WEBVTT - Churchill Sees Mid-Market Loan Value ‘in Plain Sight’ 0:00:18.360 --> 0:00:21.040 Hello, Welcome to the Credit Edge, a weekly markets podcast. 0:00:21.160 --> 0:00:23.640 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:24.040 --> 0:00:26.360 This week, we're very pleased to welcome Randy Schwimmer, vice 0:00:26.440 --> 0:00:28.120 chairman at Churchill Asset Management. 0:00:28.120 --> 0:00:30.080 How are you, Randy, James. It's great to be with you. 0:00:30.200 --> 0:00:32.000 Thank you so much for joining us today. We're very 0:00:32.040 --> 0:00:34.960 excited to hear your views. Also delighted to have back 0:00:35.000 --> 0:00:37.760 on the show as a co host. Mike Holland with 0:00:37.800 --> 0:00:38.760 Bloomberg Intelligence. 0:00:38.760 --> 0:00:40.680 Hello, Mike, Hey, James, thanks for having me. 0:00:40.760 --> 0:00:42.839 Welcome Randy, Mike. Great be with you. 0:00:43.280 --> 0:00:45.040 Thank you so Just to set the scene of it here, 0:00:45.120 --> 0:00:48.600 credit markets appear very calm and invests a long risk 0:00:48.760 --> 0:00:52.440 going into US election that some analysts say could be 0:00:52.600 --> 0:00:55.560 ruinous for the economy. It seems that there's a bit 0:00:55.560 --> 0:01:00.520 of complacency plus more demand than supply. Private debt has 0:01:00.560 --> 0:01:03.400 experienced a meteoric rise over the last few years. It's 0:01:03.400 --> 0:01:05.760 now a one point seven trillion dollar market, but it 0:01:05.760 --> 0:01:08.119 could well be worth tens of trillions of dollars when 0:01:08.120 --> 0:01:10.520 you wrap in all of the asset based finance. That 0:01:10.600 --> 0:01:15.280 looks like the next big wave rate cut expectations are 0:01:15.319 --> 0:01:18.319 being dialed down as the US economy stays hot. That 0:01:18.360 --> 0:01:20.840 will boost the appeal to investors of loans to companies 0:01:20.840 --> 0:01:23.800 which are floating so they pay more if treasury yields 0:01:23.880 --> 0:01:26.679 stay high. On the other hand, there are plenty of risks. 0:01:26.920 --> 0:01:31.039 Private credit critics worry about extremely fast growth and lack 0:01:31.080 --> 0:01:34.760 of transparency. Large portfolio managers like Pimco tell us that 0:01:34.800 --> 0:01:37.399 there's just not enough of a pickup in returns to 0:01:37.440 --> 0:01:41.120 make direct lending more appealing than public bond markets, which 0:01:41.120 --> 0:01:43.840 are also offering very high yields, and bonds are a 0:01:43.840 --> 0:01:46.840 lot easier to trade. At the same time, we're seeing 0:01:46.840 --> 0:01:50.000 more signs of private credit stress in the form of amendments, 0:01:50.040 --> 0:01:53.400 extensions and increasing number of loans being repaid with more debt, 0:01:53.680 --> 0:01:58.440 plus a rise in defaults. Regulators are also looking at 0:01:58.440 --> 0:02:01.279 the industry amid concerns any big blow up in private 0:02:01.280 --> 0:02:04.480 credit would hit banks which lend to private credit managers, 0:02:04.640 --> 0:02:07.160 and there are fears that yield chasing retail investors could 0:02:07.200 --> 0:02:09.959 get hurt. Some fear of major reckoning as too much 0:02:10.000 --> 0:02:13.240 money chases too few deals. As talk of the golden 0:02:13.280 --> 0:02:15.960 age in private credit continues and in the background, we 0:02:16.000 --> 0:02:17.920 have a lot of geopolitical risk and the threat of 0:02:17.919 --> 0:02:22.200 inflation and recession hasn't really gone out of the narrative 0:02:22.240 --> 0:02:25.280 at all. So a major downturn in the economy would 0:02:25.280 --> 0:02:30.120 obviously cause more distress in credit markets. Let's start there, Randy, 0:02:30.280 --> 0:02:32.600 what's your take? Is private credit still the place to be? 0:02:33.200 --> 0:02:37.240 James? That is a laundry list of things. And I 0:02:37.280 --> 0:02:40.640 will say that having been in the business for almost 0:02:40.639 --> 0:02:43.760 forty five years now, and when I started, it didn't 0:02:43.760 --> 0:02:46.440 have the very dignified name of private credit. It was 0:02:46.440 --> 0:02:49.800 actually called middle market lending. And I was doing it 0:02:49.880 --> 0:02:53.600 in the backwater of JP Morgan's sort of regional offices, 0:02:53.680 --> 0:02:58.639 lending to medium sized companies that the regional banks and 0:02:58.760 --> 0:03:03.200 some finance company, but mostly the regional banks were servicing. 