WEBVTT - AllianceBernstein Says Private Debt Will Keep Its Edge 0:00:18.239 --> 0:00:20.760 Hello, Welcome to the Credit Edge, a weekly markets podcast. 0:00:20.840 --> 0:00:23.880 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:23.560 --> 0:00:27.000 And I'm Totlu Alamutu as senior and list covering real 0:00:27.120 --> 0:00:30.920 estate and some banks at Bloomberg Intelligence. This week, we 0:00:31.080 --> 0:00:35.080 are very pleased to welcome Matthew Bass, who is the 0:00:35.120 --> 0:00:39.840 head of Private Alternatives at Alliance Bernstein. How are you, Matt, 0:00:40.120 --> 0:00:40.680 doing well? 0:00:40.960 --> 0:00:43.800 Totally? Thanks for having me joined today, James, Great to 0:00:43.800 --> 0:00:44.800 see you again as well. 0:00:45.440 --> 0:00:49.000 Great to have you here, Matt. Matt is Alliance Bernstein's 0:00:49.040 --> 0:00:54.480 head of Private Alternatives, overseeing assets under management of sixty 0:00:54.520 --> 0:00:58.360 five billion dollars, part of the firm's total eight hundred 0:00:58.400 --> 0:01:05.080 and nine billion dollars in aum. Private alternatives include corporate 0:01:05.080 --> 0:01:10.640 direct lending, commercial real estate, asset based finance, and opportunistic investing. 0:01:11.000 --> 0:01:12.600 Great, so, Matt, thanks for coming on the show. Just 0:01:12.600 --> 0:01:13.920 to set the scene a little bit here before we 0:01:13.959 --> 0:01:17.240 start talking. Markets are getting whipswored by trade wars, inflation 0:01:17.319 --> 0:01:19.319 and growth fears, as well as a whole load of 0:01:19.360 --> 0:01:22.720 alarming developments on the geopolitical front. Companies have got used 0:01:22.720 --> 0:01:24.880 to paying more for their debt, higher for longer is 0:01:24.920 --> 0:01:27.160 assumed at this point, but credit markets are pricing in 0:01:27.319 --> 0:01:29.920 very low odds of a US recession, which is being 0:01:29.959 --> 0:01:32.440 talked about a lot more now that consumers seem to 0:01:32.440 --> 0:01:36.000 be weakening. Corporate debt spreads have widened over the last week, 0:01:36.160 --> 0:01:37.760 just by a little bit, but they're still very well 0:01:37.800 --> 0:01:42.000 below long term averages. Market pricing still projects a fair 0:01:42.000 --> 0:01:44.960 amount of calm. Nothing much to worry about here, but 0:01:45.080 --> 0:01:49.400 news headlines show the exact opposite, from radical policy shifts 0:01:49.400 --> 0:01:52.600 by the US government to ongoing military conflict, stubborn inflation, 0:01:52.680 --> 0:01:55.760 and sliding consumer confidence, plus a ton of uncertainty about 0:01:55.800 --> 0:01:58.560 what the FED does next on rates. In the face 0:01:58.600 --> 0:02:00.960 of that growing wall of worry, there does seem to 0:02:00.960 --> 0:02:03.920 be complacency in markets, and we continue to see robust 0:02:04.200 --> 0:02:07.000 investor demand for corporate bonds and loans, especially in the US, 0:02:07.280 --> 0:02:09.720 and not a lot of net new supply that more 0:02:09.760 --> 0:02:12.240 than anything, I think, is keeping spreads quite tight. And 0:02:12.280 --> 0:02:15.960 then on the sidelines or maybe the star of the show, 0:02:15.960 --> 0:02:18.240 the private credit golden aze, just seems to go on. 0:02:18.320 --> 0:02:20.919 So Matt, what is your take. Should we focus more 0:02:20.960 --> 0:02:23.360 on the pro growth talk of the new administration, or 0:02:23.400 --> 0:02:25.679 do we need to worry about the trade wars, about 0:02:25.720 --> 0:02:28.360 the policy shifts, about the geopolitical headwinds, and should those 0:02:28.440 --> 0:02:29.240 be more in the price. 0:02:30.200 --> 0:02:32.320 I think we've certainly got a lot in the press 0:02:32.400 --> 0:02:37.160 now to talk about relating to the administration, tariffs, et cetera. Look, 0:02:37.639 --> 0:02:40.760 I think there's a significant amount of uncertainty in the 0:02:40.760 --> 0:02:44.160 market today. And look, you know, kind of stepping back, 0:02:44.400 --> 0:02:46.400 you know, one of the you know, we've got a 0:02:46.440 --> 0:02:49.120 business that we built at Alliance Bernstein really over the 0:02:49.160 --> 0:02:51.680 past ten to fifteen years. It's kind of focused in 0:02:52.120 --> 0:02:56.040 private credit across asset classes. You know, the reason we 0:02:56.120 --> 0:02:58.640 built this. One of the main benefits of investing in 0:02:58.680 --> 0:03:02.800 private credit, putting aside premium you could generate from a 0:03:02.840 --> 0:03:07.520 yield perspective, is the direct origination and better risk control. 