WEBVTT - How Oaktree's Head of Sourcing Finds the Next Great Deal 0:00:03.080 --> 0:00:21.439 Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to 0:00:21.480 --> 0:00:25.120 another episode of the All Thoughts Podcast. I'm Tracy Alloway. 0:00:24.840 --> 0:00:25.360 And I'm Joe. 0:00:25.560 --> 0:00:26.600 Wasn't that Joe? 0:00:26.680 --> 0:00:29.280 Do you remember deal toys? Did you ever see those? 0:00:29.880 --> 0:00:32.680 I never got a deal I never I do know 0:00:32.680 --> 0:00:33.040 what they were. 0:00:33.040 --> 0:00:35.360 You wouldn't get a deal toy unless you were working. 0:00:35.120 --> 0:00:38.720 Out, so I'm aware that they existed, but I don't 0:00:39.280 --> 0:00:40.599 never had one. I never saw one. 0:00:40.760 --> 0:00:42.519 I used to be slightly obsessed with them. 0:00:42.640 --> 0:00:45.200 Were they toys like or were they like like were 0:00:45.200 --> 0:00:47.240 they those sort of looseight Uh? 0:00:47.720 --> 0:00:51.919 Yeah, that's pretty much it. So if you are working 0:00:52.200 --> 0:00:55.520 in capital markets or in mergers and acquisitions and you 0:00:55.600 --> 0:00:57.800 completed a deal, you would mark the end of that 0:00:57.840 --> 0:01:01.880 transaction by, you know, adding some sort of swag I guess. 0:01:01.920 --> 0:01:03.640 And it could be really boring. It could just be 0:01:03.680 --> 0:01:06.200 a looseight block or something like that. But some of 0:01:06.240 --> 0:01:09.440 them were really interesting and fun. And one of the 0:01:09.440 --> 0:01:12.440 ones I remember seeing was someone it must have been 0:01:12.480 --> 0:01:16.400 working in like capital markets. It was a little toggle, 0:01:16.880 --> 0:01:18.960 like an actual like think of like a railroad I 0:01:19.200 --> 0:01:22.640 kind of toggle, and it was to celebrate the first 0:01:22.800 --> 0:01:25.160 ever pick toggle transaction. 0:01:25.480 --> 0:01:27.440 So can I say something you know we talked to 0:01:27.640 --> 0:01:30.360 First of all, it's amazing. Second of all, you know, 0:01:30.680 --> 0:01:34.280 we talked to a lot of investors on the podcast. 0:01:34.560 --> 0:01:37.200 We talked to a lot of people whose job in 0:01:37.280 --> 0:01:40.160 some way resembles our job, which is looking at screens 0:01:40.560 --> 0:01:44.080 all day or maybe looking at data. I think if 0:01:44.120 --> 0:01:46.920 I ever had gone into finance, I would have some 0:01:47.160 --> 0:01:49.760 job that looked involved a lot of looking at screens 0:01:49.760 --> 0:01:51.880 and a lot of maybe looking at data, but mostly 0:01:51.920 --> 0:01:55.480 just looking at screens. We don't often talk talk to 0:01:55.600 --> 0:01:57.680 a lot of people who are in the world of 0:01:57.720 --> 0:02:01.160 actually talking to other people about making things happen. I 0:02:01.280 --> 0:02:02.840 never think i'd be good at that. No one wants 0:02:02.840 --> 0:02:04.400 to hang out with me, you know, stuff like that. 0:02:04.520 --> 0:02:06.640 And so I want to learn and talk to more 0:02:06.680 --> 0:02:10.320 people about how actually things in finance, whether we're talking 0:02:10.320 --> 0:02:12.320 about a deal, whether we're talking about a new issuance, 0:02:12.400 --> 0:02:16.280 et cetera, how that actually happens, how an instrument or 0:02:16.320 --> 0:02:18.520 security actually comes into the world. 0:02:18.720 --> 0:02:20.960 Well, I'm very pleased to say, Joe that we do, 0:02:21.040 --> 0:02:23.320 in fact have the perfect guest for this topic. We're 0:02:23.360 --> 0:02:25.560 going to be speaking to someone who's day to day 0:02:25.560 --> 0:02:30.080 business is talking to people sourcing and finding deal and 0:02:30.120 --> 0:02:34.760 someone who also knows exactly about that Pictoggle deal toy 0:02:34.960 --> 0:02:37.400 that I mentioned earlier. So I'm very excited we're going 0:02:37.480 --> 0:02:39.360 to be talking. We're going to try to thread the 0:02:39.400 --> 0:02:43.200 needle between sourcing