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Speaker 1: Hello, and 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 Michelle Russell Dawe,

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Speaker 1: co head of private debt and credit Alternatives at Schroeders.

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Speaker 2: How are you, Michelle, I'm well, James, Thanks so much

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Speaker 2: for taking the time to spend some time with me.

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Speaker 1: Appreciate you joining us today. We're very excited to have

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Speaker 1: you on the show. Also delighted to have as our

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Speaker 1: co host on Credit Edge, David Haven's the Bloomberg Intelligence.

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Speaker 1: How's it going, David?

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Speaker 3: Great to be with you both and everyone else out there.

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Speaker 1: Brilliant. Okay, so just to set the scene of it here,

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Speaker 1: private debt has experienced a meteoric rise over the last

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Speaker 1: few years. It still has plenty of fans. It's not

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Speaker 1: going away, but there are plenty of risks building in

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Speaker 1: this one point seven trillion dollar market. Last week's guest,

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Speaker 1: Rob Horn from Blackstone, predicted that private debt will grow

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Speaker 1: to thirty trillion once you wrap in all the asset

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Speaker 1: based finance for infrastructure, housing, energy, transition, and a whole

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Speaker 1: lot of other stuff. They think it's going to balloon

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Speaker 1: as it hits the mainstream. We're going to dig into

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Speaker 1: that today and do check out that episode. It's still online.

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Speaker 1: You should. It's a great conversation. So on top of that,

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Speaker 1: last month's FED rate cut kicked off what could be

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Speaker 1: a significant easing cycle that potentially undermines the appeal to

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Speaker 1: investors of private credit loans, which are floating so they

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Speaker 1: pay less when rates go down. At the same time,

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Speaker 1: fundraising appears to be slowing a bit. Flows from the

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Speaker 1: Middle East have dropped. New US measures on the horizon

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Speaker 1: could make it harder for insurers to invest as well,

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Speaker 1: So there's a bunch of stuff going on there. In addition,

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Speaker 1: regulators have the industry in their sites and make growing

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Speaker 1: concerns about how any big blow up would affect banks

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Speaker 1: which lend to the private credit managers, and also fears

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Speaker 1: that retail investors might get hurt. The same time, we're

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Speaker 1: seeing private credit stress in the form of amendments, extensions,

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

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Speaker 1: a rise in defaults. Some theory big reckoning as too

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Speaker 1: much money chases too few deals. Then we have the

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Speaker 1: geopolitical risk the US election, the threat of recession hasn't

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Speaker 1: really gone away. If there is actually a major downturn

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Speaker 1: in the US economy, which a lot of people sort

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Speaker 1: of discounting at this point, it would cause distress in markets,

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Speaker 1: including private credit. And there's a lot of fear still

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Speaker 1: about what we cannot see, So we can start there. Michelle,

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Speaker 1: what do you make of all this? Are we on

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Speaker 1: a smooth path to thirty trillion?

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Speaker 2: Well, I think we might already actually be at thirty trillion,

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Speaker 2: depending on what you do or don't include in that

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Speaker 2: market called private credit, right, And I think you'll see

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Speaker 2: people like me and like the folks from Blackstone estimate

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Speaker 2: the market at somewhere between twenty trillion and forty trillion, again,

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Speaker 2: depending on what you include. That's not even from growth,

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Speaker 2: that's just the type of financing that's already sitting out

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Speaker 2: there in what people call us the base finance, consumer finance,

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Speaker 2: corporate finance, fund finance. And I'll use that term finance

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Speaker 2: probably more times than anybody really wants to hear. But James, Wow,

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Speaker 2: all of those things that you just said. I thought

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Speaker 2: I was like a negative bond cynic. But when you

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Speaker 2: tee up all of those different questions that people have

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Speaker 2: about today. I think it actually really unpacking even some

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Speaker 2: of that will tell you why the markets that we

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Speaker 2: see as what we call private debt or private credit

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Speaker 2: are going to grow so much. And even if you

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Speaker 2: start with the first thing that you talked about, which

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Speaker 2: was we're on a cycle towards rates normalization, I would

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Speaker 2: argue normalizing is the right word, not easing. But that's

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Speaker 2: just me as income goes down. There's a really interesting

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Speaker 2: actual positive about traditional private debt. And I don't always

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Speaker 2: come positive on traditional private debt, but it's this that

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Speaker 2: exactly at the time when things might be getting a

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Speaker 2: bit more stressful for guys to make higher interest payments,

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Speaker 2: we've now begun to give them relief.

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Speaker 4: So while the income.

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Speaker 2: Is going down, there's a little bit of a nice

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Speaker 2: hedge insofar as in theory, the risk is going down

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Speaker 2: because they have less interest expense. And it's one of

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Speaker 2: the conundrums related to things like direct lending and leverage

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Speaker 2: loans that you know, the risk compensation that you're receiving

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Speaker 2: is scaled alongside of the directionality of interest rates. And

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Speaker 2: it's a real interesting concept when you think about private

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Speaker 2: debt that maybe you actually have a bit of a

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Speaker 2: hedge to the cycle going on, even though you're getting

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Speaker 2: a little less income. So thinking about some of the

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Speaker 2: positives that you can take away from the sector as

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Speaker 2: well as the diversity that.

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Speaker 4: You can get within that sector.

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Speaker 2: I think is actually this is probably a better time

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Speaker 2: than any to do that.

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Speaker 3: So, Michelle, it's interesting that you bring that up because

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Speaker 3: for the past well not two years, but once rates

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Speaker 3: started to go up, and once you know, we saw

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Speaker 3: credit Swiss fall by the wayside and a couple of

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Speaker 3: the US regional banks fall by the wayside, everybody was

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Speaker 3: pointing fingers at private credit, saying, these guys are going

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Speaker 3: to blow a part of the seam. So I know

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Speaker 3: that you do more than just you know, sort of

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Speaker 3: BDC type private credit. So I think the point that

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Speaker 3: you're making about rates going down being a natural hedge

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Speaker 3: to portfolio quality, I think is actually a pretty good one.

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Speaker 3: But my quick question is, are you as surprised as

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Speaker 3: I am and others are that we didn't see more

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Speaker 3: credit problems in this last cycle.

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Speaker 2: I don't even know that we had a credit cycle.

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Speaker 3: I'm with you.

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Speaker 4: Is that provocative?

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Speaker 2: Like I think that I almost wonder and again this

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Speaker 2: is sort of a big picture wonder And the analogy

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Speaker 2: that I use is, I feel like people just keep

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Speaker 2: giving me a blue pill and trying to plug me

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Speaker 2: back into a matrix, right, and I can wake up

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Speaker 2: and the day is whatever I want it to be,

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Speaker 2: just like Keanu Reofs did so.

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Speaker 4: Many years ago.

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Speaker 2: I actually think that what we went through, if you

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Speaker 2: even call it a recession during COVID, wasn't a credit cycle.

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Speaker 2: So can we have a recession without a credit cycle?

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Speaker 2: I think so if driven by liquidity? And I so,

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Speaker 2: I really don't think we've seen that sort of what

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Speaker 2: I would call like a like a typical credit cycle

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Speaker 2: in quite some time. It feels a bit like a

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Speaker 2: never ending credit cycle. And again that I think we

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Speaker 2: can have a credit cycle. But if people get so

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Speaker 2: comfortable with risk, right, and and and and and we've

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Speaker 2: seen that even in just the last you know, a

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Speaker 2: couple of weeks since the FED, if people get so

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Speaker 2: comfortable with risk, and if you think about private credit

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Speaker 2: as receiving relief almost before anyone else, right, it really

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Speaker 2: makes you wonder if there's not some sort of a

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Speaker 2: confluence of both the funding mechanism through things like clos

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Speaker 2: that never sell that make it just a little bit

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Speaker 2: harder to have what we're used to as a traditional

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Speaker 2: credit cycle, and or whether or not there's not enough

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Speaker 2: flexibility within the corporate side of the business to manage

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Speaker 2: around that to some degree. So so I think it's

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Speaker 2: it's a it's a it's a really interesting cont guys

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Speaker 2: to think about how how these things do both in

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Speaker 2: rates up and rates down cycles. When do they get

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Speaker 2: the pressure, when do they get the relief? But then

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Speaker 2: also to kind of think about people have an awful

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Speaker 2: lot of corporate credit exposure, right, and there's a lot

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Speaker 2: of money that is in something even more simple like

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Speaker 2: money market that could move as rates go down. And

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Speaker 2: the more that that moves into things like traditional credit,

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Speaker 2: the more there will be a need for people to

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Speaker 2: move into things like private credit, and the more there

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Speaker 2: will be a need for people to diversify into things

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Speaker 2: that feel a little bit different from a fundamental or

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Speaker 2: from a risk premium perspective, like asset base finance or

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Speaker 2: on the liquid side, asset backed securities. Like this is

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Speaker 2: sort of the daisy chaining that we see out of

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Speaker 2: not having that credit cycle right. The pain trade is

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Speaker 2: for spreads to tighten and for returns to reduce and

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Speaker 2: for people to still need those returns.

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Speaker 1: Yeah, well we still asking, you know, signs of a

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Speaker 1: relatively hot economy that maybe you know puts a floor

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Speaker 1: into rates and doesn't mean that they go down as

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Speaker 1: fast as some of the doves expected, and in which

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Speaker 1: case you can still kind of till T bill and

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Speaker 1: chill it around four percent, IgG credit for five percent.

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Speaker 1: Why do you have to get fancy?

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Speaker 2: Yeah, you don't boring as the new sexy, That's what

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Speaker 2: I say. Like, and I think you don't need to

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Speaker 2: get fancy. You only need to get fancy if you're

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Speaker 2: underfunded as a pension, or if you have liabilities you

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Speaker 2: need to match, or if you need some sort of

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Speaker 2: diversifying returns. I mean, right, like traditionally, owning T bills

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Speaker 2: and chilling works as long as you don't get big

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Speaker 2: disruptions or reinvestment risk. Right. And by the way, I'm

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Speaker 2: in the camp that you articulated. I think the market

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Speaker 2: has overestimated the potential for short term US policy rates

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Speaker 2: to decline. Like like what was priced in even up

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Speaker 2: till very recently was a fairly quick decline more consistent

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Speaker 2: with a need to ease than a need to normalize. Right,

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Speaker 2: And so I'm in your camp where I mean, what

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Speaker 2: does normal mean?

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Speaker 4: It doesn't mean one or zero.

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Speaker 2: I think if you survey all of the folks under

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Speaker 2: twenty eight years of age, they will say that's what

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Speaker 2: normal rates are because that's been.

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Speaker 4: Their historical experience.

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Speaker 2: But if you survey people that are a bit older

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Speaker 2: than that, they won't say normal rates or you know, zero,

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Speaker 2: one or two, depending on how old they are, they

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Speaker 2: might say, you know, four or five or six. So

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Speaker 2: I do think that even these floating rate instruments will

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Speaker 2: still continue to offer a pretty attractive yield from a

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Speaker 2: base rate perspective. The question is is how where are

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Speaker 2: we seeing also the compression of the risk premium that

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Speaker 2: sits on top of that, Right, And the more crowded

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Speaker 2: or the more well subscribed to market is, the more

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Speaker 2: likely you've also seen a combination of the potential for

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Speaker 2: base rate decline, so that base yield of the ust

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Speaker 2: bails as well as the margin that sits on top

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Speaker 2: of that. And that's where I think private private debt

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Speaker 2: and defining private debt private credit as the base finance

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Speaker 2: gets a little bit more important because as you move

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Speaker 2: through those technical terms and the jargon. Some of these

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Speaker 2: things are much more accepted and have more history than others,

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Speaker 2: and some have a lot of history but a lot

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Speaker 2: less visibility. And I think kind of understanding where the

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Speaker 2: inefficiency is that you're monetizing becomes really important. And you know,

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Speaker 2: for the sake of this conversation, and me being an

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Speaker 2: acronym queen also hating acronyms at the same time, it's

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Speaker 2: kind of ironic. I would say that, Like when we

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Speaker 2: talk about private debt, most people think that that means

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Speaker 2: traditional corporate direct lenting. Right when we talk about private credit,

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Speaker 2: sometimes that's a bigger market that might include things like

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Speaker 2: you know, corporate credit, real estate credit in the structure

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Speaker 2: debt credit. When we talk about things like asset based finance,

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Speaker 2: that's going to be you know, loads that can include

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Speaker 2: loans to consumers, that can include buying loans and pools.

