe five. The result of that,

842
00:46:50,520 --> 00:46:52,759
Speaker 2: to your question, is that the loan to value has

843
00:46:52,800 --> 00:46:57,120
Speaker 2: gone from kind of forty fifty percent maybe three years

844
00:46:57,160 --> 00:47:01,080
Speaker 2: ago to thirty five percent today. That's a record low

845
00:47:01,120 --> 00:47:03,839
Speaker 2: as far as I remember. And so the value proposition

846
00:47:04,040 --> 00:47:07,319
Speaker 2: for people who are you know, like ourselves, who are

847
00:47:07,760 --> 00:47:10,799
Speaker 2: enjoying record years this year, is that the portfolio we're

848
00:47:10,840 --> 00:47:15,560
Speaker 2: building has much greater cushion in it relative you know,

849
00:47:15,600 --> 00:47:19,719
Speaker 2: the cash equity that these sponsors are putting in relative

850
00:47:19,760 --> 00:47:21,440
Speaker 2: to the amount of debt that they can apply on

851
00:47:21,480 --> 00:47:23,800
Speaker 2: these balance sheets, just because of the high cost of debt.

852
00:47:23,680 --> 00:47:28,840
Speaker 1: Kapital the record yeah, for fundraising or for returns.

853
00:47:28,440 --> 00:47:31,720
Speaker 2: Well pretty much both for us. I'm just speaking for Churchill.

854
00:47:31,760 --> 00:47:34,520
Speaker 2: I mean we I wake up January first thinking it's

855
00:47:34,560 --> 00:47:36,520
Speaker 2: going to be a miserable year. I'm sort of, you know,

856
00:47:36,760 --> 00:47:41,320
Speaker 2: just expecting the worst. Yeah, and then you know, lo

857
00:47:41,400 --> 00:47:44,880
Speaker 2: and behold, our model actually works. And now you know,

858
00:47:44,880 --> 00:47:48,239
Speaker 2: we've had some tailwinds we have. You know, we we

859
00:47:48,360 --> 00:47:53,120
Speaker 2: have great partnership with our parent company at TIA Neuvene

860
00:47:53,239 --> 00:47:56,120
Speaker 2: that we work well with. We have our our new

861
00:47:56,880 --> 00:48:00,360
Speaker 2: addition to the family, Archmont that we added to the

862
00:48:00,440 --> 00:48:03,000
Speaker 2: Navine Private Capital business a year and a half ago.

863
00:48:03,080 --> 00:48:06,640
Speaker 2: We're great partners with them. They are European direct lending

864
00:48:06,680 --> 00:48:09,759
Speaker 2: partner and work you know, really hand in hand with them.

865
00:48:09,840 --> 00:48:12,960
Speaker 2: So I think that, look, the opportunity set for private

866
00:48:13,040 --> 00:48:16,160
Speaker 2: credit has never been better. I think that we're entering into,

867
00:48:16,280 --> 00:48:19,040
Speaker 2: going back to the inflection point issue, a really interesting

868
00:48:19,080 --> 00:48:21,880
Speaker 2: world right now because high rates are going to linger,

869
00:48:22,000 --> 00:48:25,799
Speaker 2: which means that people have to be careful. Nevertheless, M

870
00:48:25,840 --> 00:48:28,960
Speaker 2: and A is picking up, which means that for investors

871
00:48:29,000 --> 00:48:31,680
Speaker 2: who have been starved for distributions, we haven't even talked

872
00:48:31,680 --> 00:48:36,200
Speaker 2: about DPI, we haven't used those letters yet start for distributions.

873
00:48:36,200 --> 00:48:39,240
Speaker 2: They're now starting to see some of the iceberg melting.