deals and also something else we've been 0:02:43.240 --> 0:02:45.839 interested in lately, which is private. That's right, all right, 0:02:45.880 --> 0:02:49.240 So without further ado, we're speaking with Millwood Hobbes. He 0:02:49.440 --> 0:02:54.000 leads Oak Trees Sourcing, an originations group. So really again 0:02:54.160 --> 0:02:57.280 the perfect person, Millwood, thank you so much for coming 0:02:57.320 --> 0:02:59.480 on all thoughts, Thank you for having me. So I'm 0:02:59.560 --> 0:03:03.280 right right about the pictogle toy. You've seen this toy. 0:03:03.440 --> 0:03:06.720 Yes, I've seen it. My favorite deal toys. There's two 0:03:06.760 --> 0:03:10.200 that stick out when Ford spun out Hurts in two 0:03:10.240 --> 0:03:13.400 thousand and five, I was part of that transaction, and 0:03:13.480 --> 0:03:16.959 so I have a set of car keys and there's 0:03:18.360 --> 0:03:21.600 from Hurts and it's it's a it's they're called loose Heights. Yeah. 0:03:21.680 --> 0:03:23.320 And then the other one, which was pretty cool. I 0:03:23.360 --> 0:03:25.600 did the Mars regularly deal with Byron Trott, and so 0:03:25.639 --> 0:03:29.480 I have two eminem amazing guys that sort of they 0:03:29.600 --> 0:03:30.079 lay out. 0:03:29.919 --> 0:03:31.920 The train a room in your house that's sort of 0:03:31.919 --> 0:03:34.560 like I'm imagining high school athletes trophies. 0:03:35.880 --> 0:03:39.200 So so you know, I have we moved there in 0:03:39.280 --> 0:03:41.920 Covid in twenty twenty and we bought a house and 0:03:42.040 --> 0:03:45.040 I have like a real library. And then that library 0:03:45.120 --> 0:03:47.840 are two things from investment banking that I have. I 0:03:47.920 --> 0:03:50.840 have bank books from deals we used to we used 0:03:50.840 --> 0:03:53.080 to go to a printer and we used to draft. 0:03:53.240 --> 0:03:56.160 Oh like the pitch that well, it's like a it's 0:03:56.200 --> 0:04:00.520 like an actual it's a glossy picture book of of 0:04:00.560 --> 0:04:03.240 the deal. The transaction goes through transaction over youw, it 0:04:03.240 --> 0:04:06.680 goes through company, it goes through business, and that was 0:04:06.760 --> 0:04:10.760 what folks used to actually underwrite deals back in early 0:04:10.840 --> 0:04:13.600 two thousands. Yeah, and then I have loose sites, so 0:04:13.640 --> 0:04:14.800 I have a lot of loose sights. 0:04:15.040 --> 0:04:18.320 So the unit that you're leading at oak Tree that 0:04:18.440 --> 0:04:22.280 was created I think relatively recently, it was like twenty 0:04:22.680 --> 0:04:23.880 What was the thinking behind that? 0:04:24.200 --> 0:04:29.080 So the market private credit in origination and financing of 0:04:29.120 --> 0:04:31.080 deals has evolved quite a bit. If you just go 0:04:31.200 --> 0:04:34.240 back to kind of pre Dot Frank, most private equity 0:04:34.279 --> 0:04:38.040 firms didn't have what we call capital markets professionals, and 0:04:38.440 --> 0:04:42.080 post Dot Frank and the migration and creation of a 0:04:42.160 --> 0:04:45.280 robust private credit mark. Most of the private equity firms 0:04:45.400 --> 0:04:50.680 have capital markets professionals who really spend time drafting, creating, 0:04:50.839 --> 0:04:54.919 structuring financings for the private equity buyouts. And what we 0:04:55.000 --> 0:04:57.680 figured out oak Tree we were founded in nineteen ninety five, 0:04:57.720 --> 0:05:00.520 we managed a couple hundred billion dollars. What we were 0:05:00.520 --> 0:05:03.920 figuring out when I first started in twenty thirteen. Every 0:05:03.960 --> 0:05:06.480 strategy within oak Tree kind of did its own thing. 0:05:06.960 --> 0:05:09.200 So if a deal came into one strategy and it 0:05:09.240 --> 0:05:12.000 didn't work, it just kind of died in that strategy. 