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Speaker 2: Welcome back to our special Bloomberg coverage live from the
Speaker 2: Milicon Global Institute Conference in Beverly Hills, California. Armor Romain
Speaker 2: Bostik alongside Carol Masser and Carol the next guest, really
Speaker 2: does have a great view on what's going on in
Speaker 2: the world of credit and private markets.
Speaker 3: Steven says yeah, even says that within the.
Speaker 2: Liquid credit marker right now, there are a lot of
Speaker 2: opportunities out there partickling in high yield bonds, I'll leverage
Speaker 2: loans primarily because he sees those as areas of market imbalance.
Speaker 2: Armon Panosi and joining us right now the co chief
Speaker 2: Executive Officer and how to performing credit over at oakh Trey.
Speaker 3: Great to see you again, arm Man.
Speaker 4: To see it too, Thank you.
Speaker 2: Le's start, we got a lot to talk about. Let's
Speaker 2: start with the liquid credit here, because I am curious
Speaker 2: about that supplied demand and balance, what's driving that and
Speaker 2: what closes the gap.
Speaker 5: You know, it's a it's an unusually uncertain time because
Speaker 5: we have a lot of liquidity in the markets, especially
Speaker 5: after all the COVID related stimulus. A lot of savers
Speaker 5: have capital to spend and to invest. But meanwhile we
Speaker 5: have some overhangs. We have the highest cost of borrowing
Speaker 5: we've seen in many years, we have a slow in
Speaker 5: growth rate in the economy, and it just no one knows.
Speaker 4: You know, should we be really heavily.
Speaker 5: Going into the markets and getting that yield that's available
Speaker 5: in the markets these days, or are spreads too tight
Speaker 5: and so that vacillation between the opportunities that causes some
Speaker 5: volatility month to month.
Speaker 2: Well, that's what I'm curious about, particularly in the high
Speaker 2: yield space, like how much risk is there and when
Speaker 2: you get when you're looking at spreads, is there enough
Speaker 2: compensation for that risk.
Speaker 5: So when we when we think about spreads or total
Speaker 5: return from pre COVID days, we would always focus on spread.
Speaker 5: The reason was was because high old bonds were priced
Speaker 5: at par and the absolute yields on treasuries were very
Speaker 5: very low, so spread was what you were really focusing on.
Speaker 5: These days, there's other ways to win in high yield.
Speaker 5: The prices are discounted, there's convexity, there's higher base rates
Speaker 5: ten year treasury at four and a half, and the
Speaker 5: spreads are not so low that are concerning. They're sort
Speaker 5: of within the range of historical norms. As a result,
Speaker 5: total return is more attractive today than it's been in
Speaker 5: quite some time. Meanwhile, spreads are a little bit tighter,
Speaker 5: but spreads reflect credit risk, and credit risk in the
Speaker 5: high yield bond market is actually lower today.
Speaker 4: Than it's been in quite some time.
Speaker 6: So, having said that, when you look at high yield,
Speaker 6: does it matter the quality?
Speaker 7: Do you want higher quality? Is that how you're looking
Speaker 7: in terms of the investment.
Speaker 5: Play, oak Tree generally in our liquid credit strategies looks
Speaker 5: for higher quality, and usually it's focused on single B
Speaker 5: or upper single BE credit quality. There's a lot of
Speaker 5: opportunity there in the high old bond market. There's about
Speaker 5: eight hundred issuers. It's about a one point four trillion
Speaker 5: dollar market, So you could put together a diversified portfolio
Speaker 5: that will avoid defaults and losses pretty well. That's what
Speaker 5: we're aiming to.
Speaker 8: Achieve it open.
Speaker 6: What are the risks that you think about most in
Speaker 6: terms of having to factor.
Speaker 5: In for hygold in particular. Yeah, let's go hi yield.
Speaker 5: You know, I think high yield is a pretty bifurcated market.
Speaker 5: You know, half of hygyield today is trading out of
Speaker 5: two hundred spread.
Speaker 4: So when you think.
Speaker 5: About that, you say, well, how do I actually get
Speaker 5: the return that I want? Can't really get it with
Speaker 5: two hundred spread. That's kind of more consistent with investment
Speaker 5: great bonds. So you have to look at single bees
Speaker 5: and you have to really select credit carefully. It's really
Speaker 5: easy to make make bad decisions. It's easy to make
Speaker 5: some mistakes, and so avoiding triple c's that have generally
Speaker 5: speaking shorter maturities. I think those are going to be
Speaker 5: the locus of a lot of defaults over the next
Speaker 5: two years. But within that single bee category, can you
Speaker 5: really put together a well diversified by industry, by region
Speaker 5: portfolio that could outperform the markets through a cycle.
Speaker 7: You can just push that in.
Speaker 6: I know it's a little crazy, no, don'tie. We want
Speaker 6: to make sure you can hear us.
Speaker 2: All right, let's move on and talk a little bit
Speaker 2: about M and A or A the LBO environment right now.
Speaker 2: I think a year ago there wasn't a whole lot
Speaker 2: to talk about there. We've seen activities start to pick
Speaker 2: up a little bit.
Speaker 3: What are you seeing.
Speaker 5: Absolutely, the forward pipeline for M and A deal flow
Speaker 5: is certainly better than the last six months, and I
Speaker 5: think it's a combination of factors.
Speaker 4: First of all, spreads have.
Speaker 5: Come in both in broadly syndicated loans and in private credit.
Speaker 5: Over the last twelve to eighteen months, there's probably been
Speaker 5: about one hundred to one hundred and fifty basis points
Speaker 5: of spread compression. Meanwhile, the private equity firms that have
Speaker 5: dry powder, you know, they have a ticket in a
Speaker 5: time clock and they really need to deploy that capital,
Speaker 5: and they took a pause for about twelve to eighteen months.
Speaker 4: So now they're back and a little bit.
Speaker 5: More realistic to have to pay up a little bit
Speaker 5: to buy good businesses. And meanwhile the sellers of those businesses,
Speaker 5: they're also getting realistic because they have investors telling them
Speaker 5: that they want their capital back too. So the bid
Speaker 5: ask is narrowed, and the frequency of deals that we're
Speaker 5: seeing in the market looking for financing solutions.
Speaker 8: Has picked up.
Speaker 2: That's interesting you say that about the gap, that gap
Speaker 2: in between I guess realism and just you know, fantasy,
Speaker 2: because that was a big topic of conversation last year
Speaker 2: that buyers and sellers were just so far apart. Here
Speaker 2: who has actually given in on that? Has it been
Speaker 2: the seller has finally woken up to the fact that
Speaker 2: maybe this just isn't as valuable as I thought it was.
Speaker 5: I think they both moved a little bit. You know,
Speaker 5: when you when you were near a seller and you
Speaker 5: own a let's say you're a private equity firm, you
Speaker 5: own a business, you have it marked at a certain valuation.
Speaker 5: It takes a little bit of time to move that
Speaker 5: value down as you kind of reassess the market conditions.
Speaker 5: So I think generally speaking, those valuations have been stable
Speaker 5: to maybe declining, and it allows those private equity firms
Speaker 5: to transact more they if they could, if they could
Speaker 5: get a price that's as good or better than their mark,
Speaker 5: they're more likely to sell. And by the way they
Speaker 5: had marked up their positions generally speaking, you know, if
Speaker 5: they if they paid one hundred million dollars of inequity
Speaker 5: to buy a business, generally speaking, after a two year
Speaker 5: period that it marked it one and a half times
Speaker 5: two times already. Yeah, and so it is a factor
Speaker 5: of kind of bringing that down and managing that the
Speaker 5: appearance of sort of your marks and the legitimacy of
Speaker 5: those marks.