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Speaker 2: It can include financing receivables. So this is why I say,

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Speaker 2: like when we talked about initially the size of that

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Speaker 2: market when you start to consider all of those things,

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Speaker 2: and in some of the larger scale tre that can

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Speaker 2: go on from banks to the public markets as they

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Speaker 2: deal with their regulatory adjustment is a pretty big market,

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Speaker 2: which can actually mean that you have a pretty broad

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Speaker 2: toolkit to manage some of these things that we've talked about,

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Speaker 2: like whether or not we'll ever see a cycle. I

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Speaker 2: do think we will see one. I don't think it

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Speaker 2: will come soon. How you manage rates going back to normal,

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Speaker 2: whether that's a lower than what we've seen recently, or

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Speaker 2: whether it's pretty close to what we've seen recently. But

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Speaker 2: I do agree with what you said, James, which I

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Speaker 2: don't think that we're in economic trouble in the US

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Speaker 2: right now.

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Speaker 3: So, Michelle, quick scan of Schroter's website shows seven hundred

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Speaker 3: and seventy or billion pounds of assets center management. A

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Speaker 3: little quick math yeah, tells me that's probably close to

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Speaker 3: a trillion dollars US global funds. You've got tens of

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Speaker 3: billions of dollars of you know, sort of broadly defined

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Speaker 3: private credit you're managing. What are your clients coming to you,

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Speaker 3: you know, asking what are the looking for? You know,

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Speaker 3: you also have a large public business at Schroeder. But

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Speaker 3: what are you seeing on the what's the buzz that

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Speaker 3: you're hearing on the private product?

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Speaker 2: Yeah? So so for us all of the buzz and

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Speaker 2: and and probably I'll explain what I do, which is

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Speaker 2: a little bit more niche than traditional private credit. So

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Speaker 2: so i'm I'm I'm likely to get a bit of

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Speaker 2: a tilt when people are coming to me to start with.

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Speaker 2: But people, the buzz is diversification, right, I think the

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Speaker 2: buzz is like, I just spent you know, the last

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Speaker 2: year reloading my fixed income liquidity. I've done a lot

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Speaker 2: of corporate credit, I've got a lot of equity, I've

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Speaker 2: got private equity I have I'm you know, I've been

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Speaker 2: building a direct lending portfolio for for quite some time.

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Speaker 4: What next?

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Speaker 2: What do I do now to diversify the way that

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Speaker 2: I'm earning returns? Like that's like, we get that. And

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Speaker 2: maybe by way of context, within that shorter business that

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Speaker 2: you described, there's a business that is a bit over

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Speaker 2: one hundred billion US dollars that is called Schroder Capital,

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Speaker 2: and that is the private asset arm of Schroeder and

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Speaker 2: that has four pillars, right. It has a real estate equity,

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Speaker 2: it has infrastructure equity, it has private equity, and then

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Speaker 2: it has this other acronym called PDCI, which is private

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Speaker 2: debt and Credit Alternatives and that's where I sit, and

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Speaker 2: that is about a thirty four billion dollar business today.

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Speaker 2: So for context, that's kind of as I described that business.

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Speaker 2: We are a bit unique within private debt insofar as

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Speaker 2: we're not emphasized on traditional direct lending. We're a fairly

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Speaker 2: flexible business. We work public private as well, so we

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Speaker 2: can build some hybrid products with liquidity, and we basically

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Speaker 2: cover the types of debts that would sit under some

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Speaker 2: of the syndicated markets that's that public private continuum, and

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Speaker 2: have a special emphasis on things like asset based finance

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Speaker 2: as a result of that. Does it mean that we

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Speaker 2: don't do leverage loans, absolutely not. Does it mean we

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Speaker 2: don't do direct lending, absolutely not. But we're a bit

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Speaker 2: differentiated in how we approach that so by virtue of that,

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Speaker 2: so when people want something a little different, that's when

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Speaker 2: we're seeing the inquiry I need diversification.

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Speaker 4: Can you help me?

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Speaker 2: I need to think I'm in a difficult situation because

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Speaker 2: my private debt and private equity is not returning capital

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Speaker 2: to me when I expected it. Do you have anything

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Speaker 2: shorter in tenor And again, if you think about some

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Speaker 2: of the things that fall under these asset based finance markets,

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Speaker 2: variety of tenors of debt. We often find that we're

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Speaker 2: sort of a bit like the Vanilla Ice of the

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Speaker 2: private debt market. And if that's too older, hopefully for

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Speaker 2: this the folks at least on this call right now,

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Speaker 2: hopefully you're a bit aligned with my genre. But Vanilla

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Speaker 2: Ice was the one hit wonder that says, if you've

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Speaker 2: got a problem, yo, I'll solve it. And so that's

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Speaker 2: kind of what we find that we get asked a

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Speaker 2: little bit more for. But it's that diversification ask that

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Speaker 2: we see as the buzz, and that is what leads

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Speaker 2: you to on the public side things like asset backed securities,

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Speaker 2: structure product whatever, you securitize, credit, whatever you want to

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Speaker 2: call that, and on the private side in things like

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Speaker 2: acid based finance.

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Speaker 3: So I think I read somewhere that are you also

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Speaker 3: involved in capons?

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Speaker 2: Actually that's a good component of of what fits under PDCA.

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Speaker 3: Yeah, So so it's a diverse So you've got a

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Speaker 3: diversity of insurance link securities bonds into the mortgage banking

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Speaker 3: or i'm sorry, the mortgage insurance elements.

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Speaker 2: We call it risk transfer. And this is again like

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Speaker 2: there's a lot of this technical jargon in like these

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Speaker 2: markets that fit under what we would call private debt

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Speaker 2: or asset based finance. And if I was to try

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Speaker 2: to be simple for once, it's you know, if you

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Speaker 2: look at things that have a debt contract back, like

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Speaker 2: like where the repayment on the debt contract is kind

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Speaker 2: of the cashloads. Think about like a loan or project finance,

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Speaker 2: right that that loan itself is repaid by the borrower

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Speaker 2: as they operate a property or a facility, and it's

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Speaker 2: that cashload that pays off the debt. Like this should

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Speaker 2: sound like it's you know, your auto loan, James, if

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Speaker 2: you have one, right as you pay that back that

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Speaker 2: could be in a pool that I own, and I

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Speaker 2: would be receiving that cashlow directly. Yeah, that should sound

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Speaker 2: of a lot like some of the securitization markets, of

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Speaker 2: which IOLs is a type of securitization as well. Catlond

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Speaker 2: often is technically a type of securitization. So it's this

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Speaker 2: repayment by cashlow of debt that I think is really

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Speaker 2: a good way to talk about what is asset based finance.

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Speaker 2: And again it can be debt on buildings, so like

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Speaker 2: a mortgage, either residential or commercial. It can be consumer

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Speaker 2: debt like personal loans, student loans, auto loans. It can

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Speaker 2: be debt where you have a corporate borrower rather than

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Speaker 2: a consumer borrower, where you have the security of an

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Speaker 2: equipment that's critical to their business. It could be something

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Speaker 2: like a leverage loan that might otherwise sit within a CLO.

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Speaker 2: And by the way that that growth in like the

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Speaker 2: direct lending market from twenty twenty three, some of that

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Speaker 2: was facilitated by direct lending nancing things that previously had

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Speaker 2: been bank syndicated. Now that trend has reversed a little

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Speaker 2: bit as well. But this is one of the reasons

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Speaker 2: why I say, like there's not too far of a

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Speaker 2: step from ABS to ABS. It just depends on whether

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Speaker 2: or not it's syndicated. Right, So as you think about that,

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Speaker 2: the story there is definitely one of diversification. And you know,

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Speaker 2: like I said, IOLs is a really interesting and very

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Speaker 2: differentiated fundamental risk. And so when we think about our platform,

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Speaker 2: we think about how do we diversify risk premium And

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Speaker 2: if I'm if I'm honest, and you look at like

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Speaker 2: the real estate leg of it, the infrastructure leg of

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Speaker 2: what we do, the consumer leg of what we do,

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Speaker 2: and the corporate leg of what we do. The real

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Speaker 2: other component is how are you going to if you

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Speaker 2: like those you shouldn't like them all at once, but

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Speaker 2: if you like them, you go after the asset that

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Speaker 2: you like. What's the form that you consume it in?

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Speaker 2: I think is actually the interesting part. Like you have

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Speaker 2: to understand the cashlow, but the format that you consume

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Speaker 2: that cashlow and could be very different. You could lend

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Speaker 2: directly on it, you could buy a pool of it,

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Speaker 2: you could provide financing on it to someone else, or

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Speaker 2: and this is what I mentioned with IOLs, you could

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Speaker 2: be doing a risk transfer or a transfer of risk

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Speaker 2: and we see people do that. We do it for banks,

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Speaker 2: and you do it for insures or reinsures. Those are

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Speaker 2: all different forms to access a different type of cashlow.

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Speaker 1: And the investibas general that's looking for diversification, all insurance.

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Speaker 1: You're seeing much.

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Speaker 4: So interesting all the place? Yeah, it is.

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Speaker 2: It is like I think this is actually the one

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Speaker 2: of the more uniform stories. Although we see people on

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Speaker 2: the journey at different points, right, So some of those

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Speaker 2: client types that you mentioned are at the starting point

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Speaker 2: of a diversification journey and some are very sophisticated and

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Speaker 2: have you know, more nuanced appetites because they've already been

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Speaker 2: they're already halfway down the road, right, And so this

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Speaker 2: is an idea of you know, do you need a

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Speaker 2: broad based exposure, do you already have some exposure.

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Speaker 4: And or.

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Speaker 2: Like, do you need something a little bit more specific

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Speaker 2: to complement what you already have. And so by by

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Speaker 2: those client types chains that you mentioned, insurance obviously have

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Speaker 2: been involved in the private markets for some time. I mean,

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Speaker 2: you know, private lending to companies is they're no stranger

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Speaker 2: to that, right, and they're no stranger to the securitization

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Speaker 2: markets in the US that's actually incredibly capital.

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Speaker 4: Efficient for them.

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Speaker 2: They're no stranger to lending on real estate debt, they're

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Speaker 2: no stranger to infrastructure debt, right. So insurers are obviously

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Speaker 2: what people think of, and insurance money is also can

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Speaker 2: benefit from illiquidity premium and is generally longer in nature

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Speaker 2: and in terms of its liability, so that that's obviously

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Speaker 2: what people go to when they think of this. However,

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Speaker 2: pensions for a long time have been looking at devoting

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Speaker 2: some portion of their allocation to earning liquidity premium. So

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Speaker 2: that's my code for for private markets. And many of

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Speaker 2: them have experience in direct lending. That's usually the gateway drug, right,

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Speaker 2: and then they are looking for or are on some

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Speaker 2: diversification journey there as you said, sovereign wealth funds. They've

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Speaker 2: been in that journey for some time.

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Speaker 4: Where we're seeing I.

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Speaker 2: Think probably the bigger uh and and this is not

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Speaker 2: by scale, but the bigger new push is more in

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Speaker 2: the interest of wealth high network family offices. Even even

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Speaker 2: things like like Schroeders calls this like democratization of private

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Speaker 2: assets or private credit or private debt, and it's it's

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Speaker 2: is there a way to deliver this into people that

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Speaker 2: don't have this allocation, that can understand it and have

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Speaker 2: some desire to participate in it, right, And and that's

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Speaker 2: what you see a little bit more from a buzzword

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Speaker 2: perspective in the press. Is this delivery mechanism And you

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Speaker 2: mentioned earlier on I think David, it was you like

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Speaker 2: the BDCs, like that's been a way to deliver exposure

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Speaker 2: to private debt. We don't have a BDC at Schroders,

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Speaker 2: but there are many that are well known to deliver

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Speaker 2: a private debt into the hands of people that maybe

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Speaker 2: aren't at like institutional investors where it's been previously delivered right,

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Speaker 2: much like a like a mortgage rate, you know, that

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Speaker 2: was a way to democratize the income available from real

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Speaker 2: estate to a broader market. So we're starting to see

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Speaker 2: that trend develop in the form of different funds, different

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Speaker 2: funds structures, things like interval funds in the US, l

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Speaker 2: tafts overseas as a way to allow an audience to

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Speaker 2: participate within that. So I think insurers are obviously huge

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Speaker 2: players in these private markets, and in ABF, I think pensions,

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Speaker 2: I think sovereigns as well. I think for sure, wealth

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Speaker 2: and family office is a channel that I think a

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Speaker 2: lot of people are are are are courting and promoting

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Speaker 2: to in a way that again diversifies the client base

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Speaker 2: for some of these strategies.