0:05:12.040 --> 0:05:15.120 So what we decided as the market evolved and moved 0:05:15.160 --> 0:05:19.599 towards capital solution provider versus this fund does this and 0:05:19.640 --> 0:05:22.880 this fund does that. We created my group with the 0:05:22.920 --> 0:05:24.719 real purpose of a couple of things. Number one is 0:05:24.800 --> 0:05:29.760 making sure we were focused on providing capital solutions versus 0:05:30.080 --> 0:05:33.279 trying to figure out what fit a particular strategy. Yeah, 0:05:33.400 --> 0:05:35.479 and then the second reason we really did it is that, 0:05:36.000 --> 0:05:38.480 you know, capital is the commodity in our business. Everyone 0:05:38.520 --> 0:05:40.760 has a lot of money, but how do you get 0:05:40.760 --> 0:05:43.600 the first call in the last call? And that's the relationship. 0:05:43.960 --> 0:05:46.680 So my team is meant to really spend time and 0:05:46.720 --> 0:05:50.480 develop relationships with the counting parties because look, the reality 0:05:50.480 --> 0:05:53.919 of it is, we shouldn't. We're not agreeing on We 0:05:54.000 --> 0:05:56.800 have different investors, So a private equity firm has a 0:05:56.839 --> 0:06:00.599 different investor base than we have. The goal in my 0:06:00.720 --> 0:06:03.680 group is to one make sure the entire firm sees 0:06:03.720 --> 0:06:06.880 a transaction, and two we're involved in the art of 0:06:06.880 --> 0:06:09.920 the deal, right, And so the goal is no one 0:06:09.960 --> 0:06:12.960 really should win. Both parties should be just mildly annoyed. 0:06:13.480 --> 0:06:15.800 And how do you do that? How do you do that? 0:06:15.880 --> 0:06:17.479 In a way you do it the relationship. 0:06:17.600 --> 0:06:20.400 That's funny because we say that in journalism sometimes, like 0:06:20.640 --> 0:06:24.000 the goal is for everyone to be like slightly dissatisfied 0:06:24.000 --> 0:06:27.440 in the story, because if everyone's happy, then you basically 0:06:27.480 --> 0:06:28.440 put out a press. 0:06:28.160 --> 0:06:31.760 Release somebody's wrong. If one side is really happy, the 0:06:31.800 --> 0:06:32.840 other side is probably wrong. 0:06:33.200 --> 0:06:35.720 I know Tracy already more or less ask this question, 0:06:35.800 --> 0:06:37.800 but I'll just put it in a different way. What 0:06:37.880 --> 0:06:39.760 do you just give us a sort of brief overview. 0:06:39.760 --> 0:06:41.320 If someone says, what do you do and how'd you 0:06:41.360 --> 0:06:43.200 get here? What did you do and how you get here? 0:06:43.520 --> 0:06:45.920 Yeah, so you don't want you don't want my full 0:06:46.040 --> 0:06:47.440 full background. 0:06:47.000 --> 0:06:49.320 Oh, I actually do, because you've been in the market 0:06:49.360 --> 0:06:50.000 for a really. 0:06:49.760 --> 0:06:50.360 Long time. 0:06:52.200 --> 0:06:52.719 Childhood. 0:06:52.720 --> 0:06:55.240 But okay, okay, I'll start from what I'll start from. 0:06:55.360 --> 0:06:58.200 So so look, my my dad was in public accounting, 0:06:58.320 --> 0:07:00.200 and originally so I got a fool. I could a 0:07:00.200 --> 0:07:02.920 scholarship to Rutgers to go to law school. I sat 0:07:02.960 --> 0:07:06.160 in political science and I would fall asleep and wake 0:07:06.240 --> 0:07:08.159 up and they were talking about the same thing. So 0:07:08.200 --> 0:07:09.680 I said, I don't think I can do four years 0:07:09.680 --> 0:07:13.000 of political science. So I switched to accounting. Because my generation, 0:07:13.720 --> 0:07:16.720 you did what the adult said to do. And so 0:07:16.840 --> 0:07:19.920 I switched to public into accounting, and my dad said, 0:07:20.200 --> 0:07:24.000 don't do public accounting, do banking. So I started out 0:07:24.040 --> 0:07:27.040 at a firm called Nation's Bank, which is now is 0:07:27.040 --> 0:07:30.720 a predecessor to Bank of America. And the most interesting 0:07:30.840 --> 0:07:33.680 job I had at Nations Banking, I was a controller 0:07:33.720 --> 0:07:36.360 for leverage finance. I was de controlling, the youngest controller 0:07:36.840 --> 0:07:39.360 in the firm, and I said, I want to be 0:07:39.360 --> 