874
00:48:39,280 --> 00:48:42,960
Speaker 2: And I think investors LPs who invested in fund six

875
00:48:43,000 --> 00:48:45,000
Speaker 2: and we're you know, we're being asked by this monsor, Hey,

876
00:48:45,000 --> 00:48:46,919
Speaker 2: we'd love you to invest in fund seven, and like, great,

877
00:48:46,920 --> 00:48:48,680
Speaker 2: I haven't gotten any money back on Fund six. Now

878
00:48:48,719 --> 00:48:50,680
Speaker 2: going to start to get money back. When they start

879
00:48:50,680 --> 00:48:52,399
Speaker 2: to get money back, they're going to start putting money

880
00:48:52,440 --> 00:48:55,240
Speaker 2: in fund seven. And when money starts going to Fund seven,

881
00:48:55,600 --> 00:48:58,320
Speaker 2: then those sponsors are going to start investing when they invest,

882
00:48:58,400 --> 00:49:00,719
Speaker 2: they're going to be coming to Churchill for financing. So

883
00:49:00,760 --> 00:49:03,400
Speaker 2: you're going to start to see over the next eighteen

884
00:49:03,440 --> 00:49:06,560
Speaker 2: to twenty four months, I think kind of an unwinding

885
00:49:07,640 --> 00:49:11,960
Speaker 2: of some of the stuck nature of where we've been

886
00:49:13,040 --> 00:49:15,319
Speaker 2: in terms of the cycle. And this tends to be

887
00:49:15,400 --> 00:49:17,640
Speaker 2: going cycles where one thing leads to another, and I

888
00:49:17,640 --> 00:49:20,600
Speaker 2: think freeing up of capital which will lead to more investing,

889
00:49:20,600 --> 00:49:22,560
Speaker 2: which will lead to more fundraising. So I think there

890
00:49:22,600 --> 00:49:25,719
Speaker 2: is a virtuous cycle that we look forward to experiencing

891
00:49:25,760 --> 00:49:27,000
Speaker 2: over the next twenty four months.

892
00:49:27,120 --> 00:49:29,319
Speaker 1: How much of that money coming back comes from cholesterolized

893
00:49:29,360 --> 00:49:32,040
Speaker 1: fund obligations do you think, Oh.

894
00:49:31,760 --> 00:49:35,320
Speaker 2: That's a great question. I think a fair share. Yeah.

895
00:49:35,360 --> 00:49:38,839
Speaker 2: I mean the innovation, as we talked about at the top, Mike,

896
00:49:39,960 --> 00:49:43,960
Speaker 2: you know, James, is you know, really exciting to watch

897
00:49:43,960 --> 00:49:48,359
Speaker 2: in the technology that's being applied to both on the

898
00:49:48,400 --> 00:49:51,200
Speaker 2: fund structuring side as well as on the financing side.

899
00:49:51,200 --> 00:49:53,400
Speaker 2: And one of the things, for example, that we're doing

900
00:49:53,880 --> 00:49:58,160
Speaker 2: at Churchill is the secondary's market. So in the absence

901
00:49:58,239 --> 00:50:02,520
Speaker 2: of realizations from sales of companies, LPs and gps are

902
00:50:02,560 --> 00:50:05,600
Speaker 2: looking for liquidity and so being able to go to

903
00:50:05,840 --> 00:50:08,040
Speaker 2: these LPs and GPS and saying, hey, we have a

904
00:50:08,080 --> 00:50:12,799
Speaker 2: way of actually freeing value of from your portfolios, from

905
00:50:12,840 --> 00:50:15,239
Speaker 2: your fund investments to give you the ability to go

906
00:50:15,280 --> 00:50:18,520
Speaker 2: out and do other stuff with that, both on the

907
00:50:18,560 --> 00:50:21,759
Speaker 2: secondary side as well as on the so called nav

908
00:50:21,840 --> 00:50:25,040
Speaker 2: financing side or friends that to ark one have a

909
00:50:25,080 --> 00:50:28,880
Speaker 2: business that's basically looking at the asset value of the

910
00:50:29,200 --> 00:50:31,960
Speaker 2: of these businesses as a wholesale matter and saying we

911
00:50:32,000 --> 00:50:36,319
Speaker 2: can lend against portfolios, against funds, against the value of

912
00:50:36,440 --> 00:50:40,600
Speaker 2: the companies. That kind of sophistication which is really exciting

913
00:50:40,640 --> 00:50:44,640
Speaker 2: to watch, is you know, in an asset class that's

914
00:50:44,680 --> 00:50:47,279
Speaker 2: growing the way private credit is. I mean, it's you know,

915
00:50:47,520 --> 00:50:48,879
Speaker 2: it's it's fun.