Speaker 7: Hey, let's talk about some of.
Speaker 6: The upcoming low maturities that are coming on next year
Speaker 6: and for the years to come. What kind of opportunities
Speaker 6: does that present for you guys.
Speaker 5: You know, it's a huge market opportunity for oak Tree.
Speaker 5: We're one of the world's largest providers of capital solutions,
Speaker 5: and we just see a very large tale of credit
Speaker 5: risk or just issues because there were a lot of
Speaker 5: borrowers that took on credit when base rates were near zero,
Speaker 5: never contemplated five percent or five and a half percent sofa,
Speaker 5: never contemplate four and a half percent treasury rates. And
Speaker 5: so the owners of those businesses have found themselves where
Speaker 5: there are good businesses. They've actually grown over the last
Speaker 5: five years, but they have not grown into a capital
Speaker 5: structure that is now four hundred bases points more expensive
Speaker 5: than it was to difference, huge difference. So capital solutions,
Speaker 5: rescue lending, that's a huge part of what we do.
Speaker 5: Ed OT treat and I expect that over the next
Speaker 5: two or three years we're going to be very, very active.
Speaker 6: There any signs already you're starting to see it or
Speaker 6: not yet.
Speaker 5: Well, we've seen some maturity driven rescue lending, even in
Speaker 5: twenty twenty three.
Speaker 4: We were quite active last.
Speaker 5: Year, and so what we're not seeing yet is cash
Speaker 5: flow shrinkage rescue lending. So in other words, if a
Speaker 5: company is not performing well and just can't cover its
Speaker 5: interest expense, yeah, that's a little bit riskier than what
Speaker 5: most rescue lenders want to step into. At least at
Speaker 5: this time, it's been more focused on maturities, and the
Speaker 5: maturity schedule really kicks in in twenty twenty six and
Speaker 5: twenty seven, so twenty twenty five sort of a year
Speaker 5: in advance that maturity is when it's going to be
Speaker 5: the most active.
Speaker 2: But what do you think is going to be the
Speaker 2: outcome of that. Are we going to start to see
Speaker 2: basically just sales.
Speaker 3: From one fund to another.
Speaker 2: Are we going to see a real exit into public markets?
Speaker 2: Are we just going to have to sort of address
Speaker 2: the fact that some of these companies are.
Speaker 3: Just going to go away.
Speaker 4: I think that's just going to be kicking the can.
Speaker 4: I don't think that.
Speaker 5: I don't think there will be exits writ large. I
Speaker 5: think the best businesses owned by private equity firms will
Speaker 5: certainly get sold, but it's we're really talking about the
Speaker 5: sort of the middle of the pack or the worst
Speaker 5: positions in the private equity fund. They will want some
Speaker 5: sort of solution to kick the can down the road,
Speaker 5: and they're not going to want to draw capital from
Speaker 5: a fund that was raised in twenty seventeen or eighteen
Speaker 5: to support.
Speaker 2: Those But I think it's sort of where the economy
Speaker 2: is and where rates are. And I know Oachre's always
Speaker 2: load to kind of make macro predictions. But if we
Speaker 2: do get maybe a little bit of easing in rates
Speaker 2: and financial conditions and at the same time growth economic
Speaker 2: growth holds up at least some sort of sustainable level,
Speaker 2: does that not offer any relief?
Speaker 5: It can, but I think that those two statements are
Speaker 5: at odds with one another. Seeing a meaningful reduction in
Speaker 5: rates usually means that some sort of shock has occurred,
Speaker 5: and then you have to ask yourself, well, how good
Speaker 5: do I feel about my portfolio, especially my equity portfolio
Speaker 5: in that type of environment. I mean, what happened to
Speaker 5: cause one hundred basis point decline. A twenty five to
Speaker 5: fifty basis point decline I think is immaterial in.
Speaker 4: Light of where we've gone in rates.
Speaker 5: I think you really need to see one hundred or
Speaker 5: two hundred basis point decline to really see a broad
Speaker 5: based relief for some of the most levered in the market.
Speaker 6: I'm curious about what you want to do for investors,
Speaker 6: and Bloomberg was reporting that you guys are looking to
Speaker 6: do a raise of about two billion for an asset.
Speaker 7: Back lending product. What can you tell us about.
Speaker 5: That, Well, we don't comment on specific fund raises, but
Speaker 5: we are seeing some dislocation in markets, sometimes caused by
Speaker 5: rates being high, in maturities kicking in, and sometimes caused
Speaker 5: by regulatory changes.
Speaker 6: You know.
Speaker 4: Regulation.
Speaker 5: There's a lot of work being done by regulators and
Speaker 5: banks to figure that out, and it results in higher
Speaker 5: risk weighted assets required in terms of capital at banks,
Speaker 5: which means that they will exit these legacy areas of lending,
Speaker 5: creating an opportunity for investment managers to step in.
Speaker 2: Well, just on that point too, and I know you
Speaker 2: can't comment on the funding, but at least based on
Speaker 2: what Bloomberg is reporting the focus have that fun So
Speaker 2: deals back by like equipment leases, royalty payments, things like that.
Speaker 2: These all seem like more steady streams of revenue, and
Speaker 2: they seem a little bit different than maybe what was
Speaker 2: in the complexion of the portfolio prior.
Speaker 3: Is that not right?
Speaker 5: Well, the way to think about asset back finance is
Speaker 5: it doesn't mean hard asset back finance. It just means
Speaker 5: any contractual cash flow stream that could then be securitized
Speaker 5: or a series of securities could be structured around them.
Speaker 5: So that applies to a lot of different industries. It
Speaker 5: could be medical royalties, it could be music royalties, it
Speaker 5: could be equipment finance, shipping finance, aircraft finance, and various
Speaker 5: types of consumer lending. So it's asset back finance is
Speaker 5: just different than corporate blending, which is what we really
Speaker 5: do a lot of it a treat, whether it's on
Speaker 5: the distress side or on the performing side. But really
Speaker 5: enterprise value lenders, which is what a corporate direct a
Speaker 5: corporate lending, whether it's public or private, that's what is
Speaker 5: the focus there. Asset back finance is attaching to a
Speaker 5: revenue stream.
Speaker 6: Well, speaking of assets, you know you guys do get
Speaker 6: into the real estate area, and I'm just curious, what's
Speaker 6: the smart what are you seeing when it comes to
Speaker 6: real estate?
Speaker 7: Some of the concerns that are outher, especially when it
Speaker 7: comes to office and.
Speaker 5: Other Well, I think that we're gonna have several years
Speaker 5: of maturities in real estate that will result in sort
Speaker 5: of a rolling set of defaults and losses in real
Speaker 5: estate creates an opportunity for buyers who are willing to
Speaker 5: kind of pick and choose the right markets and the
Speaker 5: right assets. So, you know what, anytime we see risk,
Speaker 5: we also see opportunity and we're excited about the opportunity
Speaker 5: part of that.
Speaker 7: But do you hear crisis around what's going on.
Speaker 3: In real estate?
Speaker 4: Like, I don't think it's a crisis.
Speaker 7: We see opportunity, But I'm just I don't.
Speaker 5: Think it's a crisis other than in certain markets in office,
Speaker 5: I think it's really hard to find a way through
Speaker 5: some of those assets without a massive repositioning in them.
Speaker 5: But even that creates an opportunity for the right.
Speaker 2: Investment, and you feel like there are people out there
Speaker 2: willing to take on that risk, take on that opportunity.