0:07:41.440 a leverage finance banker, you know. And the reason why 0:07:41.520 --> 0:07:44.520 it sounds silly when you're at my age, but they 0:07:45.080 --> 0:07:48.080 wore a nice time, They were nice shoes, They were 0:07:48.080 --> 0:07:50.080 in big in finance, and at that time Nation's Bank 0:07:50.200 --> 0:07:54.160 was a pretty big terminobe lender, and so the head 0:07:54.160 --> 0:07:56.840 of the group basically said, look, right now, you're just 0:07:56.880 --> 0:07:59.480 an accountant. He said, go get a sales job and 0:07:59.520 --> 0:08:01.640 then go to the school. So again I went to 0:08:01.720 --> 0:08:08.040 g Capitol and I financed commercial equipment, so rolling stock assets, cars, trucks, forklifts. 0:08:08.520 --> 0:08:10.240 Did that for one year to today, and then went 0:08:10.240 --> 0:08:13.320 to Columbia Business School. I summered at first Boston and 0:08:13.360 --> 0:08:16.400 I summered in asset backs and leverage finance, and then 0:08:16.480 --> 0:08:20.239 doing deoutsche Bank in two thousand full time. And during 0:08:20.240 --> 0:08:25.679 that time period I structured a lot of lbo's sun Guard, Nema, 0:08:25.760 --> 0:08:26.960 Marcus Us foods. 0:08:26.680 --> 0:08:30.640 Irridium, first Demon, Marcus being the first ever pick Togles. Yes, 0:08:30.840 --> 0:08:32.480 and so you had that deal toy. 0:08:32.720 --> 0:08:34.760 I have it, you know, I'll be honest with you. 0:08:34.840 --> 0:08:37.160 I think I gave it to someone more senior. Oh. 0:08:36.960 --> 0:08:38.320 Oh, should have given it to me. 0:08:38.720 --> 0:08:41.680 I know somebody who has one. And then in two 0:08:41.679 --> 0:08:45.040 thousand and seven I left Deutsche Bank. And really you 0:08:45.080 --> 0:08:46.920 sort of say, why would you leave Deutsche Bank? And 0:08:46.960 --> 0:08:49.160 if you go back to two thousand and seven, the 0:08:49.200 --> 0:08:54.640 market was very concentrated so versus today. There were eight 0:08:54.720 --> 0:08:58.080 underwriters who owned all the leverage finance, right, so you 0:08:58.080 --> 0:09:02.000 could see the market. You know, when I got a 0:09:02.000 --> 0:09:04.840 call to say, hey, what leverage would you provide on 0:09:04.840 --> 0:09:08.000 a deal? I'd ask the private equity firm, well, what 0:09:08.000 --> 0:09:09.800 do you think the business work, and they'd say, well, 0:09:09.800 --> 0:09:12.400 it's based on you know, leverage, and so you could 0:09:12.440 --> 0:09:14.800 see that coming to a head. So in two thousand 0:09:14.800 --> 0:09:16.920 and seven I went to Goldman Sachs. I did LBOs 0:09:16.920 --> 0:09:19.280 at Goldman Sachs and also did high you sales and 0:09:19.360 --> 0:09:20.920 joined oak Tree in twenty thirteen. 0:09:21.000 --> 0:09:23.280 It's always interesting to hear someone's background, but I like 0:09:23.320 --> 0:09:26.960 how there's dovetails with the actual development of the industry 0:09:27.000 --> 0:09:28.880 itself and this idea that at one point there were 0:09:28.960 --> 0:09:31.440 just a handful of very small or a handful of 0:09:31.480 --> 0:09:34.080 banks that ran leverage finance, and then of course we 0:09:34.160 --> 0:09:36.920 know about the proliferation of all that. So it's pretty useful. 0:09:37.000 --> 0:09:39.160 Yeah, with that background, well, why don't we dive into 0:09:39.200 --> 0:09:41.160 that a little bit more so, talk to us about 0:09:41.160 --> 0:09:45.040 how the credit market, the capital market has evolved over 0:09:45.080 --> 0:09:46.040 the course of your career. 