0:03:03.560 --> 0:03:06.280 And in those days, in the early eighties, you know, 0:03:06.280 --> 0:03:09.679 there wasn't a lot of leverage. Leverage was a later discovery, 0:03:09.760 --> 0:03:13.840 later invention. It was mostly these medium sized companies who 0:03:13.880 --> 0:03:18.239 didn't necessarily have access to the big desks on Wall Street. 0:03:18.800 --> 0:03:21.560 And but what happened over time, and by the way, 0:03:21.600 --> 0:03:23.360 it was a great business. It was a very sleepy business. 0:03:23.400 --> 0:03:26.840 Commercial ending was relatively low risk. You were secured by 0:03:26.840 --> 0:03:30.840 all the assets you had. Amortization actually you know remember 0:03:30.840 --> 0:03:37.320 those remember that term actually repaying principle over time and 0:03:37.320 --> 0:03:41.600 in financial tests. And what happened, you know, as the 0:03:41.680 --> 0:03:46.040 banks started to consolidate, and it wasn't just a regulatory issue, 0:03:46.040 --> 0:03:51.120 it was actually you know, smaller banks merging with larger banks. 0:03:51.160 --> 0:03:54.200 And so you know, the JP Morgan is actually the 0:03:54.320 --> 0:03:58.240 Chase Manhattan part of the JP Morgan enterprise that I 0:03:58.360 --> 0:04:00.720 was part of what got merged into for Chemical and 0:04:00.720 --> 0:04:04.600 then JP Morgan. And this happened across the country. So 0:04:04.720 --> 0:04:08.080 you had you know, tens of thousands of banks, you know, 0:04:08.240 --> 0:04:11.840 now just a few thousand. And what happened during that 0:04:11.880 --> 0:04:14.160 period is that these regional banks who were lending to 0:04:14.560 --> 0:04:17.440 those medium sized companies kind of went away. And in 0:04:17.480 --> 0:04:21.120 that same period, people realized that there was all of 0:04:21.160 --> 0:04:24.560 this capital that needed somehow to be accessed by somebody, 0:04:24.600 --> 0:04:28.920 and the private credit market was really given birth by 0:04:29.040 --> 0:04:31.839 finance companies like ge Capital is a perfect example, or 0:04:31.839 --> 0:04:36.640 hell Or Financial that started up businesses and Churchill had 0:04:36.640 --> 0:04:38.760 its roots, our business had had its roots in that 0:04:38.839 --> 0:04:41.840 back in the early two thousands, you know, as a 0:04:41.880 --> 0:04:46.479 private equity backed business that saw an opportunity to we 0:04:46.480 --> 0:04:50.760 were not necessarily starting something new, we were taking business 0:04:50.800 --> 0:04:54.800 from the banks that were jettising it. And that what 0:04:54.880 --> 0:04:58.400 I call the great migration of loans that went from 0:04:59.080 --> 0:05:04.960 the banks regulated environment to the non regulated, the non 0:05:05.000 --> 0:05:08.719 bank environment, which really started probably in the kind of 0:05:08.760 --> 0:05:13.120 late eighties early nineties, definitely accelerated during the Great Recession, 0:05:14.240 --> 0:05:17.120 and then in the last ten years has really, you know, 0:05:17.360 --> 0:05:20.880 kind of finalized to the point where very little of 0:05:21.000 --> 0:05:24.000 leverage loans are actually held by banks anymore, the vast 0:05:24.040 --> 0:05:27.960 majorities in the hand of non banks, and as you recall, 0:05:28.040 --> 0:05:31.600 in twenty twenty two and twenty three, the bank market 0:05:31.960 --> 0:05:35.679 for lending was non existent. So what's happened has really 0:05:35.800 --> 0:05:39.600 not been an overnight success. We've gone from private credit, 0:05:39.600 --> 0:05:42.239 has gone from the backwater when I started to nounce 0:05:42.279 --> 0:05:44.880 the beachfront, and it's the beachfront for many reasons which 0:05:44.920 --> 0:05:47.960 I look forward to talking to you about. But a 0:05:47.960 --> 0:05:51.800 lot of those