Speaker 4: Slowly, slowly, it's not there.
Speaker 5: Even though there's a lot of capital parkland the sidelines generally,
Speaker 5: especially for credit, we're not seeing a lot of that
Speaker 5: capital flood into real estate all at once right now.
Speaker 5: I think it's just the issues, especially around maturities is
Speaker 5: so significant over the next few years. There's a lot
Speaker 5: of concern to just kind of put all your exit
Speaker 5: one basket at the moment.
Speaker 3: All right, Arman, we have to leave it.
Speaker 2: They are always great to get your insights with you
Speaker 2: and the guys over and the folks over at oak Tree.
Speaker 2: You're doing off always really insightful.
Speaker 4: Thank you so much.
Speaker 2: So, then give our best to Howard arm and Punulsi,
Speaker 2: and they are co chief executive over.
Speaker 3: At oak Tree.
Speaker 6: Yeah, I think it's fascinating about the real estate side
Speaker 6: of things. I've had some conversations with folks here that's saying,
Speaker 6: you know, maybe the government's got to step in and
Speaker 6: take take some of these assets and just deal with
Speaker 6: them because nobody wants them. But it's interesting to hear
Speaker 6: Armed site. Yeah, there's gonna be buyers.
Speaker 3: How long people do want them? You know you still
Speaker 3: work in office.
Speaker 6: I do.
Speaker 7: I work at a gorgeous office.
Speaker 3: I mean, there's the man out there.
Speaker 2: It's just a different type of demand, right, Yeah, maybe
Speaker 2: it's a little less maybe the complexion of a change.
Speaker 7: I don't know.
Speaker 6: Some of those properties in midtowm Manhattan, those old properties,
Speaker 6: I do wonder whether or not you can kind of
Speaker 6: rework them.
Speaker 2: Yeah, we've seen whether they can repurpose them and find purposes.
Speaker 3: I'll some juristicans doing some interesting things.
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Speaker 3: We've got to have up some pretty good discussions today.
Speaker 2: Obviously there's been a big focus on what's going on
Speaker 2: here domestically, but I had a chance to catch up
Speaker 2: with a few people who are really investing internationally.
Speaker 3: Now Runo along.
Speaker 2: She's a co founder and the co founding partner of
Speaker 2: a company called Development Partners International, and they just focus
Speaker 2: on companies in the Pan African region.
Speaker 6: I love this because we've been so I feel like
Speaker 6: a lot of US centric, if you will.
Speaker 7: So it's interesting to see what she.
Speaker 4: Has to say.
Speaker 2: And this gets back to the old idea. Everybody's looking
Speaker 2: for that next big opportunity. She was on a panel
Speaker 2: this morning. They really talked about digital transformation, how that
Speaker 2: could actually.
Speaker 3: Close the global growth growth.
Speaker 2: Gap, and she talked a lot about how these African
Speaker 2: companies they're not looking to export their skill set. They
Speaker 2: want to kind of keep this internal here. It's an
Speaker 2: interesting dynamic. Let's take a listen as to what she
Speaker 2: had to say.
Speaker 9: The opportunity in this space is the pure demographics and
Speaker 9: all the secular trends. Huge population growth, one out of
Speaker 9: every four humans in the world by twenty fifty will
Speaker 9: be in Africa. Huge urbanization eighteen out of the thirty
Speaker 9: biggest cities in the world hoping now Africa, huge digitization,
Speaker 9: and really great opportunities for a private equity investor like
Speaker 9: myself to invest there. Am I finding it en nothing absolutely.
Speaker 9: There's a lot of talk about digitization. There's talk about
Speaker 9: the Global South, so it is being worked in all
Speaker 9: of the discussions here.
Speaker 2: So to break up, I mean, gen you mentioned the
Speaker 2: Global South because when a lot of people talk about it,
Speaker 2: you hear a lot more in the context of some
Speaker 2: of the Latin.
Speaker 3: American nations as well.
Speaker 2: As some of the Southeast Asian nations break it down
Speaker 2: as to how some of the African countries fit into that,
Speaker 2: what's the hierarchy.
Speaker 9: I do think the great investment opportunity in Africa is
Speaker 9: the lack of discussion about Africa. So how does it work? Yes,
Speaker 9: Africa is probably developmentally a little bit behind East Asia,
Speaker 9: but it is interesting to note that in the next
Speaker 9: five years Africa will grow as fast as Asia by
Speaker 9: five percent a year. And because of the low level
Speaker 9: of legacy assets and the low level of growth, the
Speaker 9: investment opportunities are huge. One said, before you see a
Speaker 9: town where the kids have no shoes, you can either
Speaker 9: be kids have no shoes there, this is batter you
Speaker 9: can say, I can sell them shoes. In Africa. The
Speaker 9: amount of demand for consumer products, be they pharmaceuticals, be
Speaker 9: they a bank account, be they agribusiness FMGG, all of
Speaker 9: those things huge unmet gap compared to the rest of
Speaker 9: the world. Other em bigger demand. If you look at China,
Speaker 9: Africa actually will have a bigger working population by twenty
Speaker 9: thirty five than either China or India.
Speaker 7: A young population.
Speaker 9: China is leveling off of that, so all of that
Speaker 9: will lead to growth and opportunities.
Speaker 2: Is that exportable growth or opportunities or does that even matter?
Speaker 10: Well?
Speaker 9: I think that Africa, as McKenzie called it, we call
Speaker 9: it the African Lions. They are more about intra Africa growth,
Speaker 9: intra Africa trade, rather than ext morning to the US
Speaker 9: and Europe. So it doesn't matter in the sas that
Speaker 9: it's still least to growth. It does matter to investors
Speaker 9: in the US if you want to hedge. The correlation
Speaker 9: Africa to the US is much less than East Asia,
Speaker 9: It's much less than Latown. So if you want something
Speaker 9: that hedges a bit the US, Africa is the investment destination.
Speaker 2: You're coming off a panel this morning that was about
Speaker 2: digitization and that closing the global growth gap. When you
Speaker 2: hear about African industries and particularly the companies that have
Speaker 2: been successful, a lot of them seem to fall into
Speaker 2: that space, whether it's telecom, internet, etc. Here is that
Speaker 2: the primary investment opportunity there now?
Speaker 9: I think because digitization goes across all industries, it's an
Speaker 9: opportunity in different segments. With the theme of digitization, what
Speaker 9: do I mean by that? In our fund, we're doing
Speaker 9: three things. First, investing directly in fintech companies. We have
Speaker 9: a company called Optasia, company called Ukes that covers all
Speaker 9: of Africa and Southern Africa. We are doing turnarounds of
Speaker 9: legacy assets, which is really one of the most interesting
Speaker 9: things happening in Africa. Look at a company like Mmantemhlan
Speaker 9: in Egypt. A few years ago they were leasing toktoks,
Speaker 9: handwriting microlos. What they're doing today is purely fintech. Millions
Speaker 9: of customers. Only Unicorn in Africa for several years and
Speaker 9: it's a Pe company. And then finally embedded finance where
Speaker 9: we're taking our company that's in a different area like
Speaker 9: specialty chemicals level in West Africa, home Choice in Southern Africa,
Speaker 9: and by putting a digital part to that, we're actually
Speaker 9: growing the valuation, We're growing number of customers, we're making
Speaker 9: them more efficient. So in Home Choice selling home goods
Speaker 9: to women, primarily they had a side of the company
Speaker 9: that was giving credit to these women's That side of
Speaker 9: the company became really a lender is much much bigger
Speaker 9: and fintech through digitization from the original company.