916
00:50:49,239 --> 00:50:51,560
Speaker 1: But when you use those acronyms and you talk about innovation,

917
00:50:52,000 --> 00:50:55,600
Speaker 1: you know, going back to misguided conclusions, people tend to worry.

918
00:50:56,280 --> 00:50:58,200
Speaker 1: People you know, have been asking me for you know,

919
00:50:58,239 --> 00:51:00,879
Speaker 1: probably twenty years, when is the collateralize the COLO market,

920
00:51:00,920 --> 00:51:03,640
Speaker 1: when's that gonna blow up? Because there's this uh you know,

921
00:51:04,120 --> 00:51:06,479
Speaker 1: missed understanding that it's the same as CDOs that caused

922
00:51:06,480 --> 00:51:08,759
Speaker 1: the finish question. But is there is there you know,

923
00:51:08,880 --> 00:51:10,480
Speaker 1: is this innovation does any of it worry? Is there

924
00:51:10,480 --> 00:51:11,840
Speaker 1: any for us out there, Randy.

925
00:51:11,680 --> 00:51:15,200
Speaker 2: That you worry about well, you know, being a part

926
00:51:15,200 --> 00:51:18,279
Speaker 2: time journalist, James, I'm always worrying, you know. I I

927
00:51:18,560 --> 00:51:21,000
Speaker 2: having been in this business for so long and having

928
00:51:21,040 --> 00:51:23,520
Speaker 2: been on the large cap side, worked at big banks,

929
00:51:24,520 --> 00:51:28,400
Speaker 2: I've watched the excess. You know. My sort of favorite

930
00:51:28,400 --> 00:51:30,839
Speaker 2: saying is, you know, in the capital markets, anything worth

931
00:51:30,880 --> 00:51:34,640
Speaker 2: doing is worth overdoing. So it's it is a challenge

932
00:51:34,640 --> 00:51:38,560
Speaker 2: and sometimes you just wish that there would be more restraint.

933
00:51:38,600 --> 00:51:41,319
Speaker 2: But the reality is, and I write about this a lot,

934
00:51:41,960 --> 00:51:45,000
Speaker 2: capital finds its own level. That's the truth. Capital finds

935
00:51:45,040 --> 00:51:48,719
Speaker 2: its own level. It finds It definitely fills a vacuum.

936
00:51:49,040 --> 00:51:52,759
Speaker 2: And the beauty of the system, the capital system in

937
00:51:52,800 --> 00:51:55,640
Speaker 2: the United States is it is so there's so much

938
00:51:55,800 --> 00:52:00,400
Speaker 2: creative capital being put to work today. We tend to

939
00:52:00,880 --> 00:52:04,360
Speaker 2: be spoiled because we don't we don't realize how lucky

940
00:52:04,360 --> 00:52:06,319
Speaker 2: we are. I mean, I look around at you know,

941
00:52:06,320 --> 00:52:09,440
Speaker 2: from the Bloomberg Studio, you know, one of the foremost

942
00:52:09,480 --> 00:52:11,719
Speaker 2: media companies on the planet, and looking at all of

943
00:52:11,760 --> 00:52:14,960
Speaker 2: the exciting stuff going on that you report about every day.

944
00:52:15,160 --> 00:52:17,239
Speaker 2: I mean, we're really blessed in New York City to

945
00:52:17,280 --> 00:52:21,160
Speaker 2: be you know, part of this ecosystem where companies can

946
00:52:21,200 --> 00:52:23,480
Speaker 2: come to capital in all sorts of forms, and it's

947
00:52:23,520 --> 00:52:26,920
Speaker 2: being created every day, not just with private equity firms.