reasons were really driven by many needs 0:05:51.880 --> 0:05:55.040 won by the regulatory agencies who were saying, we want 0:05:55.080 --> 0:05:58.240 to get this off the balance sheets of banks onto 0:05:59.279 --> 0:06:04.120 non regulated lenders who don't aren't carrying deposits for customers 0:06:04.160 --> 0:06:08.159 that we have to worry about, and private equity sponsors 0:06:08.160 --> 0:06:12.120 and frankly, medium sized businesses who people forget. You know, 0:06:12.160 --> 0:06:14.560 the middle market in the United States is a very 0:06:15.839 --> 0:06:19.400 you know, it's a job creation engine. Half of the 0:06:19.480 --> 0:06:21.279 jobs that are created in the United States are coming 0:06:21.279 --> 0:06:25.480 from that middle market, and so financing those businesses is 0:06:25.960 --> 0:06:28.560 pretty critical to the healthy of the economy. If you 0:06:28.640 --> 0:06:31.440 took all of the say three hundred thousand companies that 0:06:31.520 --> 0:06:34.520 are between say five million in revenues and a billion 0:06:34.560 --> 0:06:38.000 in revenues, it would equal the it would be the 0:06:38.000 --> 0:06:41.800 third largest GDP on the planet, Okay, behind China and 0:06:41.800 --> 0:06:45.560 head of Japan. That's a huge market. And so what's 0:06:45.600 --> 0:06:48.520 happening is private credit quote unquote, which is now what 0:06:48.960 --> 0:06:53.920 this new middle market is being called, is being asked 0:06:53.960 --> 0:06:57.479 to finance all of these opportunities because the banks aren't there. 0:06:57.560 --> 0:07:00.600 So I think that you know, it is it's not 0:07:00.920 --> 0:07:04.080 something that I think should be viewed with alarm, but 0:07:04.440 --> 0:07:07.799 you know, frankly, as a constructive thing for the economy 0:07:07.800 --> 0:07:09.280 and for the capital markets as a whole. 0:07:10.080 --> 0:07:12.760 It's interesting you put it that way. You know, I 0:07:12.760 --> 0:07:15.040 think as we look back over the arc of financial 0:07:15.040 --> 0:07:17.200 innovation and what happened in the eighties with the jump 0:07:17.240 --> 0:07:19.840 bonds and Michael Milkin and maybe in the late nineties 0:07:19.880 --> 0:07:22.400 with market value CDOs which didn't go so well, and 0:07:22.440 --> 0:07:24.960 then we had clos which actually really ramped up in 0:07:25.000 --> 0:07:29.240 the early aughts. You had this increase of capital available 0:07:29.240 --> 0:07:34.040 to companies, right, So there was an augmentation of credit 0:07:34.040 --> 0:07:39.040 availability through the new structures of those clos which survived 0:07:39.240 --> 0:07:41.680 really well right during the financial crisis. I mean there 0:07:41.720 --> 0:07:44.800 was maybe one or two that had I don't think 0:07:44.800 --> 0:07:46.720 there are any corporate clos that had a triple A 0:07:46.800 --> 0:07:47.920 that was impaired, right. 0:07:48.320 --> 0:07:49.600 Maybe or even double A. 0:07:49.680 --> 0:07:52.680 Even double A, right, So, but it provided a massive 0:07:52.720 --> 0:07:56.480 amount of capital for M and A and for acquisitions 0:07:56.520 --> 0:07:59.800 over those years. And I wonder what your perspective is 0:07:59.840 --> 0:08:04.360 on on this latest innovation. Will this create a more 0:08:04.400 --> 0:08:07.920 benign credit environment because we'll have fewer defaults? Is the 0:08:08.560 --> 0:08:13.360 is the business default cycle? The corporate default cycle? Declient 0:08:13.720 --> 0:08:16.040 is the top of that coming down a little bit. 0:08:16.600 --> 0:08:19.280 Yeah, James mentioned default rates, and that's a probably good 0:08:19.280 --> 0:08:22.560 place to start because one of the things that's different 0:08:22.920 --> 0:08:25.520 in the private markets than in the public markets is 0:08:25.520 --> 0:08:31.000 that handling troubled situations. And you and I had my 0:08:31.080 --> 0:08:34.080 co conversation before we started about the challenge of doing 0:08:34.120 --> 0:08:37.480 that in a public environment where you have investors or 0:08:37.559 --> 0:08:41.400 lenders or you know, vulture funds