Speaker 2: For investors who want exposure to that, are there relatively
Speaker 2: easy avenues. Obviously they can go through somebody like your
Speaker 2: company at Development Partners. But are there enough of those
Speaker 2: companies out there for investors who want that type of access.
Speaker 9: There are opportunities, and that I would say that the
Speaker 9: opportunities are through direct investment or through funds like ours,
Speaker 9: because a lot of these companies are not yet public,
Speaker 9: so they're not reflected in the twenty three stock exchanges
Speaker 9: in Africa quite yet. There are some you will see
Speaker 9: in the future that they will be.
Speaker 7: Some of our.
Speaker 9: Companies, frankly, are not only just listening in Africa and
Speaker 9: in London, but actually they're going to the Middle Eastern
Speaker 9: stock exchanges because of proximity. So eventually there will be
Speaker 9: opportunities on the listed side. Right now, it's direct investments
Speaker 9: and private equity.
Speaker 2: Runa Alam there the CEO and co founding partner over
Speaker 2: at Development Partners International. She has her primary focus really
Speaker 2: on African companies.
Speaker 6: Well, I feel like some of the you know, earlier
Speaker 6: conversations we talked about how much investment into Africa specifically
Speaker 6: has come out of China, but they have really pulled
Speaker 6: back over their own concerns and slowdowns, if you will.
Speaker 6: But also, you know, you think about Africa more broadly
Speaker 6: the higher global interest rate environment that's been problematic for
Speaker 6: them to really tap into.
Speaker 3: The capitol art problematic for them. So has the stronger
Speaker 3: dollar as well.
Speaker 2: But at least in her optimism, she looks at some
Speaker 2: of the demographic trends, the young population, the rise, of course.
Speaker 8: And they have.
Speaker 2: And then some of those countries have great educational systems too,
Speaker 2: so they're building a great skill set as well.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 3: Let's get right to it now, we're able joining us
Speaker 3: right now. Really, there's no introduction.
Speaker 2: The CEO overhead Kane Anderson one of the top alternative
Speaker 2: investment management firms, a big focus of real estate, credit, infrastructure,
Speaker 2: and energy.
Speaker 8: Out.
Speaker 2: Great to see you, great to have out, great to
Speaker 2: be here, object and great to have you. And I
Speaker 2: do want to te to talk about investment strategy at
Speaker 2: a time where I mean things are stable, certainly a
Speaker 2: lot more stable than what they were a year ago,
Speaker 2: but there's still a lot of dislocations out there, and
Speaker 2: I just want to know what kind of what your
Speaker 2: thought process is in navigating that.
Speaker 11: Our thought process is this is this is a time
Speaker 11: of dislocation and one that I think is going to
Speaker 11: take a while to work through. So we're incredibly excited
Speaker 11: because we've actually built our platform for times just like this.
Speaker 11: So we want to be relevant in all in all cycles.
Speaker 11: But really where we want to be buying is times
Speaker 11: of dislocation. And that's the reason with intentionality that we've
Speaker 11: built the real estate platform to invest in in elastic
Speaker 11: demand sectors so medical, office, seniors housing, student housing, class
Speaker 11: being multifamily often referred to as workforce. So you know
Speaker 11: when you know when the macro economy falters or enters
Speaker 11: a more difficult period of time. And I'd say we're
Speaker 11: in one right now, and I think this will be
Speaker 11: the case for kind of the next twenty four months.
Speaker 11: It'll be choppy at best. I've been in the hard
Speaker 11: landing camp for a while. I still sit there throwing
Speaker 11: a hard landing. We've had This is the ninth time
Speaker 11: that we've had inverted an inverted yield curve since nineteen
Speaker 11: sixty two. In seven of the eight previous times, only
Speaker 11: exception being nineteen sixty seven, we've had a recession, so
Speaker 11: there is a great deal of historical precedence for the
Speaker 11: fact that a recession follows an inverted yield curve. I
Speaker 11: also think that bank balance sheets are in a very
Speaker 11: precarious position at the moment. I do think that that
Speaker 11: means that I think effectively Powell eased rates last month
Speaker 11: by by essentially saying that the FED was comfortable with
Speaker 11: a bigger balance sheet. That was an effective ease. I
Speaker 11: do think that we will see two to three rate
Speaker 11: So you.
Speaker 3: Didn't interpret that what he said as hawkish.
Speaker 4: I did not.
Speaker 11: I interpreted it as dubbsh and I think that it
Speaker 11: took the market a little bit of time to digest.
Speaker 11: But now we've seen sort of seven of eight up days.
Speaker 11: You've seen the ten year treasury drop from four to
Speaker 11: seventy to four forty four to forty five. So I
Speaker 11: think the market digested what he said, and I do
Speaker 11: think that he's looking for.
Speaker 4: A reason to ease.
Speaker 11: I think he understands that the bigger risk between price
Speaker 11: inflation and asset deflation is asset deflation because bank balance
Speaker 11: sheets right now have the greatest amount of unrealized securities
Speaker 11: losses that they have ever had in history, and they
Speaker 11: have one point six trillion, well, not all banks, but
Speaker 11: there's one point six trillion of real estate that comes
Speaker 11: due by year in twenty twenty six.
Speaker 4: Most of that sitting on bank balance sheets.
Speaker 11: What I think he does not want to do is
Speaker 11: risk a contagion and have another financial crisis on his hands.
Speaker 11: And so I think you're walking that fine line.
Speaker 7: Is that why we get the heart landing?
Speaker 6: Help me understand, Because you see the growth, you see
Speaker 6: the metrics, consumer still spending, How do we get that
Speaker 6: heart landing?
Speaker 11: I think that the economy is doing fine, but you
Speaker 11: already see deflation happening. If you take the jobs numbers
Speaker 11: absent government spending, you have a massive decrease on the
Speaker 11: job front side. I think things slow, demand for goods
Speaker 11: and services slow. And I'm not predicting a catastrophic inflation.
Speaker 11: I certainly I think stagflation is pretty much off the table.
Speaker 11: I think the economy is too strong for that, but
Speaker 11: I do think we experience a recession now. Regardless of that,
Speaker 11: I would say our focus is on the asset classes
Speaker 11: in which we invest, and really I'm focused on the
Speaker 11: massive opportunity that exists.
Speaker 4: Sorry, go ahead, and I.
Speaker 6: Want to get into that, but I want to You know,
Speaker 6: you do look at justlocation as an as opportunistic. I
Speaker 6: know you don't play in the office area, but you're
Speaker 6: smart and you follow real estate and you follow cycles
Speaker 6: and talk about dislocation. You had Barry Stern Looks saying
Speaker 6: here at Milkan.
Speaker 7: There's a huge distress cycle ahead of us.
Speaker 6: And then you had Kathleen McCarthy a Blackstone saying the
Speaker 6: shipwreck has already happened. Dislocation in terms of views, what
Speaker 6: do you think is the view when it comes to
Speaker 6: office real estate?
Speaker 4: So office real estate, everybody wants to know.
Speaker 11: I mean, we haven't played office and have never invested
Speaker 11: in office for a very specific reason. It is the
Speaker 11: opposite of an inelastic demands. It is highly correlated to
Speaker 11: the macro economy and obviously the pandemic. Not many people
Speaker 11: underwrote that, but office is an asset class in which
Speaker 11: you put all of your capital in upfront. You hope
Speaker 11: the economy is good enough to lease it up and
Speaker 11: get out before you have.
Speaker 4: A down cycling.
Speaker 11: We've been running in ten year recession cycles for the
Speaker 11: last five decades, So that is a timing game and
Speaker 11: one that is highly correlated to the macro economy.