948
00:52:27,000 --> 00:52:29,840
Speaker 2: But you know, think about these medium sized companies that

949
00:52:29,880 --> 00:52:33,680
Speaker 2: are getting capital. The challenge is that we need to

950
00:52:33,719 --> 00:52:35,759
Speaker 2: get more of it out to them. If you think

951
00:52:35,800 --> 00:52:37,920
Speaker 2: about the three hundred, two hundred three and one thousand

952
00:52:37,960 --> 00:52:40,440
Speaker 2: companies that form this middle market in the United States,

953
00:52:40,760 --> 00:52:44,360
Speaker 2: only five percent is are owned by private equity firms.

954
00:52:44,360 --> 00:52:47,680
Speaker 2: That means that ninety five percent of the country's middle

955
00:52:47,719 --> 00:52:51,640
Speaker 2: market companies don't have access to equity capital. They can't

956
00:52:51,680 --> 00:52:54,359
Speaker 2: go publicly, they're too small. And so I think one

957
00:52:54,400 --> 00:52:56,759
Speaker 2: of the big challenges of the next ten years, you know,

958
00:52:56,920 --> 00:53:00,399
Speaker 2: is how to keep the capital growth going. And one

959
00:53:00,440 --> 00:53:04,480
Speaker 2: of the beauties I think of getting more retail and

960
00:53:04,680 --> 00:53:07,560
Speaker 2: wealth exposure to the asset class is being able to

961
00:53:07,600 --> 00:53:12,120
Speaker 2: look more broadly for opportunities in the market to access capital,

962
00:53:12,160 --> 00:53:15,400
Speaker 2: because you know, we are spoiled. The ability to access

963
00:53:15,400 --> 00:53:16,960
Speaker 2: capital the United States is unparalleled.

964
00:53:17,360 --> 00:53:19,200
Speaker 1: Given that, I mean, how do you maintain fair value?

965
00:53:19,239 --> 00:53:21,640
Speaker 1: You know, there is so much demand, there isn't enough

966
00:53:21,840 --> 00:53:24,720
Speaker 1: assets out there. We're seeing spreads all over the place compressed.

967
00:53:24,920 --> 00:53:28,640
Speaker 1: We saw the triple B spread on public bonds at

968
00:53:28,640 --> 00:53:33,480
Speaker 1: the titles since nineteen ninety eight. Last week, everything just

969
00:53:33,480 --> 00:53:36,960
Speaker 1: seems very very tight. But on the other hand, everyone

970
00:53:36,960 --> 00:53:42,719
Speaker 1: just seems really very calm and collected. Those disconnects they

971
00:53:42,760 --> 00:53:43,120
Speaker 1: tend to.

972
00:53:43,040 --> 00:53:45,040
Speaker 2: Worry me a bit. But what about you, Well, you

973
00:53:45,239 --> 00:53:49,520
Speaker 2: used the word the top complacency. I think there's that

974
00:53:49,560 --> 00:53:52,879
Speaker 2: word does not exist in the Churchill vocabulary. There is

975
00:53:53,200 --> 00:53:57,719
Speaker 2: because we're expecting the worst tomorrow. We were but battened down,

976
00:53:57,719 --> 00:54:03,240
Speaker 2: We're ready. Complacency it is not our vocabulary. We are alert,

977
00:54:03,760 --> 00:54:06,120
Speaker 2: and I think this is the true case with many

978
00:54:06,120 --> 00:54:10,279
Speaker 2: of the experienced lenders out there. I think we're in

979
00:54:10,360 --> 00:54:12,800
Speaker 2: a very unusual point. Going back to this inflection point,

980
00:54:13,080 --> 00:54:15,759
Speaker 2: I do not think that this period will last. It

981
00:54:15,800 --> 00:54:18,440
Speaker 2: never does. There's always going to be something, whether it's

982
00:54:18,440 --> 00:54:22,319
Speaker 2: the elections or something else that triggers more of a

983
00:54:22,760 --> 00:54:29,320
Speaker 2: risk off parameter. The thing that we and you've experienced