who come into these 0:08:41.440 --> 0:08:44.800 troubled situations at a discount, right, that's their job. They 0:08:44.880 --> 0:08:46.600 look at opportunities and they say, I'm going to buy 0:08:46.640 --> 0:08:48.800 into forty cents on the dollar, and their job is 0:08:48.840 --> 0:08:50.640 to get out at fifty cents on the dollar, sixty 0:08:50.679 --> 0:08:53.160 cents or more. Their job is not necessarily to get 0:08:53.200 --> 0:08:55.840 out of par whereas the direct lenders, the middle market 0:08:55.920 --> 0:08:58.960 lenders such as ourselves, you know, we're not in it 0:08:58.960 --> 0:09:01.520 to trade. We're in it to create growth and to 0:09:01.600 --> 0:09:05.640 create financing opportunities for investors, but also support our private 0:09:05.640 --> 0:09:09.480 equity clients. And so it's really a par market for us. 0:09:09.480 --> 0:09:12.120 And what we seek to do with our other lending 0:09:12.160 --> 0:09:15.720 partners is to create a situation where all the lenders 0:09:15.720 --> 0:09:19.719 are acting in an aligned manner to maintain value and 0:09:20.200 --> 0:09:22.800 preserve value, and if there's a problem with the company, 0:09:23.000 --> 0:09:26.040 to extract value out of that and the beauty of 0:09:26.320 --> 0:09:28.480 that in this in the middle market, by that, I 0:09:28.520 --> 0:09:32.320 mean companies whose financings are say one hundred million to 0:09:32.440 --> 0:09:35.559 five hundred million on average, that the lenders are all 0:09:35.679 --> 0:09:38.440 there to make sure that they can get out of 0:09:38.480 --> 0:09:41.760 this with their money back. Because in the credit market, 0:09:41.920 --> 0:09:44.640 it's not about the you know, an equity gain. It's 0:09:44.640 --> 0:09:48.560 not about you know, making money beyond the private the 0:09:48.559 --> 0:09:52.280 principal and interest that you're getting back. Your your job 0:09:52.360 --> 0:09:54.439 is to you know, get your money back with your 0:09:54.480 --> 0:09:57.320 interest in fees and that's it. And so you're not 0:09:57.360 --> 0:10:01.480 trying to do anything heroic. However, Mike, as you mentioned, 0:10:01.559 --> 0:10:06.439 in a sophisticated market that has technology surrounding it, there 0:10:06.440 --> 0:10:11.040 are many opportunities to create both kind of a syndicated 0:10:11.440 --> 0:10:15.160 similar to the COLO market, a syndicated product that allows 0:10:15.200 --> 0:10:18.080 investors to pick and choose among tranches depending on risk 0:10:18.160 --> 0:10:23.280 and return. The even syndicating within a private credit context. 0:10:23.480 --> 0:10:27.480 You know, liquidity trading within a private credit context is 0:10:27.480 --> 0:10:31.240 probably the next generation, and I think we're seeing that developing. 0:10:31.280 --> 0:10:33.840 It's kind of exciting, but also it's kind of assumes 0:10:33.840 --> 0:10:35.720 that you know, you're always doing the right sort of deals, 0:10:35.760 --> 0:10:37.880 You're always doing the diligence to pick the right sort 0:10:37.880 --> 0:10:40.640 of companies to see that there is some value We've 0:10:40.640 --> 0:10:43.640 had guests on this show over the last few months 0:10:43.679 --> 0:10:47.800 talking about the massive opportunity but also flagging the potential 0:10:47.880 --> 0:10:50.480 risks of what they have called tourists coming in who 0:10:50.760 --> 0:10:53.280 maybe aren't so sophisticated, not have such a long track 0:10:53.280 --> 0:10:56.000 record as you do, doing you know, quote unquote the 0:10:56.040 --> 0:10:58.400 wrong kind of deals which can go bad. Maybe there 0:10:58.440 --> 0:11:01.040 isn't the value there that people have ascribed to it 0:11:01.080 --> 0:11:03.680 going in. Do you think that there's more of that 0:11:03.760 --> 0:11:05.880 kind of activity now because there's so much demand for 0:11:05.880 --> 0:11:06.400 this product. 0:11:06.640 --> 0:11:09.720 Yeah, and it's so hard in this market as everyone 0:11:09.760 --> 0:11:12.200 has scaled, you know, and you've seen that happen, and 0:11:12.760 --> 0:11:18.200 I think commentators have talked about the growing dispersion of managers, 0:11:18.200 --> 0:11:20.200 and I think we're going to see that going forward. 