0:09:46.400 --> 0:09:51.160 Yeah, so, look, when I first started, covenants were pretty 0:09:51.200 --> 0:09:56.240 standard amendments to deals were actually fairly standard, and as 0:09:56.280 --> 0:09:59.240 you moved forward, by two thousand and seven, the majority 0:09:59.320 --> 0:10:02.959 market was cove light. The one interesting thing about pre 0:10:03.160 --> 0:10:06.760 Dodd Frank was in the credit agreement, which is a 0:10:06.840 --> 0:10:09.360 document that sort of governs the loan if you will, 0:10:09.880 --> 0:10:12.640 you had to hedge fifty percent of your floating rate risk. 0:10:13.200 --> 0:10:16.959 And so going into the cycle, two things that made 0:10:17.040 --> 0:10:20.560 since then is one folks were hedged fifty percent, and 0:10:20.600 --> 0:10:23.959 then the other thing is lightboar if you remember back 0:10:24.000 --> 0:10:26.400 in two thousand and seven was at five percent, so 0:10:26.440 --> 0:10:29.320 the spread to deals was two hundred and fifty to 0:10:29.360 --> 0:10:33.199 get to that seven and a half percent average LBO. Well, 0:10:33.360 --> 0:10:36.319 what happened at when Dodd Frank, when the markets cried 0:10:36.320 --> 0:10:40.680 the world the global financial crisis, rates went to zero, right, 0:10:40.720 --> 0:10:45.400 So companies actually generated cash flow in that cycle. The 0:10:45.520 --> 0:10:48.120 challenge or difference we have today is we've been in 0:10:48.200 --> 0:10:52.560 no rate environment, so no one really hedged one and 0:10:52.600 --> 0:10:57.240 then two there because there was zero percent base rates, 0:10:57.280 --> 0:10:59.840 the spread on deals was much higher. Instead of two 0:11:00.120 --> 0:11:03.280 or fifty, you had for fifty five hundred, six hundred. 0:11:03.640 --> 0:11:07.080 So when twenty two when rates started to move up, 0:11:08.040 --> 0:11:10.880 you actually had a situation where a lot of companies 0:11:10.920 --> 0:11:15.040 couldn't support the cash flows because no one predicted that 0:11:15.160 --> 0:11:18.600 race will movement, and most folks were not hedged like 0:11:18.640 --> 0:11:20.200 they were in two thousand and seven. 0:11:35.880 --> 0:11:37.840 Can you talk a little bit, you know, it's a 0:11:37.880 --> 0:11:40.600 theme that obviously comes up with every private credit but 0:11:40.679 --> 0:11:44.400 also other episodes as well. Talk to us a little 0:11:44.400 --> 0:11:48.920 bit more about like the post the immediate the passage 0:11:48.920 --> 0:11:52.280 of Dodd Frank and how it's set into people's brands, 0:11:52.520 --> 0:11:55.360 that this is going to restructure the financial industry, that 0:11:55.360 --> 0:11:57.760 there are to be various activities, whether we're talking about trading, 0:11:57.800 --> 0:11:59.800 whether we're talking about lending, et cetera. Right, these are 0:11:59.840 --> 0:12:03.120 not to be part of the banks anymore. Right, talk 0:12:03.160 --> 0:12:05.120 to us a little bit about those sort of early 0:12:05.480 --> 0:12:07.079 posting you know, and they were talking to two thousand 0:12:07.080 --> 0:12:10.800 and nine, twenty ten, those initial conversations that people were 0:12:10.840 --> 0:12:13.920 having about something new, New opportunities are going to emerge 0:12:13.960 --> 0:12:14.280 from them. 0:12:14.520 --> 0:12:17.160 Right. Well, well, if you go back to two thousand 0:12:17.160 --> 0:12:21.680 and seven, when a portfolio manager and a public side 0:12:22.120 --> 0:12:26.080 was selling risk in the market, the banks were the 0:12:26.120 --> 0:12:29.320 shock absorber to that risk. Yeah, right, So you know 0:12:29.320 --> 0:12:32.079 when I was sitting at Goldman Sachs, it wasn't unusual 0:12:32.160 --> 0:12:35.160 for us to buy two hundred million dollars of an 0:12:35.160 --> 0:12:36.840 issue and it would be on your balanchie and it'd 0:12:36.840 --> 0:12:39.880 be on our balance sheet. Right post what Dodd Frank 0:12:40.080 --> 0:12:42.960 did effectively has said, okay, if you go back to 0:12:43.000 --> 0:12:45.559 the leverage. And I hope I'm not being too technical, but. 0:12:45.600 --> 0:12:46.200 No, there's great. 0:12:46.200 --> 0:12:50.200 Banks were levered roughly thirty times pre global financial crisis. 0:12:50.840 --> 0:12:54.760 Post they're fifteen times levered. Right, So once you shrunk 0:12:54.880 --> 0:12:57.640 that liquidity or capital out of the banks, they can 0:12:57.720 --> 0:13:02.160 no longer absorb the deals. And so what happens is 0:13:02.240 --> 0:13:05.800 and this is why liquidity is really an important phenomenon. 