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Speaker 3: Yeah, and wealth and family office I think makes sense

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Speaker 3: because that's a UH you know, that's a fairly quite

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Speaker 3: sophisticated market. In many instances. We're hearing more and more

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Speaker 3: though about maybe ETFs delivering private debt to UH to

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Speaker 3: public markets, and there is a there is room for

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Speaker 3: error there because there's obviously an asset liability mismatch where

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Speaker 3: you've got you know what, what are often illiquid assets

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Speaker 3: and potentially matched up against demand liabilities. So just sort

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Speaker 3: of curious about about your view of of you know,

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Speaker 3: when enough is enough in terms of the democratization of

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Speaker 3: the private markets.

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Speaker 2: Yeah. So so this is where I think there's a

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Speaker 2: there's probably a wide range of opinions here, but I

436
00:23:01,320 --> 00:23:04,240
Speaker 2: think this is all about the rapper. You have to

437
00:23:04,280 --> 00:23:07,159
Speaker 2: be in the business of delivering on the promises that

438
00:23:07,240 --> 00:23:10,440
Speaker 2: you make, and if you have in liquid assets only

439
00:23:10,880 --> 00:23:16,280
Speaker 2: in a liquid wrapper that is daily liquid, you you

440
00:23:16,400 --> 00:23:19,480
Speaker 2: better have really short ton of assets or you have

441
00:23:19,560 --> 00:23:22,240
Speaker 2: to have I think nobody is going to put really

442
00:23:22,280 --> 00:23:25,880
Speaker 2: long liquid liquid assets in a daily liquid structure without

443
00:23:25,960 --> 00:23:28,520
Speaker 2: having some sort of a plan for delivering that liquidity.

444
00:23:28,840 --> 00:23:31,240
Speaker 2: What makes you know what I don't like to hear,

445
00:23:31,800 --> 00:23:34,680
Speaker 2: and I wouldn't like to hear as an investor, would be, Hey,

446
00:23:34,840 --> 00:23:37,760
Speaker 2: you know, my redemptions and my contributions are going to

447
00:23:37,840 --> 00:23:41,840
Speaker 2: offset each other. Like that's that's not a plan. Like

448
00:23:42,160 --> 00:23:44,679
Speaker 2: I think this is this is something that people need

449
00:23:44,720 --> 00:23:46,919
Speaker 2: to take a really critical look at. Is like you

450
00:23:47,040 --> 00:23:49,920
Speaker 2: have to have the right rapper or the right structure

451
00:23:50,560 --> 00:23:54,800
Speaker 2: around a product that sort of has some better balance

452
00:23:54,880 --> 00:23:59,040
Speaker 2: as you said between that potential for liquidity mismatch, right,

453
00:23:59,560 --> 00:24:03,480
Speaker 2: So and ETS is sort of an you know, as

454
00:24:03,359 --> 00:24:06,359
Speaker 2: a daily liquid, a bit of an extreme against something

455
00:24:06,359 --> 00:24:08,880
Speaker 2: that could be incredibly ill liquid. But I'm a little

456
00:24:08,960 --> 00:24:11,840
Speaker 2: less familiar maybe with how people are delivering directly through

457
00:24:11,840 --> 00:24:14,159
Speaker 2: that channel and what they're actually putting in there and

458
00:24:14,320 --> 00:24:16,800
Speaker 2: what they have in there that's cash or liquid to

459
00:24:17,160 --> 00:24:20,639
Speaker 2: manage the needs for meeting redemptions, you know, But I

460
00:24:20,720 --> 00:24:23,760
Speaker 2: think that's important, and that is very likely in my view,

461
00:24:24,200 --> 00:24:26,840
Speaker 2: where you will get a lot more regulatory scrutiny is

462
00:24:26,880 --> 00:24:30,240
Speaker 2: where you are interacting with markets that require that liquidity,

463
00:24:30,280 --> 00:24:32,800
Speaker 2: where people have the expectation of that, and you know,

464
00:24:33,560 --> 00:24:35,520
Speaker 2: I think that's that's probably one of the areas that

465
00:24:35,520 --> 00:24:37,280
Speaker 2: we'll get a really hard look or should get a

466
00:24:37,280 --> 00:24:38,080
Speaker 2: really hard look. Right.

467
00:24:39,000 --> 00:24:41,439
Speaker 1: And when you're talking to the new potential, you know,

468
00:24:41,520 --> 00:24:44,280
Speaker 1: big guys like high net worth, family office, that sort

469
00:24:44,320 --> 00:24:47,320
Speaker 1: of thing. You know, when you have that discussion how

470
00:24:47,400 --> 00:24:50,040
Speaker 1: much of it is greed, how much of it is

471
00:24:50,080 --> 00:24:54,160
Speaker 1: fomo and how much of it is fear gosh, by

472
00:24:54,160 --> 00:24:57,520
Speaker 1: which I mean you know, you're presumably offering better returns

473
00:24:57,760 --> 00:25:01,320
Speaker 1: in some senses, but you know, and everyone's doing it,

474
00:25:01,359 --> 00:25:03,679
Speaker 1: So there's some fomo. But you know, to what extent

475
00:25:04,200 --> 00:25:06,520
Speaker 1: am I putting my money at risk? I don't understand thisself.

476
00:25:06,520 --> 00:25:08,840
Speaker 1: It's complicated. I can't trade out of all those things.

477
00:25:09,280 --> 00:25:11,919
Speaker 1: How much you know, to people worry about this market.

478
00:25:12,560 --> 00:25:16,720
Speaker 2: It's really interesting because you can really experience a whole

479
00:25:16,840 --> 00:25:21,520
Speaker 2: range of what i'll call sophistication and investors. And you know,

480
00:25:21,600 --> 00:25:24,119
Speaker 2: this is one of the things that I wouldn't underestimate.

481
00:25:24,240 --> 00:25:27,399
Speaker 2: I mean, some of the family offices or high net

482
00:25:27,440 --> 00:25:31,560
Speaker 2: worth investors that have engaged us. Actually I've gone out

483
00:25:31,600 --> 00:25:36,200
Speaker 2: to some of the originators and issuers of basic consumer

484
00:25:36,280 --> 00:25:39,240
Speaker 2: debt and have their own conversations. They've done their own

485
00:25:39,320 --> 00:25:43,840
Speaker 2: due diligence and and so I mean, you can't kind

486
00:25:43,840 --> 00:25:46,480
Speaker 2: of undersell the fact that there's a wide range of people,

487
00:25:46,520 --> 00:25:49,399
Speaker 2: some of whom are incredibly sophisticated there, right, And so

488
00:25:49,520 --> 00:25:52,479
Speaker 2: I just don't want to portray people as being unable

489
00:25:52,480 --> 00:25:55,119
Speaker 2: to make these decisions. But if we talk about you know,

490
00:25:55,920 --> 00:25:58,480
Speaker 2: pomo or fear or greed, you know, at the end

491
00:25:58,520 --> 00:26:00,159
Speaker 2: of the day, I think one of the things that

492
00:26:00,200 --> 00:26:02,720
Speaker 2: we hear that would strike a better balance here is

493
00:26:02,720 --> 00:26:04,359
Speaker 2: that you know, a lot of people say, like what

494
00:26:04,440 --> 00:26:04,919
Speaker 2: am I like?

495
00:26:04,960 --> 00:26:06,240
Speaker 4: What risks am I being paid for?

496
00:26:06,320 --> 00:26:09,199
Speaker 2: I want to understand that, like and also to one

497
00:26:09,240 --> 00:26:11,439
Speaker 2: of the points that you guys made earlier is you

498
00:26:11,480 --> 00:26:13,520
Speaker 2: know this is like T Bill and Chill, that's gonna

499
00:26:13,520 --> 00:26:15,320
Speaker 2: be like my new favorite quote. Why have I never

500
00:26:15,359 --> 00:26:18,000
Speaker 2: heard that before? By the way, T Bill and Chill,

501
00:26:18,520 --> 00:26:21,200
Speaker 2: I'm going to tell that to my father tonight. So

502
00:26:22,840 --> 00:26:25,000
Speaker 2: we've actually heard quite often over the course of the

503
00:26:25,080 --> 00:26:27,320
Speaker 2: last two years. If I'm getting five and a half

504
00:26:27,320 --> 00:26:29,359
Speaker 2: in tea bills, like how much extra am I getting

505
00:26:29,400 --> 00:26:30,360
Speaker 2: paid to take this risk?

506
00:26:30,400 --> 00:26:31,560
Speaker 4: And why would I do that? Right?

507
00:26:31,640 --> 00:26:35,280
Speaker 2: So, really, I do think that people want to feel

508
00:26:35,320 --> 00:26:39,040
Speaker 2: appropriately paid for risks. So I see there's less about greed.

509
00:26:39,560 --> 00:26:43,840
Speaker 2: I see it a little bit more about return diversification,

510
00:26:45,680 --> 00:26:48,919
Speaker 2: and like, like, I'm not so sure in this channel

511
00:26:48,920 --> 00:26:51,720
Speaker 2: that we're talking about necessarily like family office a high

512
00:26:51,720 --> 00:26:54,479
Speaker 2: net worth, that it's necessarily fear because in some cases

513
00:26:54,480 --> 00:26:57,600
Speaker 2: family office or high net worth can be fairly quick adapters.

514
00:26:57,880 --> 00:26:59,720
Speaker 2: I think when you talk about what we were talking

515
00:26:59,720 --> 00:27:02,800
Speaker 2: about before, like the ets market, like, I do think

516
00:27:02,880 --> 00:27:06,840
Speaker 2: like that more that that market may want to take

517
00:27:06,880 --> 00:27:08,679
Speaker 2: its lead from. Oh I wish I could do what

518
00:27:08,760 --> 00:27:11,159
Speaker 2: institutions have done, and I want to follow that. So

519
00:27:11,440 --> 00:27:13,919
Speaker 2: I'm kind of a tail end and that would be

520
00:27:13,960 --> 00:27:16,000
Speaker 2: more aligned to fear. But so I think you give

521
00:27:16,080 --> 00:27:18,600
Speaker 2: up things fall. I'm not giving a super interesting answer

522
00:27:18,680 --> 00:27:20,840
Speaker 2: there because I think depending on where people are in

523
00:27:20,880 --> 00:27:23,640
Speaker 2: their journey, like, the answer could be any of those things, right,

524
00:27:23,680 --> 00:27:25,600
Speaker 2: it could be returned, it could be fear, it could

525
00:27:25,600 --> 00:27:29,600
Speaker 2: be fomo, it could be it could be greed. But

526
00:27:29,640 --> 00:27:33,440
Speaker 2: I don't see a disproportionate single answer. It depends highly

527
00:27:33,480 --> 00:27:36,399
Speaker 2: on how much people have really been looking into this

528
00:27:36,440 --> 00:27:40,600
Speaker 2: and for how long. My concern is more that you

529
00:27:40,720 --> 00:27:44,600
Speaker 2: get pressure right as returns and risk premiums can press.

530
00:27:45,320 --> 00:27:49,560
Speaker 2: And that is the true fomo and and and I alluded.

531
00:27:49,760 --> 00:27:51,680
Speaker 4: I think to earlier to the pain trade.

532
00:27:52,000 --> 00:27:55,359
Speaker 2: Like everybody, many people have been sitting waiting for, you know,

533
00:27:55,400 --> 00:27:59,160
Speaker 2: a credit cycle to happen, waiting for an opportunity, and

534
00:27:59,320 --> 00:28:06,440
Speaker 2: we've just had disproportionate pressure in money coming after risk assets.

535
00:28:06,440 --> 00:28:08,080
Speaker 4: That's one of the principal reasons why.

536
00:28:07,880 --> 00:28:10,160
Speaker 2: People look to private debt because the public markets are

537
00:28:10,200 --> 00:28:14,720
Speaker 2: so tight and valuations are so high, Right, Tina, there

538
00:28:14,760 --> 00:28:17,280
Speaker 2: is no alternative, Well now there is now an alternative.

539
00:28:17,920 --> 00:28:19,760
Speaker 4: So you will see though that.