0:11:21.040 --> 0:11:23.240 Scale really matters now. And if you come into this 0:11:23.360 --> 0:11:27.160 market today as a new entrant with no track record, 0:11:27.200 --> 0:11:29.760 I think it's really really hard to raise money. And 0:11:29.800 --> 0:11:32.480 if it's hard to raise money, then what that means 0:11:32.520 --> 0:11:34.600 is that you're probably going to be more of a 0:11:35.160 --> 0:11:41.120 you know, small desk that's looking for very specialized opportunities 0:11:41.480 --> 0:11:43.840 and those are really tricky. And I think that the 0:11:43.880 --> 0:11:47.240 beauty of where we are, which is very mainstream, very 0:11:47.280 --> 0:11:50.400 traditional middle market. These are companies that are like I say, 0:11:50.600 --> 0:11:55.240 you know, medium sized businesses, not upper middle market, not 0:11:55.320 --> 0:11:57.280 the broadly indicated market, and not in this in the 0:11:57.320 --> 0:12:01.679 small cap market, but businesses where you have enough scale 0:12:02.160 --> 0:12:08.040 so that private equity sponsors can create growth and can 0:12:08.679 --> 0:12:11.920 start with a platform business and then add on to 0:12:12.200 --> 0:12:16.600 create value for their shareholders, but not so large that 0:12:16.640 --> 0:12:19.439 you get into the large market where you start to 0:12:19.480 --> 0:12:22.720 see more of the excesses in terms of you know, 0:12:22.720 --> 0:12:24.960 what we see in the broadly syndicated market, what we 0:12:25.000 --> 0:12:28.200 see in the bond market, you know, covenant light, some 0:12:28.280 --> 0:12:34.480 of the you know, idiosyncrasies with collateral packages and trading 0:12:34.559 --> 0:12:37.480 value in and out of companies, and so it tends 0:12:37.520 --> 0:12:41.880 to be much more of a conservative playground. And I 0:12:41.920 --> 0:12:45.480 think if you stick to your knitting, you know, you 0:12:45.520 --> 0:12:49.520 can avoid some of the big problems that we've seen 0:12:49.520 --> 0:12:50.600 in other situations. 0:12:50.840 --> 0:12:53.200 But I'd say there is that potential for access is 0:12:53.200 --> 0:12:57.360 in the larger parts of the loan market and coding 0:12:57.400 --> 0:13:00.959 private credit. We were hearing, you know, some time ago 0:13:01.040 --> 0:13:02.760 that this was probably going to spread to the middle 0:13:02.760 --> 0:13:05.400 market in terms of you know, week of covenance, West pricing, 0:13:05.520 --> 0:13:08.439 west protections, all that stuff. Would you say right now 0:13:08.440 --> 0:13:12.080 that that's not the case, that they still better, you know, 0:13:12.640 --> 0:13:15.880 lenders market for the middle market than the broadly syndicator. 0:13:16.080 --> 0:13:19.200 It hasn't, and it's been a bit of a surprise, 0:13:20.200 --> 0:13:26.359 but in part the classic traditional middle market is inhabited 0:13:26.440 --> 0:13:30.640 by lenders such as ourselves that have long relationships with 0:13:30.679 --> 0:13:32.640 these private equity companies. So just to give you a 0:13:32.640 --> 0:13:37.920 little sense we have as part of our kind of SEP. 0:13:38.120 --> 0:13:39.720 You know, the thing that makes us different from the 0:13:39.720 --> 0:13:44.240 competition is we have about three hundred relationships as an 0:13:44.400 --> 0:13:48.439 LP as a limited partner and investor in three hundred 0:13:48.440 --> 0:13:51.480 different private equity sponsors. They're probably the krem de la 0:13:51.559 --> 0:13:54.560 creme of the middle market in North America out of 0:13:54.640 --> 0:13:58.560 probably you know, over twenty twenty five hundred maybe overall 0:13:58.559 --> 0:14:00.640 private equity sponsors. So we're in the sort of top 0:14:00.679 --> 0:14:06.320 tier as an LP and on their on their advisory boards, 0:14:06.760 --> 0:14:09.520 and so we have a special relationship really as a 0:14:09.559 --> 0:14:13.760 client as an investor to these sponsors. And when you're 0:14:13.960 --> 0:14:16.760 when you're in that