0:13:06.440 --> 0:13:09.920 So when a PM calls the desk and says, hey, 0:13:09.960 --> 0:13:13.480 I have to move five, ten, fifteen million, you're not 0:13:13.520 --> 0:13:15.680 really sure what their real size is because they know 0:13:15.760 --> 0:13:18.280 the market's not liquid. When I was in sales and trading, 0:13:18.760 --> 0:13:21.640 Pimco or somebody would call and say, hey, I've got 0:13:22.000 --> 0:13:24.000 several million to move, and I'd say, well, this is 0:13:24.000 --> 0:13:26.040 your first call or a last call, and they laugh 0:13:26.080 --> 0:13:27.520 and they say why, I said, because I give you 0:13:27.520 --> 0:13:30.400 two different prices. And so what happens in a market 0:13:30.480 --> 0:13:34.960 that's less liquid is as they're trying to sell, they 0:13:35.000 --> 0:13:38.800 call relative different banks, and every time they make a call, 0:13:38.920 --> 0:13:42.040 a bank then assumes that there's more behind that to go, 0:13:42.640 --> 0:13:45.360 and so they rerack the pricing. And so in a 0:13:45.400 --> 0:13:49.319 public security, which is different than private, a public security 0:13:49.360 --> 0:13:54.560 can actually move pricing wise without anything really trading, but 0:13:54.679 --> 0:13:58.880 on the anticipation that there's their supply out there, and 0:13:58.960 --> 0:14:02.200 so that created you know, and if you go back 0:14:02.240 --> 0:14:04.679 to two thousand and nine, private credit market was like 0:14:04.720 --> 0:14:07.880 three hundred billion dollars, right, most of that was more 0:14:07.960 --> 0:14:11.320 mes or off the run, not what we call our 0:14:11.360 --> 0:14:14.520 regular way direct lending private credit, which we were active in, 0:14:15.000 --> 0:14:17.400 but we're doing it more on the distress or opportunistic 0:14:17.440 --> 0:14:22.000 credit side, and over time, because of the liquidity and 0:14:22.080 --> 0:14:26.320 capital requirements of banks, more of that has just migrated 0:14:26.680 --> 0:14:30.280 to the private credit market, supplemented by the fact that 0:14:30.320 --> 0:14:34.200 there are these private equity professionals who are very efficient 0:14:34.440 --> 0:14:38.080 at looking at both markets and figuring out where they 0:14:38.080 --> 0:14:40.320 should play or where they should place their credit or 0:14:40.320 --> 0:14:40.840 their deals. 0:14:41.160 --> 0:14:43.600 I'm getting a lot of flashbacks to writing about corporate 0:14:43.600 --> 0:14:48.120 bond inventories that the dealers like around twenty twelve, so 0:14:48.360 --> 0:14:51.320 just on this note, is the pitch from private credit? 0:14:51.400 --> 0:14:54.680 Is it basically execution? Like you don't need to worry 0:14:54.960 --> 0:14:58.920 about us actually being able to do or complete this deal. 0:14:58.960 --> 0:15:01.640 Where is it a bank? You know they're taking into 0:15:01.880 --> 0:15:06.280 into account leverage considerations, regulatory requirements and all that, right. 0:15:06.560 --> 0:15:10.040 Right, So what a proper deal should be? Right? If 0:15:10.120 --> 0:15:14.160 you're sitting in private equity, your job is to find 0:15:14.200 --> 0:15:18.400 the most efficient, best price capital for your deal. Right. 0:15:19.040 --> 0:15:21.880 The public market, what they're very good at doing is saying, 0:15:22.040 --> 0:15:24.800 here is the indicative rate for a deal. And let's 0:15:24.840 --> 0:15:28.280 just say the indicative on a term loan is sofur 0:15:28.360 --> 0:15:32.280 plus four hundred. Right, then the private equity firm comes 0:15:32.280 --> 0:15:35.680 to us and says, where will you actually own that risk? Right? 0:15:36.000 --> 0:15:38.240 So they get a level where we're owning, which won't 0:15:38.280 --> 0:15:41.680 be the indicative because remember the banks are marketing, Hey, 0:15:41.720 --> 0:15:44.000 we can get you the best rate and best execution. 