0:03:07.600 --> 0:03:11.000 So even so, especially in environments like this, these are 0:03:11.360 --> 0:03:13.600 situations where you want to be closer to the bar 0:03:13.840 --> 0:03:16.160 or where you want to be able to conduct more 0:03:16.160 --> 0:03:19.600 in depth due diligence, control your own destiny. Kind of 0:03:19.680 --> 0:03:22.600 reasons to be investing in private markets right, speaking to 0:03:22.639 --> 0:03:23.560 markets just like this. 0:03:23.560 --> 0:03:26.760 Today, Matt, one of the issues you were talking about, 0:03:26.800 --> 0:03:30.520 you know, changing environments and regulation and so on. As 0:03:30.720 --> 0:03:32.840 regulation is one of the issues I think that is 0:03:33.600 --> 0:03:37.280 coming up. So last week we saw some headlines about 0:03:37.560 --> 0:03:43.360 the SEC looking into private credit ETFs. There's obviously a 0:03:43.440 --> 0:03:47.040 number of issues around disclosure and liquidity and so on. 0:03:47.320 --> 0:03:53.240 What's your view on potential increase in regulatory's scrutiny And 0:03:53.320 --> 0:03:57.240 do you think that the growth of private credit will 0:03:57.280 --> 0:03:59.480 come from retail or do you think it's more the 0:03:59.480 --> 0:04:03.840 institutions assigning more to this asset class that will drive 0:04:04.840 --> 0:04:07.280 the next sort of stage for this part of the 0:04:07.800 --> 0:04:08.720 of our industry. 0:04:09.080 --> 0:04:11.520 Yeah. Sure. Just to put in perspective, I think you've 0:04:11.560 --> 0:04:15.360 got a longer broader secular trend in place, which is 0:04:15.400 --> 0:04:19.039 really a share shift of how credit is provided in 0:04:19.080 --> 0:04:23.720 the market globally between banks, capital markets, and private investors. 0:04:23.760 --> 0:04:28.760 So what we've seen over time is an increased interest 0:04:29.839 --> 0:04:34.040 behalf of private capital. So the reasons for that one 0:04:34.520 --> 0:04:38.680 from a borrower perspective, You've got increased flexibility and certainty 0:04:38.680 --> 0:04:41.159 of execution, and borrowers are willing to pay up for 0:04:41.320 --> 0:04:46.480 access to that capital. So there's a real entrenched driver 0:04:46.680 --> 0:04:51.360 in terms of the supply of private credit. The demand side, 0:04:51.560 --> 0:04:54.120 as you asked about, you know, initially this was an 0:04:54.120 --> 0:04:58.080 institutionally driven market. So let's put that in perspective. Pre 0:04:58.560 --> 0:05:02.640 financial crisis, Global antil crisis, the market for corporate private 0:05:02.680 --> 0:05:05.160 credit was about one hundred and fifty billion in size. 0:05:05.160 --> 0:05:08.200 It's about a trillion and a half today, about the 0:05:08.200 --> 0:05:11.000 same size as the high yield market and leverage loan market. 0:05:11.040 --> 0:05:15.520 They're all about equal, so that that growth has largely 0:05:15.600 --> 0:05:20.039 been driven by institutional investors and increasingly retail investors. So 0:05:20.680 --> 0:05:23.840 as you look at the the ETF Private credit ETF 0:05:23.880 --> 0:05:28.680 as an example, it's another vehicle to utilize to expand 0:05:29.560 --> 0:05:34.920 private credit delivery into a broader retail investor base. Now 0:05:35.720 --> 0:05:38.360 they're they're positives of that, they're negatives of that. You know, 0:05:38.400 --> 0:05:42.680 I always kind of anchor back to major concern being 0:05:42.960 --> 0:05:46.719 a potential mismatch and liquidity. Right, as a private credit investor, 0:05:46.760 --> 0:05:51.200 you have the benefit of being able to go really 0:05:51.200 --> 0:05:56.240 deep from a due diligence perspective, structure appropriate covenants, and 0:05:56.560 --> 0:06:01.120 have control of a transaction should things go. A key 0:06:01.240 --> 0:06:05.680 part of that risk mitigation is also the longer term 0:06:05.800 --> 0:06:10.200 nature of the investors and having long term locked up capital. 