relationship, you're getting all of their 0:14:16.760 --> 0:14:19.880 deal flow, and then you can be selective from that 0:14:20.000 --> 0:14:23.560 deal flow. So it's kind of like credentialed pipeline that's 0:14:23.560 --> 0:14:25.520 coming at you. We get about a thousand deals a 0:14:25.600 --> 0:14:30.000 year in our senior pipeline, and we end up getting 0:14:30.040 --> 0:14:32.880 about fifty or sixty that we like. So that's a 0:14:33.000 --> 0:14:37.040 pretty selective ratio. And so not only picking from the 0:14:37.080 --> 0:14:39.680 best of the sponsors, we're also picking the best industries 0:14:39.720 --> 0:14:42.800 that we like over over cycles that are going to 0:14:42.840 --> 0:14:46.200 be you know, created with all weather portfolio. But also 0:14:46.320 --> 0:14:48.720 then in the best industries, what are the best companies, 0:14:48.720 --> 0:14:51.600 what are the survivors, what are the businesses that really 0:14:51.840 --> 0:14:54.000 will be able to exist no matter what cycle or 0:14:54.040 --> 0:14:57.320 what rate environment you're in. So you end up with 0:14:58.560 --> 0:15:00.480 a sort of I think kind of I call it 0:15:00.480 --> 0:15:04.160 a triple filtered portfolio, which you can't get anywhere else. 0:15:04.480 --> 0:15:06.480 And so if you look at the way that we've 0:15:06.520 --> 0:15:09.480 constructed our business, it's very hard to come from the 0:15:09.600 --> 0:15:12.680 outside as a new entrant with no track record and 0:15:12.760 --> 0:15:15.800 try to get that relationship with that private ecory sponsor, 0:15:16.040 --> 0:15:18.320 build up the trust that you need in order to 0:15:18.360 --> 0:15:22.480 develop that relationship. Because in this market where you're actually 0:15:22.520 --> 0:15:26.560 financing these businesses that are hard won, I mean the 0:15:26.880 --> 0:15:31.320 auctions and the purchase base multiples is still relatively high 0:15:31.400 --> 0:15:34.080 for good companies. The sponsor is not going to hand 0:15:34.080 --> 0:15:36.840 over their keys to a lender that they don't trust. 0:15:37.040 --> 0:15:38.600 So that's why it's hard to break in. 0:15:40.520 --> 0:15:42.840 Going to back to the regulatory side for a little 0:15:42.880 --> 0:15:45.920 bit with the focus on the banks and you know, 0:15:46.240 --> 0:15:48.640 having been at Credit Swiss when they were going through 0:15:48.720 --> 0:15:51.640 leverage lending guidelines and you know, being told by the 0:15:51.720 --> 0:15:54.440 OCC and the FED that you can't model this company 0:15:54.440 --> 0:15:55.120 out to six times. 0:15:55.280 --> 0:15:56.160 We had a lot of rules. 0:15:56.160 --> 0:15:57.680 I did a lot of work that was sent to 0:15:57.720 --> 0:16:00.280 them basically telling them about our leverage lending position, which 0:16:00.280 --> 0:16:03.960 I thought was really interesting. Since that time, the bank 0:16:04.080 --> 0:16:05.920 is no longer really doing that anymore. It's had its 0:16:05.920 --> 0:16:08.040 own issues and it's you know, it's kind of progressed. 0:16:08.080 --> 0:16:11.360 I wonder, you know, also as a healthcare analyst, looking 0:16:11.400 --> 0:16:13.920 at what the way the regulators look at private equity 0:16:14.000 --> 0:16:18.480 right now, you know, how does how do you envision 0:16:19.440 --> 0:16:24.520 the regulators putting in place a regime that would monitor 0:16:26.480 --> 0:16:29.320 and really be able to keep track of these loans 0:16:29.320 --> 0:16:30.960 that are out there, and would they go down to 0:16:31.000 --> 0:16:33.960 that certain level of looking at like you know, leverage, 0:16:34.120 --> 0:16:36.800 you know, over a specific time frame, you know. 0:16:37.400 --> 0:16:40.880 Yeah, well it's hard to predict what they will do, 0:16:40.960 --> 0:16:44.000 but and they're certainly aware of it, right, I think 0:16:44.040 --> 0:16:47.480 that's pretty clear. I think it's it's probably a misnomer 0:16:47.520 --> 0:16:50.440 to say that we are in an unregulated market. I 0:16:50.520 --> 0:16:53.560 know that, you know, we are owned by an insurance 0:16:53.560 --> 0:16:57.120 company TIA and New Veen, who are you know, regulated 0:16:57.160 --> 0:17:00.520 by the SEC and by the Insurance Can Mission and 0:17:00.520 --> 0:17:03.440 so forth, So there's plenty of regulations around our business. 