984
00:54:29,320 --> 00:54:34,280
Speaker 2: this when stuff happens and headline risk emerges from places

985
00:54:34,320 --> 00:54:38,040
Speaker 2: that you could not have imagined. The challenge when you

986
00:54:38,239 --> 00:54:42,279
Speaker 2: own correlated assets, and we saw this in twenty two

987
00:54:42,400 --> 00:54:46,200
Speaker 2: for sure, is that everything trades down right at once,

988
00:54:46,640 --> 00:54:50,279
Speaker 2: because it can there's this emotion that gets into the

989
00:54:50,280 --> 00:54:53,080
Speaker 2: water that's very hard to resist. The thing that we

990
00:54:53,200 --> 00:54:56,279
Speaker 2: like about our asset class is that it resists that

991
00:54:56,480 --> 00:55:00,480
Speaker 2: it's not perfect. It does tend to rhyme, resonate a

992
00:55:00,520 --> 00:55:04,880
Speaker 2: little bit, but it tends to not behave exactly the

993
00:55:04,960 --> 00:55:07,480
Speaker 2: way the liquid markets do. And that's the challenge if

994
00:55:07,520 --> 00:55:09,279
Speaker 2: you're an investor right now and you're looking at this

995
00:55:09,360 --> 00:55:11,359
Speaker 2: market and you're thinking, okay, look at look at how

996
00:55:11,440 --> 00:55:13,920
Speaker 2: far the public markets have gone. Look at the records

997
00:55:13,960 --> 00:55:18,120
Speaker 2: that that down the S and P have set this year,

998
00:55:18,239 --> 00:55:21,120
Speaker 2: and it's really remarkable in an era which I thought

999
00:55:21,160 --> 00:55:23,000
Speaker 2: we'd be headed into the fourth quarter with all the

1000
00:55:23,000 --> 00:55:26,239
Speaker 2: election issues and so forth, you know, and with the

1001
00:55:26,320 --> 00:55:29,640
Speaker 2: vics much higher than it is, something will happen. And

1002
00:55:29,760 --> 00:55:32,839
Speaker 2: when it does, those of us who are, you know,

1003
00:55:32,960 --> 00:55:36,680
Speaker 2: again in a little different part of the gym will

1004
00:55:36,719 --> 00:55:38,120
Speaker 2: feel better.

1005
00:55:38,360 --> 00:55:42,360
Speaker 1: It might be, but there is no hedge to to

1006
00:55:42,680 --> 00:55:45,120
Speaker 1: you know, if you if you're staring down this volatility,

1007
00:55:45,640 --> 00:55:48,080
Speaker 1: there's nothing you can I mean, you can bitcoin and

1008
00:55:48,080 --> 00:55:49,960
Speaker 1: go that sort of thing, but there isn't I mean,

1009
00:55:50,239 --> 00:55:51,759
Speaker 1: or as you say, just sit on the loans and

1010
00:55:51,800 --> 00:55:53,279
Speaker 1: don't do it do anything.

1011
00:55:53,000 --> 00:55:57,840
Speaker 2: Well and again through many, many years, these private loans

1012
00:55:57,840 --> 00:56:01,160
Speaker 2: and let's let's even broaden it out to alternatives, right.

1013
00:56:01,239 --> 00:56:04,200
Speaker 2: One of the things that has been interesting about the

1014
00:56:04,239 --> 00:56:08,200
Speaker 2: alternative space, and Uveen is a multi hundred billion dollar

1015
00:56:08,239 --> 00:56:13,399
Speaker 2: investor in alternatives with real estate and infrastructure and timberland

1016
00:56:13,480 --> 00:56:18,759
Speaker 2: and various other assets that are extremely important in a

1017
00:56:18,800 --> 00:56:22,480
Speaker 2: diversified portfolio when you have fixed income and public equities

1018
00:56:22,480 --> 00:56:27,200
Speaker 2: and everything else. And as an investor, diversity is really critical, right,

1019
00:56:27,239 --> 00:56:30,560
Speaker 2: And so being in something which doesn't have isn't as