0:06:10.360 --> 0:06:14.719 So to extent we go away from that into retail 0:06:14.800 --> 0:06:18.040 offering liquidity. It's just a concern that I think market 0:06:18.040 --> 0:06:21.720 participants need to be mindful of in terms of that mismatch. 0:06:21.920 --> 0:06:24.760 Yeah, that was going to be my follow up question because, 0:06:25.600 --> 0:06:30.080 as you mentioned, providing that liquidity at the retail level 0:06:30.680 --> 0:06:34.640 might be an issue. But maybe we can talk about 0:06:34.680 --> 0:06:37.160 the borrowers a little bit, because you've said that in 0:06:37.160 --> 0:06:38.920 some cases they might want to go to the private 0:06:38.960 --> 0:06:43.240 credit market and sort of shun all the scrutiny of 0:06:43.640 --> 0:06:46.080 public credit markets. But one of the things that we've 0:06:46.120 --> 0:06:49.479 seen in the last twelve to eighteen months is that 0:06:49.760 --> 0:06:53.719 public markets have become much more receptive to even some 0:06:53.800 --> 0:06:56.240 of the riskier borrowers. So we have a couple of 0:06:56.240 --> 0:06:59.279 borrowers in European real estate, for instance, that wouldn't have 0:06:59.480 --> 0:07:02.280 dreamt of coming back to the market eighteen months ago 0:07:02.400 --> 0:07:07.080 because they are deeply high yield, highly levered, and so on. 0:07:07.160 --> 0:07:09.040 But they've been able to come to the market this year. 0:07:09.080 --> 0:07:13.800 So do you think that the demand from the borrowers 0:07:14.120 --> 0:07:18.800 is still there even though public credit markets are less 0:07:18.800 --> 0:07:21.320 strained than they were twelve eighteen months ago. 0:07:21.800 --> 0:07:24.560 Sure, total, and you're talking to you know, their cyclical 0:07:24.840 --> 0:07:28.320 and secular factors at play here. So from a cyclical perspective, 0:07:29.000 --> 0:07:34.240 as public capital markets recover, as investor interest increases, right, 0:07:34.280 --> 0:07:36.560 there will be kind of an ebb and flow there 0:07:36.720 --> 0:07:39.080 on the public side, and public markets tend to get 0:07:39.080 --> 0:07:43.080 more aggressive and more conservative, right, So you know that's 0:07:43.120 --> 0:07:46.280 cyclical that that's going to remain kind of a key 0:07:46.280 --> 0:07:49.120 component between what is the share shift between public and 0:07:49.160 --> 0:07:52.560 private execution From from a secular perspective, you got to 0:07:52.600 --> 0:07:57.160 anchor to, you know, what are the tangible benefits to 0:07:57.320 --> 0:08:01.960 a borrower in diversifying its verses of financing. So you 0:08:02.080 --> 0:08:04.760 take you look at what happened on the back of 0:08:04.760 --> 0:08:06.680 the rapid rise in rates we saw a few years 0:08:06.680 --> 0:08:10.880 ago and how that impacted various specially financed non bank 0:08:10.960 --> 0:08:15.600 lenders that might have been really reliant on one source 0:08:15.640 --> 0:08:19.080 of financing that is a securitization market. That market is fickle, 0:08:19.240 --> 0:08:22.000 it shuts down, and they lose access to the lifeblood 0:08:22.040 --> 0:08:26.400 of their business, which is capital. So from a you know, 0:08:26.440 --> 0:08:28.520 from a secular long term perspective, that's one of the 0:08:28.560 --> 0:08:32.680 roles private capital plays and allowing these borrowers to diversify 0:08:32.720 --> 0:08:37.240 their sources of capital to become you know, again more 0:08:37.280 --> 0:08:40.800 more steady access across across different parts of the market cycle. 0:08:41.000 --> 0:08:43.560 Yeah. So one of the issues that's also come up, 0:08:43.559 --> 0:08:46.880 and you sort of alluded to it earlier, was banks 0:08:46.920 --> 0:08:50.480 as providers of capital. So we've seen headlines saying that 0:08:50.600 --> 0:08:55.760 JP Morgan is assigning tens of billions to direct lending. 0:08:56.160 --> 0:09:00.360 How do you view banks increased interest? I guess in 0:09:00.400 --> 0:09:02.319 this part of the market, do you view them as 0:09:02.360 --> 0:09:05.640 competitors or as collaborators. 