0:17:03.760 --> 0:17:07.480 I think the thing that that has been the big focus, 0:17:07.480 --> 0:17:09.840 and we saw that a year and a half ago 0:17:09.960 --> 0:17:13.880 with the you know, failure three key banks that what 0:17:14.680 --> 0:17:16.639 you know, the focus you know, is often on the 0:17:16.680 --> 0:17:21.520 depository community, right, and what happens when they don't realize 0:17:21.560 --> 0:17:24.720 that their bank is investing in or you know, playing 0:17:24.720 --> 0:17:28.440 in leverage loans. And in the case of those failures, 0:17:28.480 --> 0:17:31.200 you know, that was not an issue, right, Silicon Valley 0:17:31.200 --> 0:17:33.920 Bank was not involved in playing right, So it was 0:17:33.960 --> 0:17:37.720 a mismatch of assets and liabilities. And I think the 0:17:37.760 --> 0:17:41.160 beauty of the non bank world and what we discovered 0:17:41.200 --> 0:17:43.720 twenty years ago and when we started Churchill was that 0:17:43.800 --> 0:17:46.959 if you match your your assets, your long term assets 0:17:47.000 --> 0:17:51.320 with long term liabilities with investors in the institutional market, 0:17:51.359 --> 0:17:53.760 where you can go out and raise tenure money that 0:17:53.840 --> 0:17:59.040 matches the ten years of your assets, then you're locked 0:17:59.080 --> 0:18:01.199 in for a long period time. And the beauty of 0:18:01.200 --> 0:18:03.800 that is through the cycles we found that out going 0:18:03.840 --> 0:18:06.520 through the Great Recession, when we survived that through COVID, 0:18:06.600 --> 0:18:09.520 through the mini cycles that we've seen, is that having 0:18:09.520 --> 0:18:13.400 that match on the asset and liability side really creates 0:18:13.440 --> 0:18:17.240 real strength. And I think the issues that have come up, 0:18:17.640 --> 0:18:20.760 so for example, having defaults in the middle market that 0:18:20.800 --> 0:18:25.040 would migrate to the banks or migrate to the to 0:18:25.080 --> 0:18:27.560 the banking system, all of that I think has been 0:18:27.600 --> 0:18:31.560 really disproven. Nobody really seriously thinks that. I think that 0:18:31.560 --> 0:18:35.000 that middle market loans that are held in our case 0:18:35.600 --> 0:18:39.240 in a very diverse portfolio where no one name represents 0:18:39.280 --> 0:18:40.960 more than you know, one or two percent of the 0:18:41.000 --> 0:18:44.359 total portfolio, that if something goes wrong with one or two, 0:18:44.480 --> 0:18:46.439 or three or five of those names, that that's going 0:18:46.520 --> 0:18:49.359 to spread out through the system. I think the more 0:18:49.680 --> 0:18:51.520 and this is really the focus of what we do 0:18:51.640 --> 0:18:54.440 in our newsletter that you guys read, the Lead Left, 0:18:54.480 --> 0:18:57.000 which I've been publishing every week since March of two 0:18:57.040 --> 0:18:59.760 thousand and eight, we have about fifty thousand subscribers. And 0:18:59.760 --> 0:19:01.959 the thing that people tell me about it is that, 0:19:02.720 --> 0:19:06.119 you know, we tend to demestify and educate, which is 0:19:06.160 --> 0:19:08.480 really the goal of private credit, and the goal of 0:19:08.520 --> 0:19:11.919 these kinds of you know podcasts and the work that 0:19:11.920 --> 0:19:14.240 I do with your radio team is to get the 0:19:14.240 --> 0:19:16.760 word out for what private credit really is and what 0:19:16.800 --> 0:19:19.920 it isn't. And the only way that you can kind 0:19:19.920 --> 0:19:23.240 of tell is to talk to practitioners, because these are 0:19:23.240 --> 0:19:27.439 not public entities. There's no yet, there's no Bloomberg you 0:19:27.440 --> 0:19:31.360 know app that says, Okay, here's here's Churchill's you know portfolio. 