1020
00:56:30,600 --> 00:56:36,359
Speaker 2: correlated and private capital is in that category. Investors were

1021
00:56:36,440 --> 00:56:39,480
Speaker 2: very sophisticated, are now looking at this as something that

1022
00:56:40,080 --> 00:56:42,799
Speaker 2: they need in order to feel like if we go

1023
00:56:42,920 --> 00:56:46,839
Speaker 2: into a storm, there will be some stability in a

1024
00:56:46,880 --> 00:56:50,960
Speaker 2: portion of their portfolio. So I think the other issue

1025
00:56:51,000 --> 00:56:53,960
Speaker 2: is that if you are looking for yield, right, so

1026
00:56:54,040 --> 00:56:57,400
Speaker 2: the credit part provides you with income an income stream

1027
00:56:57,560 --> 00:57:01,279
Speaker 2: right at that hopefully ten to twelve or wherever we're at now,

1028
00:57:01,320 --> 00:57:03,120
Speaker 2: but you know even that a seven to nine percent,

1029
00:57:03,600 --> 00:57:06,440
Speaker 2: you know, we have equity options as well, so we

1030
00:57:06,480 --> 00:57:10,560
Speaker 2: have co invest options, we have junior capital options. You know,

1031
00:57:10,560 --> 00:57:13,520
Speaker 2: we have the secondaries option where you can get more

1032
00:57:13,520 --> 00:57:16,280
Speaker 2: of a yield, more of an equity like yield. So

1033
00:57:16,520 --> 00:57:22,120
Speaker 2: still coming out of the the core investment thesis that

1034
00:57:22,160 --> 00:57:25,160
Speaker 2: we have around private equity sponsors that again we're getting

1035
00:57:25,160 --> 00:57:31,640
Speaker 2: this pre approved you know, pipeline of deals coming from

1036
00:57:32,120 --> 00:57:35,720
Speaker 2: but instead you know, structuring it more of as an

1037
00:57:35,800 --> 00:57:40,640
Speaker 2: equity product. So you know, the more opportunities that we

1038
00:57:40,760 --> 00:57:43,640
Speaker 2: have to take the financing options that we're creating for

1039
00:57:43,680 --> 00:57:49,120
Speaker 2: our private equity sponsors and creating opportunities for investors to

1040
00:57:49,280 --> 00:57:54,040
Speaker 2: benefit from the yield and stability in those products. I mean,

1041
00:57:54,080 --> 00:57:55,080
Speaker 2: that's kind of what we live for.

1042
00:57:55,520 --> 00:57:57,560
Speaker 1: You've talked about undiscovered value, so I was wondering if

1043
00:57:57,560 --> 00:57:59,960
Speaker 1: you could put your finger on what's the best single

1044
00:58:00,080 --> 00:58:02,720
Speaker 1: credit market opportunities are the relative value. You know, we

1045
00:58:02,760 --> 00:58:04,600
Speaker 1: haven't talked about the rest of the world. We tended

1046
00:58:04,680 --> 00:58:07,520
Speaker 1: to be mostly in the US, but bi sector by country,

1047
00:58:07,600 --> 00:58:09,680
Speaker 1: is there anything out there that you think people are missing?

1048
00:58:09,920 --> 00:58:13,080
Speaker 2: Well, speaking for my European colleagues, what's kind of cool

1049
00:58:13,200 --> 00:58:15,800
Speaker 2: right now about what they're doing in Mattison was on

1050
00:58:16,000 --> 00:58:20,040
Speaker 2: with on Credit Edge with you previously. You know, the

1051
00:58:20,040 --> 00:58:23,400
Speaker 2: spreads in European direct lending is pretty high. Right now

1052
00:58:23,440 --> 00:58:26,920
Speaker 2: relative to the US now, their benchmark is lower, but

1053
00:58:26,960 --> 00:58:30,240
Speaker 2: the opportunities that they're seeing are and based on my

1054
00:58:30,360 --> 00:58:33,920
Speaker 2: visits there and things that I'm hearing from their investors,