Speaker 4: So where do I think we are with office.
Speaker 11: I think it's going to be a rough slug and
Speaker 11: I think it's they're very disparate outcomes. Office in West
Speaker 11: Palm Beach is fine, Office in San.
Speaker 4: Francisco not so much. So it's not all bad, but
Speaker 4: I don't think.
Speaker 11: I think the tastes of the nation have changed and
Speaker 11: they're not going back to pre pandemic dynamics anytime soon.
Speaker 11: And we've been slower on the return to office than
Speaker 11: really any other large economy.
Speaker 7: So I don't see it in New York.
Speaker 6: I mean on a Monday or Friday, right, it's kind.
Speaker 11: Of I agree with Kathleen, though, by the way, on
Speaker 11: the we're in the bottoming phase, I do.
Speaker 4: I you know, I would never believe.
Speaker 11: That I'm smart enough to call the bottom or say
Speaker 11: it's this month, it's this day. But we're in the
Speaker 11: bottoming phase. What I'm saying is we understood and we
Speaker 11: were very disciplined with our capital in twenty one and
Speaker 11: twenty two when we thought we were much nearer a
Speaker 11: peak than a trough. Because you had massive acid inflation
Speaker 11: due to what the Fed did. They injected a tremendous
Speaker 11: amount of money into the economy, took treasuries down tenure
Speaker 11: treasury down to eighty six phases points.
Speaker 4: So you had.
Speaker 11: Massive asset inflation that is now winding its way out
Speaker 11: of the system. I'm not saying we're at the bottom,
Speaker 11: but we are definitely in the bottoming phase, meaning we
Speaker 11: are much closer to a trough than a peak. So
Speaker 11: now for investors who have been disciplined, who have access
Speaker 11: to equity and debt capital, who are.
Speaker 4: Not dealing with problems, this is to me.
Speaker 11: I believe this is one of the three to four
Speaker 11: best buying opportunities I've seen in the last thirty five years.
Speaker 2: We'll talk about those opportunities and particularly when it comes
Speaker 2: to new projects. Is it better were well, is there
Speaker 2: a better risk return by building that or buying it?
Speaker 11: Well, it's a great question. I'm saying we're doing both.
Speaker 11: It is a very difficult building environment. The benefit in
Speaker 11: our asset classes, as I said, you sort of have
Speaker 11: the trifecta in medicalovist, senior student, affordable housing, and that
Speaker 11: is that you've got demand tail winds because you have
Speaker 11: massively escalating demand, you have an aging US population, you
Speaker 11: have supply tailwinds in the sense that you have massively
Speaker 11: constrained new supply illiquidity in the market's high interest rates.
Speaker 11: Supply is way down, and you have a buying opportunity
Speaker 11: because the rapidity with which rates rose was unforeseen by
Speaker 11: many and put and made structural leverage unworkable for many.
Speaker 11: So you've got demand tailwinds, supply tail wins, and a
Speaker 11: buying a buying opportunity. So I would say from a
Speaker 11: risk perspective, our preference would always be to buy fully
Speaker 11: stabilized askets at deep diss counts to where they have
Speaker 11: historically traded. Now, there are some opportunities on the development side,
Speaker 11: but obviously you're deferring cash flow. You've got construction costs,
Speaker 11: you've got labor dynamics, etc.
Speaker 6: But it's interesting when you talk about those dynamics that
Speaker 6: the valuations have gone up, right because the supply is down.
Speaker 6: But you can't start to create new opportunities right that
Speaker 6: are investable if you can't, if it's difficult to build out.
Speaker 4: You can't.
Speaker 11: I mean, listen, there are development deals at work, and
Speaker 11: we are active on the development side of the business.
Speaker 11: I'm just saying that the opportunities set that exists for
Speaker 11: us today, and it existed very briefly in twenty twenty
Speaker 11: and the last time it really existed before that was
Speaker 11: just POSTGFC, and that is buying super high quality, fully
Speaker 11: stabilized assets at what I'll say are discounts to intrinsic
Speaker 11: value because you have forced selling. By definition, any seller
Speaker 11: today is a motivated seller. There is no seller who
Speaker 11: is sitting around saying, hey, May twenty twenty four, June
Speaker 11: twenty twenty four, this is when I absolutely want to sell.
Speaker 4: We all know that, So.
Speaker 7: All right, have your energy.
Speaker 4: I love that.
Speaker 3: One of the smartest guys out there.
Speaker 2: I'll rabel over at Kane Andersen, seal over at Kane Anderson.
Speaker 2: Any's right, I mean, look, I mean this is kind
Speaker 2: of is what it is.
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Speaker 6: All right, everybody, we are back at Milkin and Harvard
Speaker 6: University professor of public economics, Laws Shetty was one of
Speaker 6: the conversations we have.
Speaker 7: What are you laughing at you?
Speaker 3: No, I'm going to get move cal We're almost done.
Speaker 6: Well, I have to say we had a great conversation.
Speaker 6: We had so much we wanted to talk to him.
Speaker 6: The tense discourse on college campuses regarding war geopolitics partly
Speaker 6: fueled by economic disparity.
Speaker 7: And that is something he said that really stuck with us.
Speaker 7: We spoke to him earlier.
Speaker 6: He says improving the US education system depends on better
Speaker 6: pay more successful teachers.
Speaker 10: You know, I think at cornerstone aspect of the American
Speaker 10: dream is the idea that through hard work, anyone has
Speaker 10: a chance to rise up in the income distribution relative
Speaker 10: to their parents. Historically, America was very much a land
Speaker 10: of opportunity in that way. Our studies showed that for
Speaker 10: kids born in the middle of the last century, virtually
Speaker 10: all of them, ninety two percent of them went on
Speaker 10: to earn more than their parents. But if you look
Speaker 10: at the data today for kids born in the nineteen
Speaker 10: eighties who are turning thirty around now when we're measuring
Speaker 10: their incomes as adults, it's become a fifty to fifty shot,
Speaker 10: a coin flip as to whether you're going to do
Speaker 10: better than your parents and achieve the American dream?
Speaker 7: Why is it happening?
Speaker 10: So why is the American dream faded? You know, we
Speaker 10: think there are lots of different trends that are driving that,
Speaker 10: from increasing segregation, stalling, and levels of education. So in
Speaker 10: the past, as technology progressed, as we had more global competition,
Speaker 10: American workers were becoming more skilled, getting more education, getting
Speaker 10: more advanced, knowledge able to compete with machines and with
Speaker 10: other people around the world. Around nineteen eighty that progress
Speaker 10: basically stalled. We started to lose the race between education
Speaker 10: and technology.
Speaker 2: I come from a generation where the idea was you
Speaker 2: went to college for your university, maybe.
Speaker 3: To grad school. That was all part of that upward
Speaker 3: mobility promise.
Speaker 2: It seems like a lot of frustration, particularly with the
Speaker 2: generations behind me, the millennials, etc. Have now said, look,
Speaker 2: that value proposition isn't the same, but you're still pushing
Speaker 2: us into those areas.
Speaker 3: Is there's still an argument.
Speaker 2: To be made the higher education can afford you that
Speaker 2: upward mobility.
Speaker 10: Yeah, so I continue to think, and I think the
Speaker 10: data show clearly that higher education can be a great
Speaker 10: pops upward mobility. But it matters what higher education we're
Speaker 10: talking about. There are some colleges in America where we
Speaker 10: see very clearly if you manage to get into a
Speaker 10: highly selective college, it totally changes your trajectory in terms
Speaker 10: of what you're able to earn, the types of jobs
Speaker 10: that open up, the doors that open up you. But
Speaker 10: there are other colleges in America where if you look
Speaker 10: at the outcomes follow people over time who went to
Speaker 10: those colleges, they're not doing any better than kids who
Speaker 10: didn't go to college. So the value proposition is not there.