0:09:05.400 --> 0:09:09.720 It's a symbiotic relationship. So banks have been so what 0:09:09.760 --> 0:09:13.240 you're talking about right now is specific to corporate private credits. 0:09:13.240 --> 0:09:18.840 So banks have been lenders to corporates, you know, forever 0:09:19.240 --> 0:09:25.520 now that that level of involvement started to decrease post 0:09:25.640 --> 0:09:29.520 RTC and certainly post Financial Crisis, given the regulatory reform 0:09:29.559 --> 0:09:31.880 that got put in place that led to the growth 0:09:31.960 --> 0:09:34.880 of the corporate private credit market. That said, banks are 0:09:34.920 --> 0:09:39.400 still active players in that market. In addition to providing loans, 0:09:39.400 --> 0:09:43.280 they provide other variable, valuable ancillary services to these borrowers, 0:09:43.320 --> 0:09:47.439 should be cash management, payroll, et cetera. I think what 0:09:47.440 --> 0:09:51.040 you're seeing now is just an evolution of that relationship 0:09:51.080 --> 0:09:57.080 where banks are increasingly partnering with private capital as a 0:09:57.080 --> 0:10:02.000 way to diversify their source funding. Right, in addition to deposits, 0:10:02.320 --> 0:10:05.120 let's partner with with private capital so we could provide 0:10:05.160 --> 0:10:08.320 solutions to our borrowers. We might be able to provide 0:10:08.520 --> 0:10:11.920 you know, public broadly syndicated loan execution on one hand, 0:10:12.000 --> 0:10:14.560 let's let's also have a private solution as well, so 0:10:15.200 --> 0:10:16.760 the partnership facilitates that. 0:10:17.080 --> 0:10:19.360 But all this is not terribly new, is it. I mean, 0:10:19.480 --> 0:10:22.800 you know, for years, large investment films have been sort 0:10:22.800 --> 0:10:25.600 of almost going direct to borrows and you know, lending 0:10:25.640 --> 0:10:29.040 them money. I mean, it's it's sort of old school lending. 0:10:29.120 --> 0:10:30.800 But what seems we knew is in term sort of 0:10:30.800 --> 0:10:33.400 growth in some cases rebranding of parts of the market 0:10:33.440 --> 0:10:37.720 is private. I'm wondering, you know, given the huge growth 0:10:37.800 --> 0:10:41.560 some of the guests called it at a thirty to 0:10:41.559 --> 0:10:44.560 forty trillion dollar market, what are the risks in that? 0:10:44.600 --> 0:10:47.880 I mean, anything that grows that big that first seems 0:10:47.880 --> 0:10:50.559 to have risk. Are we missing something there? 0:10:50.920 --> 0:10:54.560 Yes, large numbers have been have been cited, but let's 0:10:54.640 --> 0:10:57.800 let's kind of step back right. First, it was the 0:10:57.920 --> 0:11:03.120 corporate credit market, which was almost entirely bank intermediated, and 0:11:03.559 --> 0:11:06.800 that market had a very small private footprint, you know, 0:11:06.960 --> 0:11:09.320 pre financial crisis about one hundred and fifty billion. As 0:11:09.320 --> 0:11:13.000 I mentioned, that's trullion and a half today. So that growth, 0:11:13.000 --> 0:11:16.560 of course came with net new growth of debt capital, 0:11:16.600 --> 0:11:19.400 but it was largely driven by a share shift from 0:11:19.520 --> 0:11:23.280 bank and capital markets. That was you know, I think 0:11:23.320 --> 0:11:27.160 of an initial phase of disintermediation and kind of rebalancing 0:11:27.200 --> 0:11:32.000 of how companies finance themselves between bank capital markets and 0:11:32.080 --> 0:11:35.640 private capital. It's only a small part of the overall economy. Right, 0:11:35.920 --> 0:11:39.959 corporate credit, you're missing commercial real estate, residential real estate, 0:11:40.280 --> 0:11:44.320 consumer finance. These are all asset classes that historically have 0:11:44.600 --> 0:11:48.640 been financed by banks in the securitization market that's now 0:11:48.679 --> 0:11:52.240 opening up to private capital. Right. Key driver of that 0:11:52.440 --> 0:11:56.200 as well is insurance, and that many of these asset 0:11:56.240 --> 0:11:59.560 classes are investment grade in nature and fit well on 0:11:59.640 --> 0:12:05.360 insurance its balance sheet. So it's very natural for the 0:12:05.400 --> 0:12:09.079 growth of the market to expand significantly because we're moving 0:12:09.120 --> 0:12:13.160 beyond corporate private private credit. And whether it's forty billion, 0:12:13.559 --> 0:12:18.760 twenty billion, the number is almost irrelevant. Trillion, it's forty trillion, 0:12:19.600 --> 0:12:22.040 ten billion, the number is almost irrelevant. It's going to 0:12:22.080 --> 0:12:24.839 it should be orders of magnitude larger than the corporate market, 0:12:24.880 --> 0:12:28.319 which is consistent with its contribution to the overall economy. 