Speaker 1: Hello, Welcome to the Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2: And I'm Totlu Alamutu as senior and list covering real
Speaker 2: estate and some banks at Bloomberg Intelligence. This week, we
Speaker 2: are very pleased to welcome Matthew Bass, who is the
Speaker 2: head of Private Alternatives at Alliance Bernstein. How are you, Matt,
Speaker 2: doing well?
Speaker 3: Totally? Thanks for having me joined today, James, Great to
Speaker 3: see you again as well.
Speaker 2: Great to have you here, Matt. Matt is Alliance Bernstein's
Speaker 2: head of Private Alternatives, overseeing assets under management of sixty
Speaker 2: five billion dollars, part of the firm's total eight hundred
Speaker 2: and nine billion dollars in aum. Private alternatives include corporate
Speaker 2: direct lending, commercial real estate, asset based finance, and opportunistic investing.
Speaker 1: Great, so, Matt, thanks for coming on the show. Just
Speaker 1: to set the scene a little bit here before we
Speaker 1: start talking. Markets are getting whipswored by trade wars, inflation
Speaker 1: and growth fears, as well as a whole load of
Speaker 1: alarming developments on the geopolitical front. Companies have got used
Speaker 1: to paying more for their debt, higher for longer is
Speaker 1: assumed at this point, but credit markets are pricing in
Speaker 1: very low odds of a US recession, which is being
Speaker 1: talked about a lot more now that consumers seem to
Speaker 1: be weakening. Corporate debt spreads have widened over the last week,
Speaker 1: just by a little bit, but they're still very well
Speaker 1: below long term averages. Market pricing still projects a fair
Speaker 1: amount of calm. Nothing much to worry about here, but
Speaker 1: news headlines show the exact opposite, from radical policy shifts
Speaker 1: by the US government to ongoing military conflict, stubborn inflation,
Speaker 1: and sliding consumer confidence, plus a ton of uncertainty about
Speaker 1: what the FED does next on rates. In the face
Speaker 1: of that growing wall of worry, there does seem to
Speaker 1: be complacency in markets, and we continue to see robust
Speaker 1: investor demand for corporate bonds and loans, especially in the US,
Speaker 1: and not a lot of net new supply that more
Speaker 1: than anything, I think, is keeping spreads quite tight. And
Speaker 1: then on the sidelines or maybe the star of the show,
Speaker 1: the private credit golden aze, just seems to go on.
Speaker 1: So Matt, what is your take. Should we focus more
Speaker 1: on the pro growth talk of the new administration, or
Speaker 1: do we need to worry about the trade wars, about
Speaker 1: the policy shifts, about the geopolitical headwinds, and should those
Speaker 1: be more in the price.
Speaker 3: I think we've certainly got a lot in the press
Speaker 3: now to talk about relating to the administration, tariffs, et cetera. Look,
Speaker 3: I think there's a significant amount of uncertainty in the
Speaker 3: market today. And look, you know, kind of stepping back,
Speaker 3: you know, one of the you know, we've got a
Speaker 3: business that we built at Alliance Bernstein really over the
Speaker 3: past ten to fifteen years. It's kind of focused in
Speaker 3: private credit across asset classes. You know, the reason we
Speaker 3: built this. One of the main benefits of investing in
Speaker 3: private credit, putting aside premium you could generate from a
Speaker 3: yield perspective, is the direct origination and better risk control.
Speaker 3: So even so, especially in environments like this, these are
Speaker 3: situations where you want to be closer to the bar
Speaker 3: or where you want to be able to conduct more
Speaker 3: in depth due diligence, control your own destiny. Kind of
Speaker 3: reasons to be investing in private markets right, speaking to
Speaker 3: markets just like this.
Speaker 2: Today, Matt, one of the issues you were talking about,
Speaker 2: you know, changing environments and regulation and so on. As
Speaker 2: regulation is one of the issues I think that is
Speaker 2: coming up. So last week we saw some headlines about
Speaker 2: the SEC looking into private credit ETFs. There's obviously a
Speaker 2: number of issues around disclosure and liquidity and so on.