Speaker 10: And so I think what makes this challenging is that
Speaker 10: just saying college for everyone, we need everybody to get
Speaker 10: a higher edufiction, It's not clear that's the solution. But
Speaker 10: that doesn't mean that education is not a pathway outward mobility.
Speaker 10: We need to figure out how to get more kids
Speaker 10: to colleges that really are engines of upward and mobility.
Speaker 2: How do we do that, Because for a while, it
Speaker 2: didn't seem like there was an alternative. Right either you
Speaker 2: went to college and maybe prosper or you didn't go
Speaker 2: to college and you ended up in just kind of
Speaker 2: a wage job and maybe if you got lucky, you
Speaker 2: had some upward mobility. But is there an avenue, whether
Speaker 2: it's vocational schools or whether it's a return or the
Speaker 2: resurgence of community colleges and do your programs.
Speaker 10: Yeah, so I think vocational schools can be part of
Speaker 10: the picture. We're finding evidence that certain types of job
Speaker 10: training programs that give you exactly the skills you need
Speaker 10: to do it or maybe in the future to do
Speaker 10: certain effective AI tasks can provide a pathway to really
Speaker 10: having significant growth and earnings without having a college degree.
Speaker 10: So I think targeted training for skills that matter can
Speaker 10: be an important part of the picture as well.
Speaker 6: You know, Ros We've done a lot of recording at
Speaker 6: Bloomberg about the shortage and plumbers shortage and electricians. You know,
Speaker 6: here we are at NOKIN talking about the infrastructure build out.
Speaker 7: We need a lot of people who can do these things,
Speaker 7: and they're just not out there.
Speaker 6: So I'm just curious how you kind of roll that
Speaker 6: into and how do we get to a point where
Speaker 6: as an economy, as a society we actually respect those
Speaker 6: types of jobs.
Speaker 10: So I think part of what you're bringing up here,
Speaker 10: Carell is that the issues here are deeper. It's not
Speaker 10: just about our higher education system. What we're seeing in
Speaker 10: the data as lots of kids, you know, let alone
Speaker 10: going to a four year college, they're not finishing high
Speaker 10: school or not really motivated to get those jobs as
Speaker 10: plumbers or electricians, may not have the skills needed to
Speaker 10: navigate the labor market, the social skills, the kind of
Speaker 10: ability to adapt to the concerts, and so my view
Speaker 10: is a lot of the way we fix these issues
Speaker 10: is going back to the roots of where the problems originate,
Speaker 10: in elementary school or even before, in the communities where
Speaker 10: kids are growing up.
Speaker 6: Well, do you feel like elementary, middle schools, high schools.
Speaker 7: Are failing us today? Because it's really interesting.
Speaker 6: I mean, I grew up going an incredible public school
Speaker 6: system in New Jersey. My daughter I had to do
Speaker 6: private schools because we were in an area where public
Speaker 6: schools were horrendous. And increasingly we see people, you know,
Speaker 6: paying to get their kids through school. So is our
Speaker 6: public educational system in some way failing us before the
Speaker 6: kids even.
Speaker 7: Can think about college?
Speaker 8: Yeah?
Speaker 10: I mean I think there's serious issues in our public
Speaker 10: education sym Why aren't there serious some of you which
Speaker 10: have to do with funding, but some of which have
Speaker 10: to do with constraints in our system. So if you
Speaker 10: look at the data, there's certain types of charter schools,
Speaker 10: for example, that show really good records of success where
Speaker 10: they have high quality teachers, they're bringing kids into smaller
Speaker 10: classrooms in a bit of curriculums where you're seeing really
Speaker 10: good outcomes for those kids. But then there are other
Speaker 10: charter schools where you're seeing much less progress, And so
Speaker 10: the details really matter. We've got to get an education
Speaker 10: system that is prioritizing high quality output. Just like in
Speaker 10: the private sector in America, businesses that succeed, you know,
Speaker 10: end up doing really well in gaining market share.
Speaker 7: With no offense.
Speaker 6: They succeeded when I went through and I mean public education,
Speaker 6: went to an Ivy League school, So like they did
Speaker 6: work before, how come they're not working anymore.
Speaker 10: I think part of the issue is that other options
Speaker 10: that people have. So if you think about thirty forty
Speaker 10: years ago, many highly qualified women became teachers. Now many
Speaker 10: highly qualified women go into other careers that are much
Speaker 10: more lucrative in a relative sense than education. It becomes
Speaker 10: very challenging to retain talent in our public school system.
Speaker 10: If we pay people enough to reward them for being
Speaker 10: in education, and that influences the next generation.
Speaker 2: Well how do you fix that? I mean, this has
Speaker 2: been a problem we've talked about for a while. I
Speaker 2: always joke I have a family full of former teachers,
Speaker 2: and with emphasis on the former, because it was not
Speaker 2: a career path for a lot of them, primarily because
Speaker 2: it was not financially sustainable and there was just a
Speaker 2: lot of stress involved in it that for a lot
Speaker 2: of them just.
Speaker 3: Wasn't worth it.
Speaker 10: Yeah, I mean, I think finances are part of it.
Speaker 10: I think part of it is somehow making teaching more
Speaker 10: of a prestigious profession where people feel like this is
Speaker 10: something that I really aspire to do. But I also
Speaker 10: think part of it is just about flexibility and the
Speaker 10: way we pay people. So in most public schools in America,
Speaker 10: there's a lot of rigidity where your pay is basically
Speaker 10: set as a function of how many years you've talked.
Speaker 10: If you've got a star teacher who's really inspiring your students,
Speaker 10: there's no way to reward that feature and say you know,
Speaker 10: we're going to pay you extra, give you that bonus,
Speaker 10: really work hard to try to keep you. And most
Speaker 10: of the jobs were all in outside education. If you've
Speaker 10: got a star employee, we're going to try to keep
Speaker 10: that employee. And I think giving schools that latitude can
Speaker 10: make a difference.
Speaker 2: Rush, I do want to go back to colleges and
Speaker 2: universities and the process for prospective students to get into
Speaker 2: those universities. There's been a lot of back and forth
Speaker 2: over admission requirements or the standards.
Speaker 3: Whether you don't, I know, Harvard has gone back and
Speaker 3: forth on this.
Speaker 2: Here what is the best barometer to measure whether a
Speaker 2: student is acceptable enough to be part of your university.
Speaker 10: So our team has been studying these issues recently. Last
Speaker 10: year put out a paper trying to understand who gets
Speaker 10: into highly selective colleges Does it matter how you should
Speaker 10: evaluate students. Part of what came out of that paper
Speaker 10: is very clear evidence that standardized tests are actually some
Speaker 10: of the best predictors we have of how well kids
Speaker 10: do in college and after college. They're not perfect, and
Speaker 10: we worry that you know, you can prepare for tests,
Speaker 10: and you can take the test multiple times and there
Speaker 10: may be certain biases inherent in those tests, but the
Speaker 10: issue is that the other things that you might use
Speaker 10: if you don't have standardized tests, are even more prone
Speaker 10: to those biases. So if you put weight on things
Speaker 10: like high school grades or extracurriculars or your wreck letters,
Speaker 10: kids with more resources have more of an opportunity to
Speaker 10: credential themselves on those fronts.