1055
00:58:33,960 --> 00:58:38,160
Speaker 2: are pretty exciting. I think the what's hiding in plain

1056
00:58:38,320 --> 00:58:41,680
Speaker 2: sight for us, the opportunity, the undiscovered in a way,

1057
00:58:42,360 --> 00:58:45,640
Speaker 2: is this traditional middle market where we have found that,

1058
00:58:45,760 --> 00:58:48,760
Speaker 2: for very odd reasons, there are actually fewer competitors today

1059
00:58:49,360 --> 00:58:52,160
Speaker 2: than there were pre COVID. So in part, I think

1060
00:58:52,160 --> 00:58:54,640
Speaker 2: it's because some of the larger direct lenders have gone

1061
00:58:54,720 --> 00:58:57,960
Speaker 2: up market for opportunities, and we've seen that particularly in

1062
00:58:57,960 --> 00:59:00,360
Speaker 2: the twenty two to twenty three timeframe when the laws

1063
00:59:00,400 --> 00:59:05,440
Speaker 2: were offline, So a number of the larger managers went

1064
00:59:05,520 --> 00:59:07,440
Speaker 2: up market and sort of did kind of the bond

1065
00:59:07,760 --> 00:59:12,000
Speaker 2: replacement bank replacement business and left the middle market kind

1066
00:59:12,000 --> 00:59:15,880
Speaker 2: of to us and the small cap lenders who weren't

1067
00:59:16,000 --> 00:59:20,520
Speaker 2: able to create scale to take you know, these financings,

1068
00:59:21,200 --> 00:59:23,160
Speaker 2: you know, with one commitment letter the way we can

1069
00:59:23,240 --> 00:59:25,840
Speaker 2: in the middle market. So as a result, we probably

1070
00:59:25,840 --> 00:59:28,400
Speaker 2: only have a small handful of lenders that we're competing against.

1071
00:59:28,440 --> 00:59:31,640
Speaker 2: So this right now is kind of undiscovered value that

1072
00:59:32,400 --> 00:59:34,040
Speaker 2: you know is hiding in plain sight.

1073
00:59:34,360 --> 00:59:38,120
Speaker 1: Wait till this goes out. Tons of competition. Randy Schrimer,

1074
00:59:38,200 --> 00:59:40,400
Speaker 1: vice chairman at Church Lasset Managements, and pleasure having you

1075
00:59:40,400 --> 00:59:40,920
Speaker 1: on the Credit Edge.

1076
00:59:40,920 --> 00:59:43,400
Speaker 2: So many thanks James, Mike, thanks so much for having me.

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Speaker 1: And of course I'm very grateful to Mike Hollin from

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00:59:45,120 --> 00:59:47,720
Speaker 1: Bloomberg Intelligence. Thank you for joining Mike. Thanks guys for

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00:59:47,800 --> 00:59:50,000
Speaker 1: more Credit analysis. Read all of the Mike Collins work

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00:59:50,040 --> 00:59:52,880
Speaker 1: on the Bloomberg terminal. Bloomberg Intelligence is part of our

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00:59:52,920 --> 00:59:55,800
Speaker 1: research department, with five hundred analysts and strategists working across

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00:59:55,840 --> 00:59:59,120
Speaker 1: all markets. Coverage includes over two thousand equities and credits

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00:59:59,120 --> 01:00:02,880
Speaker 1: and outlooks on more ninety industries and one hundred market industries,

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01:00:03,120 --> 01:00:06,320
Speaker 1: currencies and commodities. Please do subscribe to The Credit Edge

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Speaker 1: wherever you get your podcasts. We're on Apple, Spotify and

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Speaker 1: all other good podcast providers including b Podgo on the

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Speaker 1: Bloomberg Terminal, give us a review, tell your friends, or

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Speaker 1: email me directly at Jcromby eight at Bloomberg dot net.

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Speaker 1: I'm James Crombie. It's been a pleasure having you join

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Speaker 1: us again next week on the Credit Edge.