0:15:44.720 --> 0:15:47.200 We're in the storage business. The banks are in the 0:15:47.240 --> 0:15:49.640 moving business, so they're trying to move the risk, and 0:15:49.680 --> 0:15:51.680 we own the risk, and so we price the risk 0:15:51.720 --> 0:15:55.400 where we'll hold it. And if those two are not aligned, 0:15:57.240 --> 0:15:58.840 what then? And then once you add to that four 0:15:58.920 --> 0:16:01.640 hundred is you ad what we call flex. So if 0:16:01.640 --> 0:16:04.920 you take the indicative plus flex, that gives you an 0:16:05.000 --> 0:16:07.280 idea of what the banks are willing to say that 0:16:07.360 --> 0:16:09.920 this debt will price. So let's say the flex is 0:16:09.920 --> 0:16:12.840 one hundred and fifty basis points, so they know on 0:16:12.880 --> 0:16:15.560 the private equity side, they know worst case the banks 0:16:15.560 --> 0:16:18.520 will own it at SOFA five point fifty, which the 0:16:18.560 --> 0:16:21.200 banks have gotten that sort of flex number based on 0:16:21.320 --> 0:16:24.480 their discussions with us to know where we would actually 0:16:24.480 --> 0:16:25.120 own that risk. 0:16:25.480 --> 0:16:25.880 I see. 0:16:26.080 --> 0:16:28.360 Yeah, So the process is how do you create an 0:16:28.400 --> 0:16:32.160 efficient auction to have the debt in the right market 0:16:32.240 --> 0:16:34.120 at the right pricing with the right structure. 0:16:35.280 --> 0:16:38.720 Okay, so here's my other question. When you are about 0:16:38.760 --> 0:16:40.760 to do a deal, or when you find a deal, 0:16:41.280 --> 0:16:44.000 who are you actually talking to? Is it the banks 0:16:44.240 --> 0:16:46.440 or is it like the companies that are borrowing in 0:16:46.480 --> 0:16:47.160 the market. 0:16:47.400 --> 0:16:49.640 So so generally in a. 0:16:51.160 --> 0:16:55.120 Yeah, oh wow, so sorry answer questions, but I'm just 0:16:55.160 --> 0:16:57.520 sort of like I'm talking question. 0:16:57.840 --> 0:17:01.560 I'm talking to both, right, everyone was my friend. And 0:17:01.600 --> 0:17:05.000 the goal is the more conversations I have, the more 0:17:05.000 --> 0:17:08.359 informed I am of where the market is right. You know, 0:17:08.400 --> 0:17:12.320 the interesting thing about public markets is that market reprices 0:17:12.440 --> 0:17:16.160 risk faster than private credit because there's a secondary market. 0:17:16.440 --> 0:17:19.399 Private credit doesn't really have a secondary market. So what 0:17:19.520 --> 0:17:22.560 we're always trying to make sure we're understanding is relative 0:17:22.600 --> 0:17:26.040 value between public and private. And so my conversation, let's 0:17:26.040 --> 0:17:30.320 say XYZ sponsor wants to buy a business, right and 0:17:30.400 --> 0:17:32.800 let's say it's a public company. The first call, I'll 0:17:32.840 --> 0:17:35.399 get his front that sponsor and say, hey, Millwood, we 0:17:35.640 --> 0:17:38.320 like you guys to look at a financing opportunity for 0:17:38.440 --> 0:17:42.440 public company we're looking to buy. I'm like great, I say, look, 0:17:42.480 --> 0:17:44.520 I'll put my compliance on the email and we'll do 0:17:44.560 --> 0:17:47.159 a conflicts checks on that business because we don't know 0:17:47.160 --> 0:17:49.960 if we own the stock or there's existing debt outstanding. 0:17:50.040 --> 0:17:53.119 So it goes through a process where that company is 0:17:53.160 --> 0:17:56.639 actually vetted from a conflicts perspective. Once it's vetted and 0:17:56.680 --> 0:18:00.000 that clears the process, then we get initial information on it. 0:18:00.000 --> 0:18:05.560 And that information could be a selling memoranda, it could 0:18:05.640 --> 0:18:09.480 be an initial model, and so then we start the process. 