Speaker 6: Of course, was Harvard University professor of public economics Raj Shetty,
Speaker 6: and I feel like that conversation you and I walked
Speaker 6: away and just felt like there were so many things
Speaker 6: that he hit upon that were so important and maybe
Speaker 6: thinking about it a little bit differently, especially when it
Speaker 6: came to the protests and the thoughts about the economic
Speaker 6: underpinnings of maybe why there are so many protests.
Speaker 3: Yeah, I think that sort of gets lost in it.
Speaker 2: We focus on the here and now what's happening, but
Speaker 2: we forget what sort of led us here, And I
Speaker 2: think being able to address that, particularly as college administrator,
Speaker 2: it's going to be really important.
Speaker 6: Really really important, really tapped into a lot of things.
Speaker 6: Education right seemed to be the door that opens up
Speaker 6: opportunities for people.
Speaker 7: But then you get a little worried. If it's not there,
Speaker 7: that's for sure.
Speaker 1: You're listening to the Bloomberg Business Week Podcast. Listen live
Speaker 1: each weekday starting at two pm Eastern on Apple car
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Speaker 6: All right, everybody, Well, speaking of the environment, we've talked
Speaker 6: a lot about M and A. We are live here
Speaker 6: at the Milkin Institute. Let's talk about M and A.
Speaker 6: Volume in the first quarter totally about three hundred and
Speaker 6: fifty two billion dollars. That was up seventy percent from
Speaker 6: a year earlier and the highest for the period since
Speaker 6: twenty twenty two.
Speaker 7: This is according to our data here at Bloomberg Now.
Speaker 6: The rebound of deal activity after a prolonged drought has
Speaker 6: been boosted by the comeback of mega deal like Capital
Speaker 6: One buying Discover our next guest, saying earlier on a
Speaker 6: panel at Milk and moderated by my co host Romain Bostik,
Speaker 6: that emanation top two and a half trillion dollars this year,
Speaker 6: but not the record amount of five trillion that company
Speaker 6: spent on M and A back in twenty twenty one.
Speaker 6: With more on the deal environment, we're joined by Andrew Bednark.
Speaker 6: He's partner in CEO of the global investment banking firm
Speaker 6: Corella Weinberg. So nice to have you here with us.
Speaker 6: Let's start big and broad. How is the M and
Speaker 6: A environment today?
Speaker 12: Yeah, so just the level set on M and A markets.
Speaker 12: There are some very observable and enduring characteristics of M
Speaker 12: and A markets. One they're large, Two they're growing, and
Speaker 12: three they're cyclical. And so we do have movements from
Speaker 12: year a year, quarter to quarter. We see peaks and
Speaker 12: troughs really throughout the history of when we've been recording
Speaker 12: M and A volume, but we are seeing higher troughs
Speaker 12: and higher peaks, and so therefore you get the dynamic
Speaker 12: of long term secular growth which has been persistent in
Speaker 12: the M and A markets. Now we're today on a
Speaker 12: pace for about two and a half trillion, which is
Speaker 12: what I mentioned in the panel yesterday with Romaine. I
Speaker 12: don't see five trillion in the near term. Usually when
Speaker 12: you have these peaks and troughs from a peak usually
Speaker 12: fall down the elevator shaft. You go down very fast
Speaker 12: and then you walk your way back up, and we're
Speaker 12: walking our way back up. So we've got a lot
Speaker 12: of encouraging signs. You've got larger deals, you've got some
Speaker 12: significant stock for stock deals. The boardrooms are very active,
Speaker 12: and I do think that's a harbinger for future activity.
Speaker 12: But it's a slow walk back up, but it's an
Speaker 12: encouraging one.
Speaker 6: Andrew Wire companies doing deals because they have to or
Speaker 6: because they want to.
Speaker 12: So strategics are eating us out of this trough in
Speaker 12: M and A, so it's clearly a strategic lead market.
Speaker 12: I think sponsors will follow. Strategics are faced with the
Speaker 12: same pressures they've typically had, which is growth, so they're
Speaker 12: looking at how much can they continue to grow the
Speaker 12: top line in a late stage economic expansion. Most economists
Speaker 12: will say GDP is probably a single digit for the USA,
Speaker 12: and emerging markets may be a multiple of that, but
Speaker 12: most of the developed markets are single digits. A lot
Speaker 12: of action has happened in the middle of the P
Speaker 12: and L cost cutting and other supply chain improvements that
Speaker 12: have been made post COVID. You have capital going back
Speaker 12: to shareholders for dividends and buybacks. But that's not enough
Speaker 12: to satisfy equity investors who want twelve thirteen, fourteen percent
Speaker 12: equity return. So how you're going to get that you
Speaker 12: have to look externally, and that's where M and A
Speaker 12: becomes this permanent part of the discussion in a boardroom
Speaker 12: about how do we grow, how do we adjust the transition,
Speaker 12: how do we adjust to transformation? All the things happening
Speaker 12: in the economy around AI energy transition. What was globalization
Speaker 12: now seems to be a bit of a shrinking globe
Speaker 12: where certain markets are uninvestable. So that presents new challenges
Speaker 12: as well, because some of the historic markets for growth,
Speaker 12: like China, for example, many companies find that to be uninvestable.
Speaker 2: Now interesting, I have cried about the strategic buyers. I mean,
Speaker 2: what type of premium do they have to pay in
Speaker 2: this environment in order to gain that type of growth?
Speaker 3: Is it much higher than what it was in the past.
Speaker 12: So valuations are elevated. We have a very large and
Speaker 12: liquid market in the United States. Globally, there's about one
Speaker 12: hundred and ten trillion dollars of equity value and I
Speaker 12: mentioned this yesterday on the panel. There's forty seven trillion
Speaker 12: in the US. Part of that is because we're a
Speaker 12: very large and liquid market and that's driving more capital
Speaker 12: to this market, which is increasing valuations, so we do
Speaker 12: have a higher multiple environment. Premium is largely an output
Speaker 12: in what we do as M and A advisors and
Speaker 12: thinking through complex transactions with our clients. We're not thinking
Speaker 12: about what premium do we have to pay, but we
Speaker 12: look at underlying cash flows, We look at synergies, We
Speaker 12: look at strategic value and enhancements that a new buyer
Speaker 12: can bring to an asset, and determine what we can
Speaker 12: pay that either is a premium or not, and then
Speaker 12: that premium either clears the market, satisfies investors, or it doesn't.
Speaker 12: It hasn't been the premium that's been an inhibitor to
Speaker 12: these transactions.
Speaker 3: I want to look at the other side of the equation.
Speaker 2: We had a guest on earlier on the show who
Speaker 2: talked about the idea that you're going to see a
Speaker 2: lot of forced selling in this market, and that's actually
Speaker 2: going to be a driver of a certain pocket of
Speaker 2: M and A. Talk about those folks out there, those
Speaker 2: companies that are struggling that are really going to have
Speaker 2: no choice about to find somebody. I mean, what are
Speaker 2: they going to be able to get in the market.
Speaker 12: Yeah, there's always Even in a very strong marketvironment, you're
Speaker 12: always going to have some companies that just run into trouble.