0:12:28.400 --> 0:12:30.280 I guess my question should then be more focused on 0:12:30.280 --> 0:12:34.000 just direct lending and the excess demand for limited number 0:12:34.040 --> 0:12:36.960 of deals. We've had conversations along the lines of, yes, 0:12:37.160 --> 0:12:38.400 you know, as long as you are pro as long 0:12:38.440 --> 0:12:39.880 as you've got some experience, you know what you're doing, 0:12:39.920 --> 0:12:41.960 you'll be fine. But all this new money, you know, 0:12:41.960 --> 0:12:45.160 this potentially tourist money, may not be doing those those 0:12:45.200 --> 0:12:47.600 great deals. They may be getting themselves into trouble. Risk 0:12:47.720 --> 0:12:49.640 could be building because it's private, we can't see it. 0:12:49.679 --> 0:12:51.000 Is that Is that a concern futile? 0:12:51.760 --> 0:12:54.520 There's definitely been significant flow of capital into the market 0:12:54.559 --> 0:12:57.640 if you talk about corporate direct lending specifically, A lot 0:12:57.679 --> 0:13:00.400 of that has gone into the upper part of the 0:13:00.400 --> 0:13:05.160 middle market and issuers who have both public and private 0:13:05.200 --> 0:13:08.320 execution alternatives. So I think you're going to see some 0:13:08.440 --> 0:13:11.920 volatility of share shift between those markets based on how 0:13:12.040 --> 0:13:14.920 open the public capital markets are. We're seeing that today 0:13:14.960 --> 0:13:18.600 and a lot of deals that were done by private 0:13:18.640 --> 0:13:21.200 credit over the past twelve months are being you know, 0:13:21.240 --> 0:13:23.959 refinanced in the public market. So I think I think 0:13:23.960 --> 0:13:26.000 you're gonna you're you're going to you're gonna see that 0:13:26.000 --> 0:13:30.120 that's going to be relatively cyclical from a risk perspective. Look, 0:13:30.120 --> 0:13:33.720 I think there are advantages that private capital has. One 0:13:35.080 --> 0:13:38.240 locked up nature of the capital, right, the primary risk 0:13:38.920 --> 0:13:43.120 outside of lending to good companies is effectively matching your 0:13:43.160 --> 0:13:47.800 assets and liabilities private capital, given the structure of these funds, 0:13:47.840 --> 0:13:52.679 even the retail funds having certain liquidity gates and tender mechanisms, 0:13:52.679 --> 0:13:55.679 do pretty good job of matching assets and liabilities. If 0:13:55.720 --> 0:13:57.560 you're able to do that, you could really focus on 0:13:57.679 --> 0:14:02.400 making good loans to good companies. And another benefit in 0:14:02.400 --> 0:14:06.880 that regard that that private credit investors have is is 0:14:06.960 --> 0:14:10.760 just the the the fee structure, the incentive structure. Many 0:14:10.800 --> 0:14:15.760 of these funds have incentive fees which naturally align compensation 0:14:16.440 --> 0:14:20.240 and with performance and the underlying manager as well, which 0:14:20.440 --> 0:14:23.560 you don't typically get at banks and or public market. 0:14:23.760 --> 0:14:25.720 Okay, you're also kind of, you know, having to take 0:14:25.760 --> 0:14:28.560 a long term view on these on these borrowers, which 0:14:28.720 --> 0:14:31.480 for macro reasons that we've discussed you know, earlier in 0:14:31.720 --> 0:14:35.320 the podcast, are quite difficult because of you know, the 0:14:35.440 --> 0:14:39.880 very turbulent policymaking and and all the other things that 0:14:39.880 --> 0:14:43.680 are going on. Is that complicating your your investment decisions 0:14:43.840 --> 0:14:46.280 and the process around it, Like, how can you see 0:14:47.160 --> 0:14:49.040 very far into the future given all of the all 0:14:49.080 --> 0:14:49.920 of the volatility. 