540
00:28:19,680 --> 00:28:22,840
Speaker 2: Compression also has begun in some of the more well

541
00:28:22,880 --> 00:28:26,760
Speaker 2: traveled private markets. So like you do see that characteristic

542
00:28:26,840 --> 00:28:29,240
Speaker 2: of people, you know, kind of feeling like they have

543
00:28:29,359 --> 00:28:32,280
Speaker 2: missed out a little bit. I do think here, and

544
00:28:32,520 --> 00:28:36,080
Speaker 2: the longer the cycle sort of persists, I think, the

545
00:28:36,080 --> 00:28:39,040
Speaker 2: more you will have people worried that they can't wait

546
00:28:39,080 --> 00:28:44,040
Speaker 2: forever to wait for an entry point. Someone very smart

547
00:28:44,120 --> 00:28:46,400
Speaker 2: when I entered the business told me being wrong on

548
00:28:46,480 --> 00:28:49,480
Speaker 2: timing Michelle is also called being wrong and I think

549
00:28:49,520 --> 00:28:51,720
Speaker 2: that's kind of a book that gets a lot of people.

550
00:28:52,400 --> 00:28:54,360
Speaker 3: Geez. I don't know, Michelle. I always said as one

551
00:28:54,400 --> 00:28:56,440
Speaker 3: as a sell side analyst, that was never wrong. I

552
00:28:56,520 --> 00:28:59,160
Speaker 3: was just sometimes early. Okay.

553
00:29:00,040 --> 00:29:01,960
Speaker 2: I like your twist on it a little better than mine.

554
00:29:01,960 --> 00:29:04,360
Speaker 2: I'm maybe I'm a little bit more self critical. That's

555
00:29:04,360 --> 00:29:06,240
Speaker 2: the difference between byside and celside.

556
00:29:06,240 --> 00:29:09,800
Speaker 3: Perhaps so well also not the biggest risk is not

557
00:29:09,840 --> 00:29:11,720
Speaker 3: buying enough. That was another one of them. That's big

558
00:29:11,800 --> 00:29:16,560
Speaker 3: fair So, uh, you have a fairly wide purview in

559
00:29:16,640 --> 00:29:20,920
Speaker 3: terms of, you know, sort of the private asset types

560
00:29:20,920 --> 00:29:23,880
Speaker 3: that you're taking a look at, and I'm sure that

561
00:29:23,960 --> 00:29:26,680
Speaker 3: they sort of you know, some rise some fall, you know,

562
00:29:26,880 --> 00:29:29,920
Speaker 3: depending on market conditions, you know, not in terms of prices,

563
00:29:29,960 --> 00:29:32,000
Speaker 3: but in terms of overall interest what what do you

564
00:29:32,000 --> 00:29:35,000
Speaker 3: think the most interesting area is right now?

565
00:29:35,360 --> 00:29:39,360
Speaker 2: Yeah, to your point, we we pivot. I think it's

566
00:29:39,440 --> 00:29:42,440
Speaker 2: it's it's something that's very important to our team and

567
00:29:42,480 --> 00:29:45,640
Speaker 2: our ethos as as a as a woman that went

568
00:29:45,680 --> 00:29:48,880
Speaker 2: through the original financial crisis owning a lot of the

569
00:29:48,920 --> 00:29:54,840
Speaker 2: acronyms within the mortgage backed securities market, I've been really

570
00:29:55,080 --> 00:30:00,040
Speaker 2: really schooled in risk management around not not forgetting the

571
00:30:00,080 --> 00:30:02,840
Speaker 2: forest for the trees, right. And one of the things

572
00:30:02,840 --> 00:30:06,080
Speaker 2: that we've done which is important, and sometimes this background

573
00:30:06,120 --> 00:30:09,040
Speaker 2: is helpful to people, is to really ensure that like

574
00:30:09,400 --> 00:30:13,960
Speaker 2: our specialists flex across areas and and and are actively

575
00:30:14,000 --> 00:30:16,600
Speaker 2: engaged so that they have something that they can point

576
00:30:16,640 --> 00:30:18,800
Speaker 2: to across the dusk from them that says, you know what,

577
00:30:18,880 --> 00:30:21,360
Speaker 2: I like this stuff better than mine. That's usually the

578
00:30:21,400 --> 00:30:24,080
Speaker 2: only way in this market you can get something somebody

579
00:30:24,400 --> 00:30:27,520
Speaker 2: outside of their own specialty is give them the flexibility

580
00:30:27,560 --> 00:30:28,960
Speaker 2: to make another positive choice.

581
00:30:29,040 --> 00:30:29,240
Speaker 4: Right.

582
00:30:29,600 --> 00:30:31,680
Speaker 2: It's a bit of an oddity, but but I do

583
00:30:31,720 --> 00:30:34,760
Speaker 2: think it's important in order to be truly objective. Otherwise,

584
00:30:34,800 --> 00:30:36,600
Speaker 2: if you have someone that only just lives in one

585
00:30:36,640 --> 00:30:38,880
Speaker 2: sector all the time, they're always going to tell you

586
00:30:38,960 --> 00:30:41,800
Speaker 2: that's good. So we have This is why our purview

587
00:30:41,800 --> 00:30:45,440
Speaker 2: maybe seems a little bit wider to you all. It's

588
00:30:45,480 --> 00:30:48,080
Speaker 2: to give us the flexibility to ensure that we're pivoting

589
00:30:48,120 --> 00:30:50,720
Speaker 2: to where the market affords an opportunity. Because nothing is

590
00:30:50,760 --> 00:30:53,720
Speaker 2: always good. There's no one thing that anybody can ever

591
00:30:53,760 --> 00:30:56,760
Speaker 2: show me that says this is always good. We can

592
00:30:56,840 --> 00:30:59,960
Speaker 2: argue the toss on timing and holding over holding per

593
00:31:00,200 --> 00:31:02,760
Speaker 2: and things like that, but there is nothing that is

594
00:31:03,240 --> 00:31:06,040
Speaker 2: never ever going to have a cycle. And I think

595
00:31:06,040 --> 00:31:10,080
Speaker 2: that that's important. So for us, we talk about flexible

596
00:31:10,080 --> 00:31:12,640
Speaker 2: best ideas, right, and again it might make us seem

597
00:31:12,680 --> 00:31:16,960
Speaker 2: a little bit more complicated, but it's part of our ethos.

598
00:31:16,960 --> 00:31:18,760
Speaker 2: We want to pivot to where the market's a boarding

599
00:31:18,760 --> 00:31:20,920
Speaker 2: an opportunity. So where do we see that today and

600
00:31:20,920 --> 00:31:24,120
Speaker 2: where don't we see that today? Is probably both interesting

601
00:31:24,200 --> 00:31:27,880
Speaker 2: questions to ask us. That we are fundamentals first, so

602
00:31:28,000 --> 00:31:30,960
Speaker 2: we're not going to feel like a distressed investor unless

603
00:31:30,960 --> 00:31:34,360
Speaker 2: the distress is really just liquidity driven, right, So we're

604
00:31:34,360 --> 00:31:36,440
Speaker 2: definitely not going to go out into the central business

605
00:31:36,440 --> 00:31:38,480
Speaker 2: districts and try to learn to own office right now

606
00:31:38,520 --> 00:31:40,640
Speaker 2: when you can stack office supply like to the moon

607
00:31:40,680 --> 00:31:44,040
Speaker 2: and halfway back. What we do like is things with

608
00:31:44,120 --> 00:31:48,520
Speaker 2: strong fundamentals and in particular where there's any inefficiency around

609
00:31:48,640 --> 00:31:52,000
Speaker 2: a regulated entity in the capital provision. So one of

610
00:31:52,040 --> 00:31:55,200
Speaker 2: our favorite areas that one of the areas where we

611
00:31:55,520 --> 00:31:58,520
Speaker 2: have been investing in our investment will go through cycles

612
00:31:58,560 --> 00:32:00,280
Speaker 2: like we'll be investing in like one or two some

613
00:32:00,360 --> 00:32:02,680
Speaker 2: that as things change, will be investing in one or

614
00:32:02,720 --> 00:32:07,080
Speaker 2: two other things. Housing in particular US but also global

615
00:32:07,120 --> 00:32:10,360
Speaker 2: housing has been an area that we like quite some.

616
00:32:10,880 --> 00:32:13,400
Speaker 2: Uh so, where we can own mortgage loans, where we

617
00:32:13,400 --> 00:32:17,680
Speaker 2: can own them in form with financial term match leverage,

618
00:32:18,120 --> 00:32:20,720
Speaker 2: where we can own exposure to housing by lending on

619
00:32:20,800 --> 00:32:23,800
Speaker 2: multi family, where we can sit in the footprint of

620
00:32:23,840 --> 00:32:26,960
Speaker 2: the regional banks we like that we like on the

621
00:32:27,120 --> 00:32:30,120
Speaker 2: multi family side new loans. We don't like other people's

622
00:32:31,000 --> 00:32:34,280
Speaker 2: older loans for a lot of obvious reasons probably, but

623
00:32:34,400 --> 00:32:38,480
Speaker 2: residential housing in particular has been one of the areas

624
00:32:38,520 --> 00:32:41,960
Speaker 2: that that we really liked. We also do some some

625
00:32:41,960 --> 00:32:48,560
Speaker 2: some quite unusual arrangements around receivables advancing that that actually

626
00:32:48,640 --> 00:32:52,719
Speaker 2: are are some of our favorites where insurance entities are

627
00:32:52,760 --> 00:32:56,160
Speaker 2: a regulated party, and there's some timing differences for us

628
00:32:56,200 --> 00:33:01,840
Speaker 2: as well. Outside of housing, we like finance and in

629
00:33:01,880 --> 00:33:06,600
Speaker 2: some cases emergency responders are one of the target audiences

630
00:33:06,600 --> 00:33:09,320
Speaker 2: for US. As we sit here with Hurricane Milton. There's

631
00:33:09,360 --> 00:33:11,560
Speaker 2: a number of parties that will you know, need to

632
00:33:11,600 --> 00:33:14,560
Speaker 2: be called in that will get government contracts to help

633
00:33:14,600 --> 00:33:16,760
Speaker 2: do that, but they needed to stage equipment prior to

634
00:33:16,800 --> 00:33:19,520
Speaker 2: the storm. This is, as you might imagine, probably a

635
00:33:19,560 --> 00:33:22,400
Speaker 2: growing business, and there's many types of disasters. But so

636
00:33:22,440 --> 00:33:24,720
Speaker 2: we think on kind of really unusual scales about what

637
00:33:24,800 --> 00:33:28,640
Speaker 2: is fundamentally strong and how can we get access to that,

638
00:33:28,800 --> 00:33:30,800
Speaker 2: and where can we get access that is a little

639
00:33:30,800 --> 00:33:33,400
Speaker 2: bit less efficient. It's going to sound pretty different probably

640
00:33:34,040 --> 00:33:35,959
Speaker 2: than what most people would have said to an answer

641
00:33:35,960 --> 00:33:39,000
Speaker 2: on that. But you know, by contrast, we're also going

642
00:33:39,040 --> 00:33:42,080
Speaker 2: to look at a fundamentally strong US economy and say,

643
00:33:42,120 --> 00:33:44,480
Speaker 2: you know, all right, what don't we want to do

644
00:33:44,600 --> 00:33:47,880
Speaker 2: right now? Where is their weakness if any? And for us,

645
00:33:47,960 --> 00:33:50,520
Speaker 2: the answer there is, while we think the consumer overall

646
00:33:50,560 --> 00:33:55,200
Speaker 2: is strong, the insecure consumer, which i'll define as lower income,

647
00:33:55,360 --> 00:34:01,120
Speaker 2: higher leveraged, weaker pay yours younger that would be a

648
00:34:01,160 --> 00:34:04,040
Speaker 2: financially insecure consumer. That's where we think the stress will

649
00:34:04,040 --> 00:34:08,120
Speaker 2: be felt as certainly if labor demanded has declined. And

650
00:34:08,160 --> 00:34:12,280
Speaker 2: that's where I think, if at all in the consumer complex,

651
00:34:12,320 --> 00:34:13,560
Speaker 2: that you see some of that risk.

652
00:34:13,680 --> 00:34:13,879
Speaker 4: Now.