Speaker 12: They're going to be over levered, They're going to have
Speaker 12: some kind of disruption to their business, maybe they have
Speaker 12: a life threatening lawsuit, something that just fundamentally changes their operations,
Speaker 12: and those companies can seek to raise new capital to
Speaker 12: hopefully recover out of a difficult situation, or in many cases,
Speaker 12: they look for a merger solution. And so whether it's
Speaker 12: a forced marriage or whether it's forced financing, you do
Speaker 12: see many of those transactions playing out, not full on bankruptcies,
Speaker 12: So not calling nine to one one I've got to
Speaker 12: go bankrupt, but we're in trouble. We need a new partner,
Speaker 12: and that partner could be a merger partner. I don't
Speaker 12: see a watershed event coming where you have a lot
Speaker 12: of forced sales. Rather, I see, and this was mentioned
Speaker 12: again in the panel yesterday, thousands of companies held in
Speaker 12: private hands that are not really what they're natural perpetual owner.
Speaker 12: Those owners are there as custodians for a time period.
Speaker 12: Private equity and otherwise to help enhance value, deliver returns
Speaker 12: for their sharehold for their LPs in that case, and
Speaker 12: then reintroduce them to public markets or sell them to
Speaker 12: another party who's a better owner. We're going to see
Speaker 12: more of that, and those assets held in private hands
Speaker 12: I think will transact going forward, but there's still a
Speaker 12: valuation problem there. A lot of those assets were bought
Speaker 12: during a high multiple period and a lot of owners
Speaker 12: are waiting for those multiples to come back.
Speaker 6: Do you think most of those properties that are held
Speaker 6: in private equity hands it's a case that that will
Speaker 6: be acquired or is it a case of going ipoing
Speaker 6: or something and coming to the public market on their own.
Speaker 12: So for the last two years or so, we've had
Speaker 12: almost no IPO market, and so that's been an alternative
Speaker 12: that you typically look at for monetization that just hasn't
Speaker 12: been available. Now we've got some early signs of opening
Speaker 12: of that plumbing, which is encouraging the reasons by making
Speaker 12: IPO is very well received and I think is a
Speaker 12: good sign of maybe an additional IPOs that will come
Speaker 12: to market. So I think the IPO is definitely back
Speaker 12: on as an opportunity for modernization but also for outright sales.
Speaker 12: But again, you do have this one immutable trait that
Speaker 12: you have in the private equity business, which is and
Speaker 12: it's true for strategics as well. What is that that
Speaker 12: they can't change the multiple they paid on entry. So
Speaker 12: the purchase price is the purchase price. There's a lot
Speaker 12: of things they can do once they own the asset,
Speaker 12: but they cannot change the purchase price. And some of
Speaker 12: these assets were bought at a higher multiple where there's
Speaker 12: more leverage and also much cheaper leverage. So one of
Speaker 12: the issues with today's higher cost of capital is that
Speaker 12: the evaluation equation, the mathematics just don't work. So I
Speaker 12: think it's going to take some more time for private
Speaker 12: equity come to the table, but they're going to come back.
Speaker 12: It's geology, time and pressure. It's just a matter. It's
Speaker 12: going to bring those two together, and they're going to
Speaker 12: come to market with assets and they're going to redeploy
Speaker 12: four trillion dollars at some point because that's what's sitting
Speaker 12: in private market.
Speaker 6: Hands got it at some point. I don't know if
Speaker 6: he asked you this on the panel, you know, I
Speaker 6: know he does a good job, but I am curious
Speaker 6: that if you had to pick one sector, You've done
Speaker 6: a lot in retail, you've got transportation. Is there one
Speaker 6: sector within the M and A environment where you're like, wow,
Speaker 6: there's going to be a lot people.
Speaker 7: Are asking, I want to do stuff right now? Where
Speaker 7: is there?
Speaker 12: Well, first of all, Romaine did an A plus job
Speaker 12: on the panel yesterday.
Speaker 4: I'm stripped to.
Speaker 6: Rip a colleague every once in a while.
Speaker 12: Is there one sector? It's an interesting market. Unlike ninety
Speaker 12: eight ninety nine it was all about telecom and tech
Speaker 12: and media. You had twenty sixteen larger because the stress
Speaker 12: was a big energy market for consolidation. I'm seeing this
Speaker 12: activity really in every sector.
Speaker 6: Wow.
Speaker 12: Because as I said yesterday, also, M and A is
Speaker 12: not a market trends, it's a and it's not a
Speaker 12: short trend. It's a long term corporate strategy. So these
Speaker 12: are the best allocators in the world within private equity
Speaker 12: and within private credit and infrastructure in real estate, those
Speaker 12: are going to be very, very active. Again, there's four
Speaker 12: trillion sitting there without leverage, so the purchasing power is
Speaker 12: much higher. You have four point eight trillion dollars on
Speaker 12: non bank corporate balance sheets. There's only so much dividend
Speaker 12: and buy back you're going to do. There's only so
Speaker 12: much build versus buy. And I would say in many industries,
Speaker 12: build versus buy is really dead because it's not practical.
Speaker 12: So in certain industries you'll always have it, like tech,
Speaker 12: But in other industries, by the time you build, it's
Speaker 12: another market and so buying becomes necessity. And so again,
Speaker 12: I just think this is a matter of time. We
Speaker 12: have to be patient and continuing the walk up.
Speaker 2: I'm curious Andrew about the regulatory environment. There's been a
Speaker 2: lot of pushback at least on the big mega deals,
Speaker 2: particularly in tech here in the US and in Europe.
Speaker 2: How much of that regulatory trend affects what you do
Speaker 2: and the type of companies that you're involved with.
Speaker 12: Very meaningful change to our business and very meaningful change
Speaker 12: to how we map out a timeline for our clients.
Speaker 12: So what used to be, you know, a fairly routine.
Speaker 12: You know, if you're not in a particularly sensitive area
Speaker 12: from a competitive perspective, you would estimate a few months
Speaker 12: to close. You'd probably request early termination, but maybe go
Speaker 12: through a short process if you didn't get that. Today
Speaker 12: there is no concept of early termination of the HSR
Speaker 12: waiting period, so that's off the table. Many, many industries,
Speaker 12: including that are not particularly consumer sensitive on pricing, are
Speaker 12: being reviewed by competitive authorities.
Speaker 3: Not just in the United States. It's happening in.
Speaker 12: Brussels with the with the with the competitive authorities in Brussels,
Speaker 12: as well as the CMA in the UK. So it's
Speaker 12: not a US alone phenomenon, but it's very real. It
Speaker 12: extends the timelines, it makes it more costly, which then
Speaker 12: I think ironically feeds into the need to do larger
Speaker 12: deals because the entry price right, well, right, if you're
Speaker 12: gonna do it, I might as well do it where
Speaker 12: it has consequence. So it's the entry price to M
Speaker 12: and A is higher because of longer duration. By the
Speaker 12: time I signed something, If it takes me longer to close,
Speaker 12: I don't know what I'm getting it closed. Yeah, right,
Speaker 12: I've got to make it meaningful. So it's really interesting dynamics.
Speaker 7: One of those things.
Speaker 6: If you're gonna do it, go big, right, it's gonna
Speaker 6: it's the same kind of steps, So just really go
Speaker 6: for it, and thank you so much, really appreciating you.
Speaker 7: Great perspective.
Speaker 6: I mean, listen, we always talk about different metrics and
Speaker 6: what it says about the health of an economy. What's
Speaker 6: going on in the deal making environment is an important one.
Speaker 2: Yeah, I mean it really is kind of the greath
Speaker 2: of this economy here. But we've heard from I mean,
Speaker 2: not just what the Andrew said, but yeah, a lot
Speaker 2: of the other folks I had on that panel yesterday.
Speaker 2: They're seeing a lot more opportunity, much more than maybe
Speaker 2: just a year, year and a half ago.
Speaker 6: I think it's fascinating, especially across so many industries.
Speaker 7: Again, or thanks to Andrew Bednar.
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