0:14:50.280 --> 0:14:53.479 Yeah, we try to focus on on cash flows, fundamental 0:14:53.480 --> 0:14:57.080 cash flows. So if that means on the corporate side, 0:14:57.360 --> 0:15:02.640 focusing on companies that have very diversified revenue base, could 0:15:02.640 --> 0:15:06.120 have long term contracts in place, high degree of recurring revenue, 0:15:06.360 --> 0:15:10.840 predictable cost structures, less reliant on consumer spending, more reliant 0:15:10.920 --> 0:15:15.320 on corporate op x as opposed to capex. So it 0:15:15.360 --> 0:15:17.440 gets down to the nature of the cash flows that 0:15:17.440 --> 0:15:21.000 we're underwriting outside of corporate. If you're looking at the 0:15:21.040 --> 0:15:26.480 asset based space broadly, if that's residential, consumer, et cetera, 0:15:27.280 --> 0:15:31.080 many of these cash flows are shorter duration in nature. 0:15:31.200 --> 0:15:36.120 Their loan portfolios, they're amortizing rapidly, you're not depending on 0:15:37.000 --> 0:15:39.320 sale of an asset to get your money back. So 0:15:39.360 --> 0:15:42.400 I think these are these are benefits, the shorter duration, 0:15:43.640 --> 0:15:46.240 the kind of nature of the revenue, the defense of 0:15:46.360 --> 0:15:47.240 nature of the revenue. 0:15:47.600 --> 0:15:49.800 One of the issues that we're facing in the public 0:15:49.840 --> 0:15:54.320 market is that yields have basically come down a lot, 0:15:54.400 --> 0:15:59.200 what spreads have tightened a lot as well? In I 0:15:59.240 --> 0:16:04.400 guess return in the private credit market aren't maybe as 0:16:04.400 --> 0:16:07.520 significant as they were a couple of years ago. So 0:16:07.840 --> 0:16:11.200 can you maybe talk about what type of returns you're 0:16:11.760 --> 0:16:15.360 expecting this year? And so linked to that has been 0:16:15.400 --> 0:16:20.680 the issue of a potential rise in defaults because rates 0:16:20.720 --> 0:16:24.640 stay higher for longer. Is that a concern in the 0:16:24.680 --> 0:16:28.720 issuers that you look at or does private credit allow 0:16:28.840 --> 0:16:33.160 you to manage those potential defaults in a different way. 0:16:33.640 --> 0:16:38.160 Yeah? Sure, So let's hit the default credit quality point second. 0:16:38.160 --> 0:16:40.640 But I want to address your question on spread. So 0:16:42.120 --> 0:16:45.720 private market will follow public markets. So just that we've 0:16:45.760 --> 0:16:49.400 seen significant spread compression in public markets, private markets are 0:16:49.440 --> 0:16:51.520 not immune. You know, if you look at the corporate 0:16:51.720 --> 0:16:57.240 middle market direct lending pricing there. I look at our business, 0:16:57.320 --> 0:17:02.360 our portfolio, we're roughly one hundred base points inside of 0:17:02.360 --> 0:17:04.439 of where we were at this time last year, just 0:17:04.480 --> 0:17:08.080 looking at overall spread on new investments. Of course you 0:17:08.160 --> 0:17:11.399 have SOFA coming down as well. You put the two together, 0:17:11.480 --> 0:17:15.200 what might have been an unlevered twelve percent gross return 0:17:15.320 --> 0:17:19.080 is probably closer to ten today, Still very attractive double 0:17:19.119 --> 0:17:22.520 digit return profile relative to what you can get in 0:17:22.560 --> 0:17:26.080 the public markets. Plus you have that the downside protection 0:17:26.280 --> 0:17:32.080 from direct origination, ability to structure documents, get covenant protection, 0:17:34.800 --> 0:17:38.600 et cetera. So you know, pricing pricings certainly come in 0:17:39.880 --> 0:17:42.440 and you know there will be a floor in many 0:17:42.480 --> 0:17:46.040 instances because not all of these borrowers have access to 0:17:46.600 --> 0:17:49.439 the public markets. So I see, you know, you're seeing 0:17:49.520 --> 0:17:54.159 probably more extreme spread compression at the larger end of 0:17:54.200 --> 0:17:57.119 the middle market where many of these borrowers have access 0:17:57.240 --> 0:18:00.280 open access to the broadly syndicated loan markets, so that 0:18:00.280 --> 0:18:03.040 that will put more pressure on pricing. 