653
00:34:14,000 --> 00:34:20,920
Speaker 2: Interestingly enough, someone else smart once told me that that

654
00:34:21,200 --> 00:34:25,279
Speaker 2: from from like the capital is always available to those

655
00:34:25,280 --> 00:34:27,959
Speaker 2: that don't need it, right and like your super prime

656
00:34:28,000 --> 00:34:31,160
Speaker 2: borrower is exactly a good example of that, right, Like

657
00:34:31,320 --> 00:34:34,080
Speaker 2: they can easily get capital from their banks and they

658
00:34:34,280 --> 00:34:36,120
Speaker 2: very rarely need it. So you don't see a lot

659
00:34:36,120 --> 00:34:41,200
Speaker 2: of personal loans to you know, super prime consumers, certainly

660
00:34:41,200 --> 00:34:44,319
Speaker 2: not in the secondary market and certainly not insecuritizations. A

661
00:34:44,320 --> 00:34:47,440
Speaker 2: lot of what we would see kind of is loans

662
00:34:47,440 --> 00:34:50,560
Speaker 2: to those consumers that need the capital more and would

663
00:34:50,600 --> 00:34:54,359
Speaker 2: qualify as financially insecure either by being younger or less experienced,

664
00:34:54,520 --> 00:34:56,279
Speaker 2: lower income, so on.

665
00:34:56,200 --> 00:34:56,799
Speaker 4: And so forth.

666
00:34:57,080 --> 00:34:59,800
Speaker 2: That for us, that's that's that's where we think there's weakness.

667
00:34:59,800 --> 00:35:02,000
Speaker 2: And I just said we're going fundamentals first.

668
00:35:02,080 --> 00:35:03,440
Speaker 4: So that's an example of.

669
00:35:03,440 --> 00:35:05,759
Speaker 2: An area where I think it's too soon. I don't

670
00:35:05,760 --> 00:35:08,759
Speaker 2: think that those types of loans are currently priced for

671
00:35:08,800 --> 00:35:10,960
Speaker 2: the potential risk of a cycle. So if you're a

672
00:35:11,000 --> 00:35:13,120
Speaker 2: fan of we can never have a cycle again.

673
00:35:13,000 --> 00:35:13,560
Speaker 4: That might work.

674
00:35:13,719 --> 00:35:16,520
Speaker 2: It's not something that we would bake in, but those

675
00:35:16,520 --> 00:35:19,880
Speaker 2: are examples of things that we feel like are attractive

676
00:35:20,320 --> 00:35:23,560
Speaker 2: so in focus for us too soon. And then there's

677
00:35:23,600 --> 00:35:26,560
Speaker 2: things that feel crowded, and that feels like a lot

678
00:35:26,560 --> 00:35:29,960
Speaker 2: of the syndicated bond markets, which I might call structure products.

679
00:35:30,440 --> 00:35:33,440
Speaker 2: So you know, your basic investment grade CLO bonds are

680
00:35:33,680 --> 00:35:36,200
Speaker 2: very very tight and the credit curve is very very flat.

681
00:35:37,239 --> 00:35:41,400
Speaker 2: Those syndicated markets impact the private markets because they're a competitor.

682
00:35:41,600 --> 00:35:43,399
Speaker 2: I know people don't like to think of it that way,

683
00:35:43,440 --> 00:35:47,080
Speaker 2: but it is definitely true. There's things called middle market

684
00:35:47,120 --> 00:35:49,360
Speaker 2: clos or that's what they used to be called back

685
00:35:49,960 --> 00:35:53,640
Speaker 2: the OG name, that are now called private credit colos,

686
00:35:53,719 --> 00:35:55,560
Speaker 2: and like that tells you how much of a buzzword

687
00:35:55,600 --> 00:36:00,239
Speaker 2: that's become. And you know these are clos that now

688
00:36:00,719 --> 00:36:03,799
Speaker 2: are not doing broadly syndicated bank loans. So if you

689
00:36:03,800 --> 00:36:06,880
Speaker 2: don't think that there's competition overlap from the syndicated markets,

690
00:36:06,880 --> 00:36:08,920
Speaker 2: I have, you know, a couple office buildings probably to

691
00:36:08,920 --> 00:36:11,839
Speaker 2: sell you. But for for us, I think it's very

692
00:36:11,880 --> 00:36:14,759
Speaker 2: important to look across both those markets, so that you

693
00:36:14,800 --> 00:36:18,520
Speaker 2: can kind of define that inefficiency premium and and define

694
00:36:18,520 --> 00:36:21,239
Speaker 2: some markets as basically a little bit overcrowded.

695
00:36:22,640 --> 00:36:24,600
Speaker 1: Walk us through a trade mishelle for those people not

696
00:36:24,680 --> 00:36:27,479
Speaker 1: deeply involved in this sector, you know, a BF private debt.

697
00:36:27,760 --> 00:36:29,520
Speaker 1: Let's say you like housing. What do you do? You

698
00:36:29,560 --> 00:36:31,319
Speaker 1: go to a bank and buy all their loans and

699
00:36:31,360 --> 00:36:33,759
Speaker 1: package them up them? Yeah, what what do you do with?

700
00:36:33,840 --> 00:36:33,960
Speaker 3: How?

701
00:36:35,120 --> 00:36:37,240
Speaker 4: M sure? There's well, there's a couple of ways.

702
00:36:37,280 --> 00:36:39,280
Speaker 2: And if I was even more basic, you know, outside

703
00:36:39,280 --> 00:36:42,560
Speaker 2: of housing, like, there's let's let's say you really like

704
00:36:42,640 --> 00:36:46,520
Speaker 2: the prime consumer and you wanted access to their housing debt.

705
00:36:47,120 --> 00:36:49,000
Speaker 2: As I said there there, they're going to be guys

706
00:36:49,000 --> 00:36:51,239
Speaker 2: that are already locked up in a low rate, fixed

707
00:36:51,320 --> 00:36:51,960
Speaker 2: rate mortgage.

708
00:36:52,520 --> 00:36:54,760
Speaker 4: These are guys that are going.

709
00:36:54,520 --> 00:36:56,480
Speaker 2: Out if they want to monetize their home equity. They're

710
00:36:56,520 --> 00:36:58,560
Speaker 2: never giving up there two and a half percent first

711
00:36:58,600 --> 00:37:01,200
Speaker 2: mortgage ever, so they're going to go out and get

712
00:37:01,239 --> 00:37:03,239
Speaker 2: a home equity line of credit. And you know, there's

713
00:37:03,280 --> 00:37:05,200
Speaker 2: a lot of different ways that you can access that

714
00:37:05,800 --> 00:37:09,920
Speaker 2: as a fall under what I would call ABS. The

715
00:37:10,000 --> 00:37:13,280
Speaker 2: first way is if the syndicated market is less efficient,

716
00:37:13,400 --> 00:37:17,080
Speaker 2: you can go buy like the lower tranches or the

717
00:37:17,080 --> 00:37:21,040
Speaker 2: residual of a securitization. That would be the most liquid

718
00:37:21,120 --> 00:37:23,839
Speaker 2: or the most visible syndicated way to do it. Like,

719
00:37:23,880 --> 00:37:25,879
Speaker 2: that's that's ABS, I might call it.

720
00:37:26,600 --> 00:37:30,200
Speaker 4: You could just go and arrange with a lender to buy.

721
00:37:30,160 --> 00:37:32,640
Speaker 2: Loans that they're making that meet your criteria, and that's

722
00:37:32,680 --> 00:37:35,680
Speaker 2: called like a forward flow agreement. Or you might go

723
00:37:35,760 --> 00:37:38,680
Speaker 2: to a lender who has an entire pool and you know,

724
00:37:38,800 --> 00:37:41,480
Speaker 2: either take that pool or pick through that pool. The

725
00:37:41,560 --> 00:37:44,239
Speaker 2: last way is maybe they just want capital. They don't

726
00:37:44,239 --> 00:37:46,080
Speaker 2: want to sell you the loans. They want you to

727
00:37:46,120 --> 00:37:49,040
Speaker 2: finance the loan. And so this is the intersection of

728
00:37:49,080 --> 00:37:51,399
Speaker 2: saying I like this asset, right, I like this type

729
00:37:51,440 --> 00:37:55,040
Speaker 2: of debt contract, and I have many different ways that

730
00:37:55,080 --> 00:37:58,799
Speaker 2: I can flex to access it. Right. I can finance it,

731
00:37:58,880 --> 00:38:01,439
Speaker 2: I can lend to it, I can buy pools of it.

732
00:38:01,600 --> 00:38:04,000
Speaker 2: I can do a future blow agreement. I can buy securities.

733
00:38:05,080 --> 00:38:07,840
Speaker 2: And if a bank has it on their balance sheet

734
00:38:07,920 --> 00:38:11,400
Speaker 2: and they want to get some capital relief, then maybe

735
00:38:11,400 --> 00:38:14,359
Speaker 2: they're buying protection from me in a risk transfer. So

736
00:38:14,719 --> 00:38:17,400
Speaker 2: this is exactly that matrix that I was describing before

737
00:38:17,440 --> 00:38:21,120
Speaker 2: about understanding the asset cashlod comes first and foremost, and

738
00:38:21,160 --> 00:38:24,200
Speaker 2: then using those different types of structural ways to access

739
00:38:24,239 --> 00:38:27,160
Speaker 2: it to either enhance your return or mitigate your risk.

740
00:38:27,280 --> 00:38:30,680
Speaker 2: That's what ABF is. It's one component cashlow and one

741
00:38:30,719 --> 00:38:34,279
Speaker 2: component structural evaluation. And I think the core skill set

742
00:38:34,280 --> 00:38:37,360
Speaker 2: here for people that do that is finding a base

743
00:38:37,480 --> 00:38:41,840
Speaker 2: of borrowers that need that flexibility. Right, that's the traditional

744
00:38:41,960 --> 00:38:44,279
Speaker 2: narrative of any kind of private debt. Why are the

745
00:38:44,320 --> 00:38:45,760
Speaker 2: borrowers going to the private market.

746
00:38:45,920 --> 00:38:48,000
Speaker 4: Well, because they need to do something a.

747
00:38:48,000 --> 00:38:51,120
Speaker 2: Little different than what is the standardized form of debt

748
00:38:51,160 --> 00:38:54,600
Speaker 2: that is consumed in the public markets or the syndicated markets. Right,

749
00:38:55,040 --> 00:38:58,440
Speaker 2: So that's kind of maybe the easy way to describe ABF.

750
00:38:58,440 --> 00:39:00,160
Speaker 2: If you want it to be even more simple, well,

751
00:39:00,480 --> 00:39:04,960
Speaker 2: some people might even define like direct lending on like

752
00:39:05,040 --> 00:39:08,560
Speaker 2: a commercial property real estate debt in other words, or

753
00:39:08,600 --> 00:39:11,040
Speaker 2: making a mortgage as a type of asset based finance.

754
00:39:11,080 --> 00:39:15,880
Speaker 2: So truly, it's a very broad swath that different managers

755
00:39:15,960 --> 00:39:19,920
Speaker 2: will cut. Some are very specialists. They might only do

756
00:39:20,040 --> 00:39:23,359
Speaker 2: things like that risk protection buying from you know, where

757
00:39:23,400 --> 00:39:26,040
Speaker 2: they provide protection to the banks or risk transfer to

758
00:39:26,080 --> 00:39:29,120
Speaker 2: the banks in a very narrow strategy. Some people might

759
00:39:29,320 --> 00:39:33,520
Speaker 2: only do real estate debt. Some people might only do

760
00:39:34,400 --> 00:39:37,600
Speaker 2: kind of the leverage finance version, which you know may

761
00:39:37,600 --> 00:39:41,120
Speaker 2: be colo warehouse colo equity. Some people might only do

762
00:39:41,239 --> 00:39:44,799
Speaker 2: direct lending. Some people only might provide nav financing on

763
00:39:44,840 --> 00:39:48,040
Speaker 2: direct lending. And some people are going to take components

764
00:39:48,080 --> 00:39:51,680
Speaker 2: of that and mix it into something that feels more flexible,

765
00:39:51,719 --> 00:39:54,120
Speaker 2: where they have that ability to kind of move.

766
00:39:54,000 --> 00:39:55,479
Speaker 4: Around as the opportunity does.