0:18:09.520 --> 0:18:11.600 And what the sponsor wants to be able to do 0:18:11.840 --> 0:18:15.000 is from the preliminary information is get a sense for 0:18:15.160 --> 0:18:16.840 do you want do you like the asset or not? 0:18:17.520 --> 0:18:19.520 Do you want to finance it, where do you want 0:18:19.520 --> 0:18:22.119 to finance it at, and what's your leverage and what 0:18:22.160 --> 0:18:25.520 you're pricing. So there's some high level indication that they 0:18:25.560 --> 0:18:28.159 get from us to determine if they if we should 0:18:28.160 --> 0:18:31.240 move forward with a more robust diligence process. So that's 0:18:31.720 --> 0:18:34.800 that's how it starts. And then at that point we 0:18:34.840 --> 0:18:37.880 do a due diligence process on the asset. Right, so 0:18:37.920 --> 0:18:41.159 we may have we may call third party consultants, we 0:18:41.240 --> 0:18:44.040 may do some background on it. We have a call 0:18:44.119 --> 0:18:47.880 with a sponsor, we understand their investment thesis, like why 0:18:47.920 --> 0:18:51.159 are they making the investment, and then we talk internally 0:18:51.359 --> 0:18:53.359 and we have an investment committee and we discuss it, 0:18:53.960 --> 0:18:56.960 and then we'll iterate with the sponsor on diligence questions. 0:18:57.680 --> 0:18:59.840 And then at that point it becomes are you in 0:18:59.880 --> 0:19:03.360 a you out? And so then once the sponsor kind 0:19:03.359 --> 0:19:05.240 of has a sense for who's in and who's out, 0:19:06.040 --> 0:19:09.159 now their goal is to get the right terms, and 0:19:09.240 --> 0:19:12.840 so there's a process around sending us their thoughts on 0:19:12.880 --> 0:19:15.840 the terms right and our job is to figure out 0:19:15.920 --> 0:19:18.840 which of those we want to negotiate and which are 0:19:18.840 --> 0:19:19.399 we fine with. 0:19:19.560 --> 0:19:22.760 First of all, this fantastic stuff. I want to talk 0:19:22.880 --> 0:19:26.840 more about, you know what, or get to what it takes, 0:19:26.920 --> 0:19:28.800 what it takes to be the first call, because you 0:19:28.840 --> 0:19:31.600 said that's that's important, and I'm like curious, Like, you know, 0:19:31.720 --> 0:19:33.840 Tracy and I are competitors, how does one of us 0:19:33.840 --> 0:19:36.000 get the first call out? But but even before we get 0:19:36.000 --> 0:19:41.040 into that question, and it occurs to me that you know, 0:19:41.119 --> 0:19:43.560 because you work for oak Tree and there are multiple 0:19:43.640 --> 0:19:46.600 strategies within it, and you work ass with like different 0:19:46.800 --> 0:19:50.719 people on different committees and different funds, et cetera, is 0:19:50.760 --> 0:19:55.959 there ever tension that arises between your recognition of the 0:19:56.040 --> 0:20:00.159 need to make the get that first call versus what 0:20:00.240 --> 0:20:03.520 people on investment committees see as the fair price right. 0:20:03.560 --> 0:20:07.080 Because if the investor is always trying to get every 0:20:07.119 --> 0:20:09.040 penny fun right, then at some point I'm going to 0:20:09.080 --> 0:20:13.080 stop calling talk to us about reconciling that. And I 0:20:13.119 --> 0:20:15.000 also have to imagine, just to sort of add on 0:20:15.040 --> 0:20:17.480 a part read to this question. You know, it would 0:20:17.520 --> 0:20:19.960 be one thing if like it was a small shop 0:20:19.960 --> 0:20:23.240 and one strategy, but you're looking at this holistically correct, 0:20:23.240 --> 0:20:26.240 Where's the investor who's running a specific line there, cares 0:20:26.240 --> 0:20:28.159 about their returns and doesn't care so much about the 0:20:28.200 --> 0:20:31.239 returns of the other fund or just the general So 0:20:31.280 --> 0:20:33.400 talk to us about reconciling some of these tensions. 0:20:33.480 --> 0:20:37.000 Right. So the biggest tension is, like I said earlier, 0:20:37.640 --> 0:20:42.840 we don't necessarily agree on price, structure, leverage. Right. But 0:20:43.040 --> 0:20:46.800 what we're doing is I'm talking to that sponsor or 0:20:46.880 --> 0:20:51.160