0:19:31.400 --> 0:19:34.240 Now one day maybe we'll get there. But I think 0:19:34.280 --> 0:19:38.320 the understanding the differences between private markets and public markets, 0:19:38.359 --> 0:19:44.040 between liquidity and illiquidity, between correlation and non correlation, which 0:19:44.080 --> 0:19:46.639 is one of the things that's a real virtue of 0:19:46.720 --> 0:19:49.520 private credit that it does not trade when the rest 0:19:49.520 --> 0:19:51.879 of the market does. And one of the reasons that 0:19:51.960 --> 0:19:54.879 it has grown over the last fifteen years is that 0:19:54.920 --> 0:19:59.840 investors have seen, during periods of volatility, how the valuations 0:19:59.840 --> 0:20:03.240 of the loans that are held by lenders like Churchill 0:20:03.440 --> 0:20:06.480 and that they own don't move around in the same way, 0:20:06.520 --> 0:20:08.720 and so there's some comfort there. It doesn't mean that 0:20:08.760 --> 0:20:11.760 they're going to put all of their capital into private credit, 0:20:11.840 --> 0:20:14.800 but it means now that it's become really a core 0:20:14.920 --> 0:20:18.200 asset of their alternatives allocation. 0:20:18.800 --> 0:20:21.119 You've told to me, and you know, before we started 0:20:21.119 --> 0:20:25.800 recording this about the biggest misguided conclusions in private credit. 0:20:26.080 --> 0:20:28.160 Hopefully not too many of them on mine. I won't 0:20:28.200 --> 0:20:29.800 be offended if they are. But but can you expand 0:20:29.800 --> 0:20:31.160 a bit on that. What do you mean by that? 0:20:31.200 --> 0:20:35.040 Well, we talked about liquidity, right, and middle market loans 0:20:35.119 --> 0:20:37.719 are not liquid, right. You can't trade them. There's no 0:20:37.920 --> 0:20:42.439 real index, you can't call up even I mean, there 0:20:42.480 --> 0:20:45.760 are some larger direct lenders who will make a market, 0:20:45.960 --> 0:20:49.159 you know, in their own asset if they have the 0:20:49.200 --> 0:20:51.159 loan on their books. You know, they will work hard 0:20:52.160 --> 0:20:54.680 to find a buyer if you're a seller or vice versa. 0:20:55.200 --> 0:20:57.600 But they're not liquid in the sense that you the 0:20:57.600 --> 0:20:59.679 way the public markets are liquid. And I think it's 0:20:59.680 --> 0:21:02.800 import to know that because you know, as we start 0:21:02.840 --> 0:21:07.040 to go, you know, we get the retailization of private credit, 0:21:07.840 --> 0:21:10.880 that the understanding that these are really different types of assets. 0:21:10.920 --> 0:21:14.719 Then the public markets will help educate investors as to 0:21:14.760 --> 0:21:17.720 the you know, what's possible and what's not possible. So 0:21:17.920 --> 0:21:20.560 getting your money out instantly the way you can, you know, 0:21:20.600 --> 0:21:22.720 out of your you know, checking account is just it's 0:21:22.760 --> 0:21:26.159 not the same kind of thing. I think that. So 0:21:26.280 --> 0:21:30.080 liquidity is really important to understand. Along with that, I 0:21:30.080 --> 0:21:34.679 think is valuation. So one of the myths about private 0:21:34.720 --> 0:21:38.760 credit is that you know valuations because they're not public, 0:21:38.800 --> 0:21:43.480 are therefore suspect that is not true anymore than if 0:21:43.480 --> 0:21:46.040 you have a public valuation out there, that it is 0:21:46.080 --> 0:21:48.680 a real valuation. And I you know, Mike, like you've 0:21:48.720 --> 0:21:50.520 worked on a trading desk, and I know that if 0:21:51.119 --> 0:21:53.919 you know, I have a particular loan that's marked at 0:21:53.960 --> 0:21:56.480 a certain price, it doesn't mean that somebody calls me 0:21:56.560 --> 0:21:58.520 up can get it at that price. And so often 0:21:58.560 --> 0:22:02.560 it's just a a guess, an indication, you know, well, 0:22:02.600 --> 0:22:04.679 we think this is where it's going to trade. And 0:22:04.760 --> 0:22:11.119 as we also know, in times of high volatility, liquidity 0:22:11.359 --> 0:22:13.960 can evaporate, and when that happens, what you think is 0:22:14.000 --> 0:22:17.520 worth part can be worth far less. And we've seen 0:22:17.520 --> 0:22:20.600 in the public markets periods, and COVID was a perfect example, 0:22:21.080 --> 0:22:24.480