767
00:39:55,560 --> 00:39:58,040
Speaker 2: And I think, you know, some people's funds are big

768
00:39:58,120 --> 00:39:59,920
Speaker 2: enough that they have to do that, and other people

769
00:40:00,040 --> 00:40:03,839
Speaker 2: elect to do that because of that flexibility, affording them

770
00:40:03,840 --> 00:40:06,600
Speaker 2: access to an opportunity right place at the right time,

771
00:40:06,640 --> 00:40:07,120
Speaker 2: if you will.

772
00:40:07,880 --> 00:40:09,920
Speaker 1: One of the other reasons that direct lending took off

773
00:40:09,960 --> 00:40:12,720
Speaker 1: there really was because the syndicated markets, the public markets

774
00:40:12,760 --> 00:40:14,680
Speaker 1: kind of shut down, or they got thoughts out, or

775
00:40:14,680 --> 00:40:17,440
Speaker 1: they rejected some more risky borrow specify when rates were

776
00:40:17,520 --> 00:40:19,960
Speaker 1: very high. Now we're kind of a wash with liquidity

777
00:40:20,000 --> 00:40:22,120
Speaker 1: of all kinds. You know, the Feds piling in, it

778
00:40:22,239 --> 00:40:24,000
Speaker 1: just seems like that, you know, that's that's going to

779
00:40:24,000 --> 00:40:26,120
Speaker 1: shift the other way. Does that not pull funds out

780
00:40:26,200 --> 00:40:29,000
Speaker 1: of private law? Does that not stop the growth? Yeah?

781
00:40:29,000 --> 00:40:31,480
Speaker 2: Well, I don't know if it stops the growth, but

782
00:40:31,600 --> 00:40:34,319
Speaker 2: it makes the sourcing a greater challenge. Right, the way

783
00:40:34,320 --> 00:40:36,759
Speaker 2: that I would look at it is and I think

784
00:40:36,800 --> 00:40:39,920
Speaker 2: you really need I've said this several times and people

785
00:40:39,960 --> 00:40:41,840
Speaker 2: like to push back on this, which I feel like

786
00:40:41,960 --> 00:40:46,040
Speaker 2: is really kind of not being sort of forthright.

787
00:40:46,120 --> 00:40:48,040
Speaker 4: But like the syndicated.

788
00:40:47,440 --> 00:40:53,320
Speaker 2: Markets for leverage loans, for example, are the only difference

789
00:40:53,400 --> 00:40:56,040
Speaker 2: is that those markets tend to be more standardized about

790
00:40:56,040 --> 00:41:00,000
Speaker 2: the contracts. And because the broadly syndicated leverage loan market,

791
00:41:00,120 --> 00:41:03,680
Speaker 2: as an example, is seventy percent financed by the syndicated

792
00:41:03,719 --> 00:41:07,800
Speaker 2: COLO market, like the tighter guardrails around that. So exactly

793
00:41:07,840 --> 00:41:10,480
Speaker 2: as you articulated, like why do people go to the

794
00:41:10,520 --> 00:41:13,719
Speaker 2: price If the syndicated market is broken, that is going

795
00:41:13,760 --> 00:41:17,600
Speaker 2: to be like a like a amazing for the private

796
00:41:17,640 --> 00:41:20,640
Speaker 2: debt markets, right, they have that opportunity then to do

797
00:41:20,760 --> 00:41:23,800
Speaker 2: loans that would have otherwise been syndicated, and they should

798
00:41:23,800 --> 00:41:26,879
Speaker 2: have really wide risk premiums because you know they will

799
00:41:26,920 --> 00:41:30,360
Speaker 2: be a wash with opportunities to source because the syndicated

800
00:41:30,400 --> 00:41:33,160
Speaker 2: market is so important. And we started to see that

801
00:41:33,239 --> 00:41:35,799
Speaker 2: around the Guilt crisis in twenty twenty two, when the

802
00:41:35,800 --> 00:41:39,040
Speaker 2: the syndicated colo market was kind of broken. It's like, Okay,

803
00:41:39,080 --> 00:41:41,000
Speaker 2: a lot of that stuff's got to get refinanced by

804
00:41:41,000 --> 00:41:41,960
Speaker 2: the private debt market.

805
00:41:42,160 --> 00:41:43,520
Speaker 4: It's an interesting.

806
00:41:43,160 --> 00:41:45,799
Speaker 2: Time right today it's the opposite, and I'm going to

807
00:41:45,800 --> 00:41:48,040
Speaker 2: throw us dat out here, Whi's probably going to be inexact.

808
00:41:48,040 --> 00:41:49,759
Speaker 2: But I think in like the first one hundred and

809
00:41:49,760 --> 00:41:52,640
Speaker 2: eighty five business does, and this year seven hundred clos

810
00:41:52,640 --> 00:41:55,080
Speaker 2: were issued, that is not a broken market. That is

811
00:41:55,120 --> 00:41:58,720
Speaker 2: an incredibly well functioning market. Debts breadth continue to tighten,

812
00:41:59,360 --> 00:42:03,160
Speaker 2: So anything that can fit that model should drive there

813
00:42:03,520 --> 00:42:05,520
Speaker 2: because that's going to be the lowest cost of capital

814
00:42:05,520 --> 00:42:07,839
Speaker 2: for those borrowers. So then it's kind of like what's

815
00:42:07,920 --> 00:42:10,239
Speaker 2: left in the rest of the market is things that

816
00:42:10,239 --> 00:42:12,920
Speaker 2: that market can't do. And that's just the example with

817
00:42:13,400 --> 00:42:16,440
Speaker 2: what I would call the intersection of direct lending, leverage,

818
00:42:16,480 --> 00:42:21,080
Speaker 2: loans and clos. Right, that's a continuum. So there's a

819
00:42:21,160 --> 00:42:24,040
Speaker 2: public market, there's an in between space, and then there's

820
00:42:24,080 --> 00:42:27,840
Speaker 2: a private market. And evaluating that continuum of competition is

821
00:42:27,920 --> 00:42:30,400
Speaker 2: really critical because what a lender has to do today

822
00:42:30,719 --> 00:42:32,520
Speaker 2: to source a loan is really different than what they

823
00:42:32,560 --> 00:42:34,040
Speaker 2: had to do at the end of twenty twenty two,

824
00:42:34,400 --> 00:42:37,160
Speaker 2: because the degree of competition coming from the syndicated market

825
00:42:37,200 --> 00:42:40,040
Speaker 2: is quite different. Doesn't mean that everybody's doing bad things,

826
00:42:40,080 --> 00:42:43,280
Speaker 2: but it just means that there's a lot less natural

827
00:42:43,320 --> 00:42:46,319
Speaker 2: inefficiency when you have a well functioning syndicated market. And

828
00:42:46,520 --> 00:42:50,520
Speaker 2: you know, the core of private markets is what's the

829
00:42:50,560 --> 00:42:53,439
Speaker 2: inefficiency that you're taking advantage of? And if you can't

830
00:42:53,440 --> 00:42:56,520
Speaker 2: answer that question, you know people should ask it of

831
00:42:56,600 --> 00:42:57,480
Speaker 2: you a lot more often.

832
00:42:58,560 --> 00:43:01,719
Speaker 1: Going back to returns on private credit, I'm interested in

833
00:43:01,719 --> 00:43:04,680
Speaker 1: what you're saying about the seeming to be, you know,

834
00:43:04,719 --> 00:43:09,360
Speaker 1: some kind of convergence between the public and private markets,

835
00:43:09,680 --> 00:43:11,600
Speaker 1: but there still seems to be a bit of an

836
00:43:11,680 --> 00:43:15,719
Speaker 1: advantage to private debt in terms of I mean, it's

837
00:43:15,719 --> 00:43:18,280
Speaker 1: pretty hard to compare apples to apples in that context.

838
00:43:18,320 --> 00:43:20,840
Speaker 1: But do you expect that gap to close completely or

839
00:43:20,880 --> 00:43:22,799
Speaker 1: is there always going to be some advantage? You're giving

840
00:43:22,840 --> 00:43:24,200
Speaker 1: up liquidity so you get paid for it?

841
00:43:24,360 --> 00:43:26,360
Speaker 2: Yeah, you should well, And I think that's what people

842
00:43:26,360 --> 00:43:29,040
Speaker 2: really need to evaluate, right like, what do you should

843
00:43:29,080 --> 00:43:32,240
Speaker 2: be compensated for giving up liquidity unless you also believe

844
00:43:32,280 --> 00:43:37,040
Speaker 2: the public markets are illiquid? So I think, you know,

845
00:43:37,120 --> 00:43:38,520
Speaker 2: I think people have a hard time.

846
00:43:38,320 --> 00:43:39,120
Speaker 4: Defining this gap.

847
00:43:39,160 --> 00:43:41,399
Speaker 2: It's actually one of the questions we get asked the

848
00:43:41,440 --> 00:43:44,239
Speaker 2: most often, which is, Michelle, what do you think that

849
00:43:44,280 --> 00:43:48,200
Speaker 2: liquidity premium has been and is now across different types

850
00:43:48,239 --> 00:43:50,680
Speaker 2: of debt? And it's a bit hard to estimate because

851
00:43:50,719 --> 00:43:53,600
Speaker 2: when you look again at what I would call traditional

852
00:43:54,000 --> 00:43:57,640
Speaker 2: direct lending as an example, what each manager does is

853
00:43:57,640 --> 00:44:00,000
Speaker 2: a little bit different, right, So some people might actually

854
00:44:00,200 --> 00:44:03,080
Speaker 2: be getting a higher quality and therefore it might appear

855
00:44:03,480 --> 00:44:06,719
Speaker 2: they earn less liquidity premium, but there's a credit differential, right,

856
00:44:06,760 --> 00:44:10,320
Speaker 2: So really unpacking this thing into what's a credit differential

857
00:44:10,360 --> 00:44:13,839
Speaker 2: that's positive versus negative? And what are you getting paid

858
00:44:13,840 --> 00:44:17,080
Speaker 2: for liquidity premium is actually very important and it's important

859
00:44:17,080 --> 00:44:19,440
Speaker 2: that you do that in any market where you have

860
00:44:19,880 --> 00:44:22,520
Speaker 2: that liquid alternative. So I think a lot of people

861
00:44:22,560 --> 00:44:24,480
Speaker 2: will look at things like, well, what do I get

862
00:44:24,520 --> 00:44:27,320
Speaker 2: paid for owning broadly syndicated leverage loans because that's floating

863
00:44:27,360 --> 00:44:30,080
Speaker 2: rate invisible versus what do I think I'm getting paid

864
00:44:30,080 --> 00:44:33,360
Speaker 2: for direct lending? Well, the broadly syndicated leverage loan INDUX

865
00:44:33,440 --> 00:44:37,040
Speaker 2: is definitely a hard blow investment grade type of an

866
00:44:37,080 --> 00:44:39,759
Speaker 2: average credit. So you know, the question also becomes what

867
00:44:39,840 --> 00:44:42,000
Speaker 2: kind of credit protection do you have in the direct

868
00:44:42,080 --> 00:44:44,080
Speaker 2: lending or in fact, are you taking things that are

869
00:44:44,120 --> 00:44:46,440
Speaker 2: even riskier than what might be in that index. So

870
00:44:46,840 --> 00:44:48,680
Speaker 2: it's a hard one to spot, which is why I

871
00:44:48,680 --> 00:44:50,880
Speaker 2: think so many people are interested in it. But you

872
00:44:50,920 --> 00:44:55,520
Speaker 2: can't have complete convergence, is my opinion. But I think

873
00:44:55,560 --> 00:44:59,080
Speaker 2: what you should be attuned to is if historically, I

874
00:44:59,080 --> 00:45:01,680
Speaker 2: think people want to ask to make liquidity premiums on

875
00:45:02,239 --> 00:45:06,080
Speaker 2: let's call it below investment grade comparisons at over two

876
00:45:06,120 --> 00:45:09,080
Speaker 2: hundred basis points. There is a market, and I do

877
00:45:09,160 --> 00:45:12,200
Speaker 2: want to pay homage to it that in the private

878
00:45:12,239 --> 00:45:16,760
Speaker 2: credit market because of structuring, in the asset based finance market,

879
00:45:16,840 --> 00:45:19,680
Speaker 2: or even in the private abs market, there are ways

880
00:45:19,719 --> 00:45:23,160
Speaker 2: that you can get less syndicated or non syndicated debt

881
00:45:23,239 --> 00:45:26,640
Speaker 2: that still has structural protection or credit protection that makes

882
00:45:26,640 --> 00:45:30,160
Speaker 2: it investment grade in quality. It's actually a very interesting market.