0:18:03.000 --> 0:18:05.119 And then on defaults. You are going to talk about 0:18:05.119 --> 0:18:05.760 those yep. 0:18:06.080 --> 0:18:09.960 Yeah, look from from a default perspective, I look at 0:18:10.000 --> 0:18:13.080 the past five years, and it hasn't been an environment 0:18:13.160 --> 0:18:17.200 without stress. Right. We went through COVID. We know what 0:18:17.200 --> 0:18:20.920 what impact that had on commercial real estate, hospitality assets 0:18:20.960 --> 0:18:24.679 as an example, and we went through, you know, an 0:18:24.720 --> 0:18:28.040 extremely rapid rise in rates from zero to five hundred 0:18:28.080 --> 0:18:30.840 basis points and the impact that had on you know, 0:18:30.920 --> 0:18:34.560 cost of borrowing, cap rates, and valuations and commercial real 0:18:34.680 --> 0:18:37.480 estate in particular. So you know, there have been pockets 0:18:37.560 --> 0:18:40.280 of severe stress over the past five years. I think 0:18:40.280 --> 0:18:44.639 it's tested the market. Look, look, ultimately you will have 0:18:44.720 --> 0:18:48.920 issuers with with borrowers, and that's why you're set up 0:18:50.160 --> 0:18:54.080 much more effectively to proactively manage those risks as a 0:18:54.080 --> 0:18:59.440 private investor. So getting access one to information ahead of time, 0:18:59.480 --> 0:19:03.280 so you can identify where stresses might be emerging or 0:19:03.320 --> 0:19:05.760 could be emerging in the future. Right should that be 0:19:06.040 --> 0:19:10.080 you know the impact of higher rates on companies borrowing costs. 0:19:10.119 --> 0:19:14.359 Being able to use that information to engage with a 0:19:14.400 --> 0:19:19.199 sponsor or owner in advance of of of really an 0:19:19.240 --> 0:19:22.600 issue becoming to the point where there's a you know, 0:19:22.680 --> 0:19:25.680 payment default as an example. So you know we're able 0:19:25.680 --> 0:19:28.840 to get ahead of issues, right, you can't. You can't 0:19:28.880 --> 0:19:32.520 necessarily avoid it. You try to make good credit decisions. 0:19:32.600 --> 0:19:35.840 But if you're able to do that with good access 0:19:35.840 --> 0:19:39.520 to information to get ahead of potential credit issues, engage 0:19:39.520 --> 0:19:44.800 with the owner. And two very important is as I 0:19:44.840 --> 0:19:49.280 mentioned earlier, the patience you have. You're not a forced seller, 0:19:49.359 --> 0:19:52.600 So anything you do from a fun structure perspective that 0:19:52.880 --> 0:19:55.479 could put you into a position where you might have 0:19:55.560 --> 0:19:59.920 to sell assets to repay to source liquidity for redeeming 0:20:00.080 --> 0:20:02.560 investors or repay leverage is what you need to avoid 0:20:02.560 --> 0:20:05.160 in these situations. If you have the time and you've 0:20:05.200 --> 0:20:08.280 made good credit decisions, you're going to be able to 0:20:08.400 --> 0:20:10.960 work through assets, especially as a creditor with a you know, 0:20:11.000 --> 0:20:12.720 significant equity cushion below you. 0:20:13.200 --> 0:20:15.800 So in direct lending right now to a US corporation, 0:20:16.040 --> 0:20:18.760 how much more would you get by doing it private 0:20:18.840 --> 0:20:20.920 as an investor compared to public markets. 0:20:21.280 --> 0:20:25.320 Yeah, Look, there's a pretty persistent illiquidity premium one hundred 0:20:25.359 --> 0:20:29.440 and fifty two hundred basis points. And even as rates 0:20:29.680 --> 0:20:33.320 both spreads base rates have come in that premiums remain 0:20:33.800 --> 0:20:37.720 fairly persistent historically. Now, now that's just the gross premium 0:20:37.760 --> 0:20:40.640 you're going to get, you know, I do want you've 0:20:40.680 --> 0:20:46.600 got to focus on the downside protection as well. And look, 0:20:46.840 --> 0:20:51.000 the data proves it out from a historical default perspective 0:20:51.080 --> 0:20:54.920 and recoveries, defaults being low, recoveries being higher. Investing in 0:20:55.680 --> 0:21:00.359 privately versus public markets. But intuitively that makes sense. You 0:21:00.440 --> 0:21:04.280 are able to conduct much more