Speaker 2: What's your view on potential increase in regulatory's scrutiny And
Speaker 2: do you think that the growth of private credit will
Speaker 2: come from retail or do you think it's more the
Speaker 2: institutions assigning more to this asset class that will drive
Speaker 2: the next sort of stage for this part of the
Speaker 2: of our industry.
Speaker 3: Yeah. Sure. Just to put in perspective, I think you've
Speaker 3: got a longer broader secular trend in place, which is
Speaker 3: really a share shift of how credit is provided in
Speaker 3: the market globally between banks, capital markets, and private investors.
Speaker 3: So what we've seen over time is an increased interest
Speaker 3: behalf of private capital. So the reasons for that one
Speaker 3: from a borrower perspective, You've got increased flexibility and certainty
Speaker 3: of execution, and borrowers are willing to pay up for
Speaker 3: access to that capital. So there's a real entrenched driver
Speaker 3: in terms of the supply of private credit. The demand side,
Speaker 3: as you asked about, you know, initially this was an
Speaker 3: institutionally driven market. So let's put that in perspective. Pre
Speaker 3: financial crisis, Global antil crisis, the market for corporate private
Speaker 3: credit was about one hundred and fifty billion in size.
Speaker 3: It's about a trillion and a half today, about the
Speaker 3: same size as the high yield market and leverage loan market.
Speaker 3: They're all about equal, so that that growth has largely
Speaker 3: been driven by institutional investors and increasingly retail investors. So
Speaker 3: as you look at the the ETF Private credit ETF
Speaker 3: as an example, it's another vehicle to utilize to expand
Speaker 3: private credit delivery into a broader retail investor base. Now
Speaker 3: they're they're positives of that, they're negatives of that. You know,
Speaker 3: I always kind of anchor back to major concern being
Speaker 3: a potential mismatch and liquidity. Right, as a private credit investor,
Speaker 3: you have the benefit of being able to go really
Speaker 3: deep from a due diligence perspective, structure appropriate covenants, and
Speaker 3: have control of a transaction should things go. A key
Speaker 3: part of that risk mitigation is also the longer term
Speaker 3: nature of the investors and having long term locked up capital.
Speaker 3: So to extent we go away from that into retail
Speaker 3: offering liquidity. It's just a concern that I think market
Speaker 3: participants need to be mindful of in terms of that mismatch.
Speaker 2: Yeah, that was going to be my follow up question because,
Speaker 2: as you mentioned, providing that liquidity at the retail level
Speaker 2: might be an issue. But maybe we can talk about
Speaker 2: the borrowers a little bit, because you've said that in
Speaker 2: some cases they might want to go to the private
Speaker 2: credit market and sort of shun all the scrutiny of
Speaker 2: public credit markets. But one of the things that we've
Speaker 2: seen in the last twelve to eighteen months is that
Speaker 2: public markets have become much more receptive to even some
Speaker 2: of the riskier borrowers. So we have a couple of
Speaker 2: borrowers in European real estate, for instance, that wouldn't have
Speaker 2: dreamt of coming back to the market eighteen months ago
Speaker 2: because they are deeply high yield, highly levered, and so on.
Speaker 2: But they've been able to come to the market this year.
Speaker 2: So do you think that the demand from the borrowers
Speaker 2: is still there even though public credit markets are less
Speaker 2: strained than they were twelve eighteen months ago.
Speaker 3: Sure, total, and you're talking to you know, their cyclical
Speaker 3: and secular factors at play here. So from a cyclical perspective,
Speaker 3: as public capital markets recover, as investor interest increases, right,
Speaker 3: there will be kind of an ebb and flow there
Speaker 3: on the public side, and public markets tend to get
Speaker 3: more aggressive and more conservative, right, So you know that's
Speaker 3: cyclical that that's going to remain kind of a key
Speaker 3: component between what is the share shift between public and
Speaker 3: private execution From from a secular perspective, you got to
Speaker 3: anchor to, you know, what are the tangible benefits to
Speaker 3: a borrower in diversifying its verses of financing. So you
Speaker 3: take you look at what happened on the back of
Speaker 3: the rapid rise in rates we saw a few years
Speaker 3: ago and how that impacted various specially financed non bank
Speaker 3: lenders that might have been really reliant on one source
Speaker 3: of financing that is a securitization market. That market is fickle,
Speaker 3: it shuts down, and they lose access to the lifeblood
Speaker 3: of their business, which is capital. So from a you know,
Speaker 3: from a secular long term perspective, that's one of the
Speaker 3: roles private capital plays and allowing these borrowers to diversify
Speaker 3: their sources of capital to become you know, again more
Speaker 3: more steady access across across different parts of the market cycle.