883
00:45:30,280 --> 00:45:32,759
Speaker 2: That's one that insures are quite common to. But I

884
00:45:32,760 --> 00:45:35,920
Speaker 2: think could be beneficial more broadly for people to understand,

885
00:45:36,280 --> 00:45:41,040
Speaker 2: particularly if they want like safe, but they want I

886
00:45:41,080 --> 00:45:43,719
Speaker 2: liquidity premium. So in other words, I do want to

887
00:45:43,800 --> 00:45:46,360
Speaker 2: draw the distinction that just because something say liquid, doesn't

888
00:45:46,440 --> 00:45:48,759
Speaker 2: mean it can't be high in quality, right, And so

889
00:45:49,239 --> 00:45:51,560
Speaker 2: we would actually look at some of the comparisons that

890
00:45:51,600 --> 00:45:54,279
Speaker 2: we can make across the syndicated and less syndicated or

891
00:45:54,280 --> 00:45:57,279
Speaker 2: non syndicated ABS markets and saying, you know, in the

892
00:45:57,280 --> 00:46:00,120
Speaker 2: investment grade market, you can probably pick up between one

893
00:46:00,200 --> 00:46:02,880
Speaker 2: hundred and one hundred and fifty basis points for just

894
00:46:03,080 --> 00:46:06,680
Speaker 2: being less liquid, right, And so these are estimates of

895
00:46:06,719 --> 00:46:10,879
Speaker 2: illiquidity premium I see, I would see being very hard

896
00:46:10,880 --> 00:46:14,600
Speaker 2: pressed to give up liquidity without eliciting that type of

897
00:46:15,080 --> 00:46:17,400
Speaker 2: a premium. So I don't think they can compress on

898
00:46:17,440 --> 00:46:19,360
Speaker 2: top of each other. But I think what you have

899
00:46:19,560 --> 00:46:22,000
Speaker 2: is a bit of a following. So more money goes

900
00:46:22,040 --> 00:46:25,720
Speaker 2: into IG corporate credit and high yield corporate credit, those

901
00:46:26,080 --> 00:46:29,919
Speaker 2: risk premiums TITAN. People that have to target particular rates

902
00:46:29,920 --> 00:46:32,160
Speaker 2: of return then need to figure out how they're going

903
00:46:32,200 --> 00:46:35,360
Speaker 2: to earn additional risk premium, and so they may increase

904
00:46:36,080 --> 00:46:39,799
Speaker 2: the allocation to things like illiquidity to the extent that

905
00:46:39,840 --> 00:46:42,480
Speaker 2: they don't they have liquidity that they don't need, right,

906
00:46:42,880 --> 00:46:45,360
Speaker 2: Or they might look at how might I build a

907
00:46:45,480 --> 00:46:49,360
Speaker 2: ladder within my liquid portfolio where I have some shorter

908
00:46:49,480 --> 00:46:52,359
Speaker 2: ten or things such that I'm self generating liquidity through

909
00:46:52,520 --> 00:46:57,719
Speaker 2: things like maturity, and lastly, consider amortization. I don't think

910
00:46:57,760 --> 00:47:00,759
Speaker 2: anybody talks about this, but you know, debt outside of

911
00:47:00,800 --> 00:47:03,360
Speaker 2: bullet maturity debt which you see commonly in corporate and

912
00:47:03,440 --> 00:47:05,759
Speaker 2: real estate, a lot of consumer debt, a lot of

913
00:47:05,800 --> 00:47:09,160
Speaker 2: housing debt amortizes. And also you can build all different

914
00:47:09,200 --> 00:47:10,920
Speaker 2: types of debt if you're doing it yourself in the

915
00:47:10,920 --> 00:47:16,000
Speaker 2: private markets. And I really wouldn't undervalue things like amortization

916
00:47:16,320 --> 00:47:18,920
Speaker 2: in this market, in particular, if the curve is flat,

917
00:47:19,680 --> 00:47:22,759
Speaker 2: you don't get rolled out. But also you know that

918
00:47:22,840 --> 00:47:24,880
Speaker 2: helps to build a cash ladder. It also helps to

919
00:47:25,120 --> 00:47:29,480
Speaker 2: de leverage your loans that it naturally matures, as opposed

920
00:47:29,560 --> 00:47:32,520
Speaker 2: to needing to refinance to mature. So just thinking about

921
00:47:32,520 --> 00:47:36,200
Speaker 2: some of those things as different ways to diversify may

922
00:47:36,400 --> 00:47:38,759
Speaker 2: give people the flexibility to own a little bit more

923
00:47:38,800 --> 00:47:42,920
Speaker 2: of what traditionally would have been considered an I liquid allocation,

924
00:47:43,440 --> 00:47:46,080
Speaker 2: but where you actually have the ability to self generate

925
00:47:46,160 --> 00:47:48,759
Speaker 2: cash low from that. So just food for thought there.

926
00:47:49,280 --> 00:47:51,480
Speaker 1: How far are we are we from seeing a properly

927
00:47:51,520 --> 00:47:53,280
Speaker 1: traded private debt.

928
00:47:53,160 --> 00:47:57,520
Speaker 2: Oh gosh, I think pretty far away. The reason that

929
00:47:57,600 --> 00:48:00,520
Speaker 2: I say that is it depends on what you're talking about.

930
00:48:00,520 --> 00:48:03,120
Speaker 2: If you're talking about credit secondaries, I don't think that

931
00:48:03,120 --> 00:48:05,520
Speaker 2: that's too far away, Like that would be trading in

932
00:48:06,360 --> 00:48:10,160
Speaker 2: shares of private credit funds. If you're talking about like

933
00:48:10,320 --> 00:48:14,600
Speaker 2: trading like an individual investment, that is, that is a

934
00:48:14,760 --> 00:48:18,680
Speaker 2: that's a challenge, right because trading realizes on some type

935
00:48:18,719 --> 00:48:21,759
Speaker 2: of contract standardization, and we're really far from that. That's

936
00:48:21,800 --> 00:48:25,080
Speaker 2: the whole thing about private credit. Everybody's got their own covenants,

937
00:48:25,120 --> 00:48:27,759
Speaker 2: their own contracts, and and so it's one of the

938
00:48:27,800 --> 00:48:32,760
Speaker 2: things that makes buying somebody else's loans that are older,

939
00:48:32,840 --> 00:48:36,040
Speaker 2: like banks that are selling performing loans for example, like

940
00:48:36,080 --> 00:48:40,160
Speaker 2: those are not your standard contracts. So that's one of

941
00:48:40,200 --> 00:48:45,440
Speaker 2: the impediments, right, Like that, actually trading requires degrees of

942
00:48:45,480 --> 00:48:48,520
Speaker 2: standardization that the private market hasn't been known for. But

943
00:48:48,719 --> 00:48:52,759
Speaker 2: like I said, just like in private equities, where secondaries

944
00:48:53,160 --> 00:48:56,719
Speaker 2: is actually a reasonable business, there's funds of secondaries and

945
00:48:57,040 --> 00:49:00,680
Speaker 2: it's actually quite I think, an interesting opportunity for many people.

946
00:49:00,760 --> 00:49:02,400
Speaker 4: I do think you'll see.

947
00:49:02,760 --> 00:49:06,200
Speaker 2: Trading in and more that there is trading, I'll call

948
00:49:06,239 --> 00:49:11,600
Speaker 2: it more buying of secondaries in all different types of funds.

949
00:49:11,880 --> 00:49:15,600
Speaker 1: You know, you sound quite optimistic, shall you sound quite bullish.

950
00:49:15,920 --> 00:49:18,719
Speaker 1: I like people who've been covering these markets for a

951
00:49:18,719 --> 00:49:21,920
Speaker 1: while to tell me what gives them pause, Because you've

952
00:49:21,920 --> 00:49:24,000
Speaker 1: seen the cycles. You've seen these things shoots up in

953
00:49:24,040 --> 00:49:26,000
Speaker 1: a straight line and you've seen them come back down again.

954
00:49:26,960 --> 00:49:28,680
Speaker 1: There's a bit of a gold rush going on in

955
00:49:28,680 --> 00:49:31,560
Speaker 1: private credit right now. What worries you? Where's the froth?

956
00:49:32,880 --> 00:49:33,440
Speaker 4: Yeah, so.

957
00:49:35,640 --> 00:49:38,760
Speaker 2: There's definitely froth, right, And I'm a natural cynic actually

958
00:49:38,760 --> 00:49:41,840
Speaker 2: as a bond girl, you know, you get built in

959
00:49:41,920 --> 00:49:44,759
Speaker 2: with a little bit of natural cynicism. So there is

960
00:49:44,840 --> 00:49:47,719
Speaker 2: quite a lot of capital that's been raised. And so

961
00:49:48,040 --> 00:49:52,279
Speaker 2: the question for me is where where will inefficient Like

962
00:49:52,360 --> 00:49:56,160
Speaker 2: there's a difference between frauth and just intermediating the inefficiency. Like.

963
00:49:56,239 --> 00:49:58,400
Speaker 2: So one of the examples I give is if you

964
00:49:58,440 --> 00:50:02,279
Speaker 2: take something like directly, which has been around for multiple decades, right,

965
00:50:02,320 --> 00:50:04,960
Speaker 2: people know what it is, people know the inefficiency. If

966
00:50:04,960 --> 00:50:08,239
Speaker 2: you have an arbitrage that inefficiency in like two decades,

967
00:50:09,120 --> 00:50:11,520
Speaker 2: I mean again I'm not so sure, but like the

968
00:50:11,600 --> 00:50:15,480
Speaker 2: capital raising for that for sure recently has been high.

969
00:50:15,520 --> 00:50:18,040
Speaker 2: And so you know, I think the froth may be

970
00:50:18,480 --> 00:50:21,520
Speaker 2: in where are you pushing at the margin and is

971
00:50:21,560 --> 00:50:24,520
Speaker 2: there a clear disclosure about how things have changed over time.

972
00:50:25,040 --> 00:50:29,120
Speaker 2: And that's always true, right if you look at syndicated

973
00:50:29,160 --> 00:50:33,920
Speaker 2: markets or markets over time. It's more that as you

974
00:50:33,960 --> 00:50:36,120
Speaker 2: have growth of a market, what's getting included in that

975
00:50:36,160 --> 00:50:38,560
Speaker 2: market that wasn't before. I mean, we've seen that. That

976
00:50:38,760 --> 00:50:42,040
Speaker 2: was the whole legacy of subprime mbs in the United

977
00:50:42,080 --> 00:50:46,799
Speaker 2: States of America, and then after the fact, everybody realized that, boy,

978
00:50:46,560 --> 00:50:49,640
Speaker 2: there was a pretty big expansion in what was being included.

979
00:50:49,760 --> 00:50:53,120
Speaker 2: So you know, the question is is the box moving, right?

980
00:50:53,719 --> 00:50:55,760
Speaker 2: And I think that the box is moving, and I

981
00:50:55,440 --> 00:50:57,319
Speaker 2: think you have to be aware of that. But the

982
00:50:57,320 --> 00:51:00,480
Speaker 2: box can move in two ways. The box can expands

983
00:51:00,600 --> 00:51:04,520
Speaker 2: sort of along the horizontal or along the vertical. And

984
00:51:04,560 --> 00:51:06,080
Speaker 2: what I mean by that is, like, you know, if

985
00:51:06,080 --> 00:51:08,600
Speaker 2: you're expanding the box just in one sector in order

986
00:51:08,640 --> 00:51:11,040
Speaker 2: to accommodate more capital raising and the need for more

987
00:51:11,080 --> 00:51:14,719
Speaker 2: sourcing and bigger funds and things like that, that is

988
00:51:14,760 --> 00:51:17,800
Speaker 2: potentially diluting the credit quality of what's in that People

989
00:51:17,840 --> 00:51:20,040
Speaker 2: need to make sure that they're compensated for that increase

990
00:51:20,120 --> 00:51:22,920
Speaker 2: in risk. In other words, if spreads are staying the

991
00:51:22,960 --> 00:51:26,520
Speaker 2: same because you've done riskier stuff, then spreads haven't really

992
00:51:26,600 --> 00:51:28,640
Speaker 2: stayed the same. I think what we're seeing now is

993
00:51:28,960 --> 00:51:29,680
Speaker 2: a little bit of that.

994
00:51:29,800 --> 00:51:30,720
Speaker 4: But I think what we're.