robust diligence, You're able 0:21:04.280 --> 0:21:07.360 to have much better access to management. Right you are 0:21:07.400 --> 0:21:11.720 typically the only lender, if not member of a smaller 0:21:12.200 --> 0:21:15.240 like minded club of lenders as opposed to a large syndicate. Right, 0:21:15.320 --> 0:21:17.159 that all is very beneficial from us that. 0:21:17.240 --> 0:21:19.600 Some people would say that the default cycle hasn't really 0:21:19.760 --> 0:21:21.360 you know, you haven't had one that hasn't been the test. 0:21:21.520 --> 0:21:24.359 You haven't had a recession. So how can you prove 0:21:24.400 --> 0:21:26.320 that data? I mean, are you going to find out 0:21:26.320 --> 0:21:28.680 when when the economy turns down? Yeah? 0:21:28.760 --> 0:21:30.199 No, I mean it's back to my point. I think 0:21:30.240 --> 0:21:33.000 the past five years you've had some real pockets of stress. 0:21:33.040 --> 0:21:37.560 It hasn't been a traditional garden variety recession. You know, 0:21:37.560 --> 0:21:39.840 we had COVID and we had a rapid rise in raids. 0:21:39.960 --> 0:21:42.440 But you know what, what did the impact of those 0:21:42.480 --> 0:21:46.120 two events had one? You know, the source of revenue 0:21:46.280 --> 0:21:49.439 for many borrowers shut off overnight if you're you know 0:21:49.920 --> 0:21:53.720 a hotel as an example, right, and you know cost 0:21:53.800 --> 0:21:57.960 of borrowing cash flow, you know, massive impact given the 0:21:58.040 --> 0:21:59.440 rise in rates. I think we've been through a pretty 0:21:59.440 --> 0:22:00.320 stressful ironment. 0:22:00.480 --> 0:22:02.880 Okay, And so this one fifty to two hundred base 0:22:02.880 --> 0:22:05.919 point premium for private against public do you think that 0:22:05.960 --> 0:22:09.440 holds on the liquidity premium alone? Do you think we're 0:22:09.480 --> 0:22:12.119 going to get squashed as everyone pals in more with 0:22:12.160 --> 0:22:12.840 the private side. 0:22:13.000 --> 0:22:17.320 Look, I think there's an element of if that premium 0:22:17.600 --> 0:22:22.200 gets too small, then as an investor, you're going to 0:22:22.240 --> 0:22:25.240 start to question why am I locking my capital up? 0:22:25.560 --> 0:22:28.400 So I think there's a self correcting mechanism. 0:22:28.600 --> 0:22:28.800 Yeah. 0:22:28.920 --> 0:22:32.160 Probably. One of the reasons it's been so historical, been 0:22:32.200 --> 0:22:34.600 so you know, consistent historically, is. 0:22:34.520 --> 0:22:36.479 That one hundred basis points that's too low. I mean, 0:22:36.520 --> 0:22:38.359 what's what's the level that people jump out to. 0:22:38.760 --> 0:22:42.080 Yeah, no, I think that one hundred and fifty to 0:22:42.119 --> 0:22:45.560 two hundred basis point level is good. Now that that's 0:22:45.680 --> 0:22:52.080 only for now. Private credit the universe and the definition 0:22:52.160 --> 0:22:55.000 of what is private credit is expanding, you reference, you know, 0:22:55.040 --> 0:22:57.920 some of those large numbers earlier. Key driver behind the 0:22:57.960 --> 0:23:01.080 growth of the market is also the expansion of investment 0:23:01.119 --> 0:23:04.800 great private credit, where in some instances you're getting a 0:23:04.800 --> 0:23:07.240 fifty basis point pick up to what you can get 0:23:07.240 --> 0:23:10.400 in the corporate high yield market and higher. So as 0:23:10.400 --> 0:23:13.840 you move up quality, that that that premium that that 0:23:13.920 --> 0:23:14.439 you need. 0:23:15.119 --> 0:23:17.800 Well, so sorry, this one fifty that applies to just 0:23:18.359 --> 0:23:19.240 high yield, is it? 0:23:19.480 --> 0:23:21.879 I'm thinking of that as in the context of corporate 0:23:21.920 --> 0:23:25.800 direct lend and what that spread premium has been historically interesting. 0:23:26.000 --> 0:23:31.600 Okay, Matt, you mentioned the pandemic, and definitely it did 0:23:32.280 --> 0:23:37.639 lead to some almost shocking or valuations in real estate 0:23:37.920 --> 0:23:43.200 in particular, which you've also mentioned, not just hotels or offices, 0:23:43.240 --> 0:23:46.000 but even residential even though we stay safe as houses 0:23:46.040 --> 0:23:49.520