995
00:51:30,600 --> 00:51:34,240
Speaker 2: Also seeing is just more things. People raising different types

996
00:51:34,280 --> 00:51:37,480
Speaker 2: of capital for things that would have otherwise still remained

997
00:51:37,520 --> 00:51:42,160
Speaker 2: with banks several years ago. So you know, big consumer portfolios.

998
00:51:42,200 --> 00:51:44,759
Speaker 2: And again I've made my I think view clear on

999
00:51:44,800 --> 00:51:46,440
Speaker 2: whether or not it's too early for that or not.

1000
00:51:47,120 --> 00:51:49,200
Speaker 2: But there is quite a lot of debt in that

1001
00:51:49,360 --> 00:51:51,640
Speaker 2: headline number that we started the call with, guys, is

1002
00:51:51,680 --> 00:51:54,880
Speaker 2: where to focus. Like the syndicated ABS markets, if you

1003
00:51:54,880 --> 00:51:58,120
Speaker 2: include them all, is like fifteen trillion. Anything that sits

1004
00:51:58,200 --> 00:52:02,160
Speaker 2: under an ABS is technically credit of some sort. The

1005
00:52:02,200 --> 00:52:04,239
Speaker 2: only thing that makes it public is the fact that

1006
00:52:04,280 --> 00:52:07,960
Speaker 2: you've issued syndicated bonds and you've got some structure that

1007
00:52:08,040 --> 00:52:11,680
Speaker 2: is standardized around it. Right, if you eradicate the entire

1008
00:52:11,719 --> 00:52:15,080
Speaker 2: ABS market and that structure, all of that fifteen trillion

1009
00:52:15,120 --> 00:52:19,319
Speaker 2: would be eligible for private tech buyers. That's why those

1010
00:52:19,360 --> 00:52:21,680
Speaker 2: market numbers can get so big so fast that you

1011
00:52:21,760 --> 00:52:24,440
Speaker 2: hear from people when you compare them back to well,

1012
00:52:24,480 --> 00:52:27,920
Speaker 2: there's actually only one point seven trillion in corporate direct lending,

1013
00:52:28,040 --> 00:52:32,319
Speaker 2: and so as we need to differentiate, probably what is

1014
00:52:32,520 --> 00:52:34,920
Speaker 2: a change in what we're defining as the market, so

1015
00:52:35,080 --> 00:52:38,960
Speaker 2: including ABF and private credit, with just the expansion of

1016
00:52:39,000 --> 00:52:42,399
Speaker 2: a single market. But I do think, like I would say,

1017
00:52:42,440 --> 00:52:47,520
Speaker 2: FROTH is overcrowded. It seems like leverage only direct lending

1018
00:52:47,600 --> 00:52:51,960
Speaker 2: colo markets they have a very strong bid and that

1019
00:52:52,000 --> 00:52:55,880
Speaker 2: to me seems like everybody's piled in to raise capital

1020
00:52:55,880 --> 00:52:58,439
Speaker 2: in one form or another. It doesn't mean that there's

1021
00:52:58,480 --> 00:53:01,320
Speaker 2: anything wrong with all the out there. It just means

1022
00:53:01,360 --> 00:53:04,360
Speaker 2: that where you see that sort of growth in capital raising,

1023
00:53:04,640 --> 00:53:07,719
Speaker 2: unless there's a credible argument to say why there's more sourcing,

1024
00:53:08,719 --> 00:53:11,279
Speaker 2: then you have to wonder what borrowers are needing to

1025
00:53:11,320 --> 00:53:14,040
Speaker 2: borrow at higher rates. And that's true of the consumer

1026
00:53:14,080 --> 00:53:17,240
Speaker 2: as well. I don't mean to just imply and impacts

1027
00:53:17,280 --> 00:53:20,799
Speaker 2: only one corner of the sector. So as markets grow,

1028
00:53:20,840 --> 00:53:22,839
Speaker 2: it's always prudent to look at them. And you know,

1029
00:53:22,920 --> 00:53:25,479
Speaker 2: again for us, and what's a little bit odd about

1030
00:53:25,560 --> 00:53:28,840
Speaker 2: us is we're a much different scale point as I

1031
00:53:29,360 --> 00:53:33,080
Speaker 2: talked about earlier Introder's capital and in PDCA, and the

1032
00:53:33,120 --> 00:53:35,879
Speaker 2: size of the transactions that we would look at would

1033
00:53:35,880 --> 00:53:38,520
Speaker 2: be much more consistent with what was done with regional banks,

1034
00:53:38,520 --> 00:53:41,799
Speaker 2: which are likely to be a little less efficient, and

1035
00:53:41,920 --> 00:53:44,319
Speaker 2: we are not afraid to pivot, and we're not tied

1036
00:53:44,360 --> 00:53:46,600
Speaker 2: to one thing. Somebody used a term with me this morning.

1037
00:53:47,200 --> 00:53:50,680
Speaker 2: He'll know who he is, Like, don't overbox yourself, and

1038
00:53:50,760 --> 00:53:54,480
Speaker 2: no good things never happen from being overboxed. You're just

1039
00:53:54,560 --> 00:53:56,960
Speaker 2: more desperate to go after the same thing. And that's

1040
00:53:56,960 --> 00:54:00,120
Speaker 2: something that I believe very strongly with us. So that

1041
00:54:00,120 --> 00:54:02,520
Speaker 2: that's kind of how i'd answered that question, James, I do.

1042
00:54:02,840 --> 00:54:07,239
Speaker 2: I'm I'm not Pollyannish at all, and I almost never

1043
00:54:07,320 --> 00:54:09,239
Speaker 2: come off as bullish, so I'm kind of excited that

1044
00:54:09,520 --> 00:54:14,560
Speaker 2: maybe I did here Rather than personality wise, I'm almost

1045
00:54:14,640 --> 00:54:17,960
Speaker 2: never bullish. But because I'm a bond, I'm a debt person.

1046
00:54:18,400 --> 00:54:21,160
Speaker 2: And what you have to remember is in the private markets,

1047
00:54:21,440 --> 00:54:24,240
Speaker 2: it's almost always it used to be called par lending.

1048
00:54:24,560 --> 00:54:26,520
Speaker 2: I don't know if you if everybody's as old as

1049
00:54:26,520 --> 00:54:28,600
Speaker 2: me and remembers that, but it was called par lending

1050
00:54:28,640 --> 00:54:30,920
Speaker 2: because you know, you very rarely got to look at

1051
00:54:30,920 --> 00:54:33,279
Speaker 2: a new loan at a price other than par. And

1052
00:54:33,320 --> 00:54:36,200
Speaker 2: if you if you're doing things at par, your upside

1053
00:54:36,239 --> 00:54:38,840
Speaker 2: is getting your coupon and your downside is losing your capital.

1054
00:54:38,920 --> 00:54:42,200
Speaker 2: That's that's why bond people are. Debt people are always cynical,

1055
00:54:42,400 --> 00:54:45,120
Speaker 2: and so I do think, with that little bit, and

1056
00:54:45,160 --> 00:54:47,080
Speaker 2: taking all of the humor out of it, of course,

1057
00:54:47,880 --> 00:54:51,280
Speaker 2: that we have to be mindful of fundamentals and credit

1058
00:54:51,400 --> 00:54:56,080
Speaker 2: after all. But the FED has definitely facilitated I think

1059
00:54:56,880 --> 00:54:59,440
Speaker 2: a bit of easing in terms of some of the

1060
00:54:59,480 --> 00:55:03,040
Speaker 2: strain that would have been on companies had rates continue

1061
00:55:03,080 --> 00:55:07,160
Speaker 2: to remain high, especially in an environment where inflation had

1062
00:55:07,280 --> 00:55:10,520
Speaker 2: really declined. Right, people, I think forget about is that

1063
00:55:10,680 --> 00:55:12,880
Speaker 2: if inflation declined one hundred and fifty basis points and

1064
00:55:12,920 --> 00:55:16,160
Speaker 2: FED fund stayed the same, that's like extra hike. So

1065
00:55:16,840 --> 00:55:18,480
Speaker 2: I do think that we'll be on a path to

1066
00:55:19,360 --> 00:55:22,640
Speaker 2: slightly lower short term rates, which will use those interest

1067
00:55:22,680 --> 00:55:26,440
Speaker 2: expenses on things like small businesses in particular, which may

1068
00:55:26,480 --> 00:55:28,240
Speaker 2: be actually a bullish note to the economy.

1069
00:55:29,120 --> 00:55:31,439
Speaker 1: Last question, very briefly, because we're almost out of time,

1070
00:55:31,680 --> 00:55:36,000
Speaker 1: was single best credit market opportunity right now? It sounds

1071
00:55:36,000 --> 00:55:36,640
Speaker 1: a relative better?

1072
00:55:37,360 --> 00:55:40,719
Speaker 2: Oh yeah for me? On a relative value basis, it's

1073
00:55:40,760 --> 00:55:43,399
Speaker 2: a bit of a toss because the most between two

1074
00:55:43,400 --> 00:55:46,319
Speaker 2: things that are very different, the most stable from a

1075
00:55:46,320 --> 00:55:49,879
Speaker 2: fundamental perspective, is definitely being able to access some form

1076
00:55:49,960 --> 00:55:53,680
Speaker 2: of home equity and fact season home equity. The most

1077
00:55:53,960 --> 00:55:58,160
Speaker 2: interesting opportunity I think is looking where there's emotional bias

1078
00:55:58,200 --> 00:56:00,680
Speaker 2: in fear, and that's in the commercial real estate, right,

1079
00:56:00,760 --> 00:56:02,920
Speaker 2: that's where most people are Like, I always look at

1080
00:56:02,920 --> 00:56:06,080
Speaker 2: that as another type of inefficiency. It's not necessarily bank

1081
00:56:06,160 --> 00:56:08,040
Speaker 2: or insurance driven, but it's like nobody wants to tell

1082
00:56:08,080 --> 00:56:09,880
Speaker 2: their boss they just made a commercial real estate loan

1083
00:56:09,920 --> 00:56:12,200
Speaker 2: because it's on everybody's radar. Oh, I'm going to have

1084
00:56:12,200 --> 00:56:13,960
Speaker 2: to defend that at every committee. Right, That's why I

1085
00:56:14,000 --> 00:56:15,480
Speaker 2: want to go in. I'm like, yeah, I'll do that.

1086
00:56:15,719 --> 00:56:18,520
Speaker 2: I'm quite happy to do that. So for me, I

1087
00:56:18,520 --> 00:56:21,480
Speaker 2: think there is like one of the more interesting opportunities

1088
00:56:21,600 --> 00:56:24,720
Speaker 2: is sitting in this space in particular where regional banks

1089
00:56:24,719 --> 00:56:26,880
Speaker 2: who are over exposed to commercial real estate can no

1090
00:56:26,960 --> 00:56:29,279
Speaker 2: longer lend or you know, have to do a very

1091
00:56:29,360 --> 00:56:32,800
Speaker 2: very very low little TV mortgage. So to me, that's

1092
00:56:32,880 --> 00:56:34,439
Speaker 2: kind of the wings of what I think is most

1093
00:56:34,480 --> 00:56:35,200
Speaker 2: interesting today.

1094
00:56:36,040 --> 00:56:36,640
Speaker 4: Great stuff.

1095
00:56:36,640 --> 00:56:39,520
Speaker 1: Michelle Russell daut Co head of Private Debt and Credit

1096
00:56:39,600 --> 00:56:41,719
Speaker 1: Alternative that schroeders, it's been a pleasure having you on

1097
00:56:41,719 --> 00:56:43,080
Speaker 1: the credit edge money thanks.

1098
00:56:43,360 --> 00:56:45,600
Speaker 2: Thanks, Thanks guys, great talking.

1099
00:56:45,360 --> 00:56:47,720
Speaker 1: To you and to David Havens are excellent co hostrom

1100
00:56:47,719 --> 00:56:49,879
Speaker 1: Bloomberg Intelligence. Thank you very much for being on the show.

1101
00:56:49,960 --> 00:56:53,879
Speaker 1: Cheers for even more analysis. Read all of David's great

1102
00:56:53,880 --> 00:56:56,759
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1103
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1104
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1105
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1110
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1111
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Speaker 1: I'm James Crombie. It's been a pleasure having you join

1112
00:57:26,760 --> 00:57:46,360
Speaker 1: us again next week on the Credit Edge.