Speaker 2: Yeah. So one of the issues that's also come up,
Speaker 2: and you sort of alluded to it earlier, was banks
Speaker 2: as providers of capital. So we've seen headlines saying that
Speaker 2: JP Morgan is assigning tens of billions to direct lending.
Speaker 2: How do you view banks increased interest? I guess in
Speaker 2: this part of the market, do you view them as
Speaker 2: competitors or as collaborators.
Speaker 3: It's a symbiotic relationship. So banks have been so what
Speaker 3: you're talking about right now is specific to corporate private credits.
Speaker 3: So banks have been lenders to corporates, you know, forever
Speaker 3: now that that level of involvement started to decrease post
Speaker 3: RTC and certainly post Financial Crisis, given the regulatory reform
Speaker 3: that got put in place that led to the growth
Speaker 3: of the corporate private credit market. That said, banks are
Speaker 3: still active players in that market. In addition to providing loans,
Speaker 3: they provide other variable, valuable ancillary services to these borrowers,
Speaker 3: should be cash management, payroll, et cetera. I think what
Speaker 3: you're seeing now is just an evolution of that relationship
Speaker 3: where banks are increasingly partnering with private capital as a
Speaker 3: way to diversify their source funding. Right, in addition to deposits,
Speaker 3: let's partner with with private capital so we could provide
Speaker 3: solutions to our borrowers. We might be able to provide
Speaker 3: you know, public broadly syndicated loan execution on one hand,
Speaker 3: let's let's also have a private solution as well, so
Speaker 3: the partnership facilitates that.
Speaker 1: But all this is not terribly new, is it. I mean,
Speaker 1: you know, for years, large investment films have been sort
Speaker 1: of almost going direct to borrows and you know, lending
Speaker 1: them money. I mean, it's it's sort of old school lending.
Speaker 1: But what seems we knew is in term sort of
Speaker 1: growth in some cases rebranding of parts of the market
Speaker 1: is private. I'm wondering, you know, given the huge growth
Speaker 1: some of the guests called it at a thirty to
Speaker 1: forty trillion dollar market, what are the risks in that?
Speaker 1: I mean, anything that grows that big that first seems
Speaker 1: to have risk. Are we missing something there?
Speaker 3: Yes, large numbers have been have been cited, but let's
Speaker 3: let's kind of step back right. First, it was the
Speaker 3: corporate credit market, which was almost entirely bank intermediated, and
Speaker 3: that market had a very small private footprint, you know,
Speaker 3: pre financial crisis about one hundred and fifty billion. As
Speaker 3: I mentioned, that's trullion and a half today. So that growth,
Speaker 3: of course came with net new growth of debt capital,
Speaker 3: but it was largely driven by a share shift from
Speaker 3: bank and capital markets. That was you know, I think
Speaker 3: of an initial phase of disintermediation and kind of rebalancing
Speaker 3: of how companies finance themselves between bank capital markets and
Speaker 3: private capital. It's only a small part of the overall economy. Right,
Speaker 3: corporate credit, you're missing commercial real estate, residential real estate,
Speaker 3: consumer finance. These are all asset classes that historically have
Speaker 3: been financed by banks in the securitization market that's now
Speaker 3: opening up to private capital. Right. Key driver of that
Speaker 3: as well is insurance, and that many of these asset
Speaker 3: classes are investment grade in nature and fit well on
Speaker 3: insurance its balance sheet. So it's very natural for the
Speaker 3: growth of the market to expand significantly because we're moving
Speaker 3: beyond corporate private private credit. And whether it's forty billion,
Speaker 3: twenty billion, the number is almost irrelevant. Trillion, it's forty trillion,
Speaker 3: ten billion, the number is almost irrelevant. It's going to
Speaker 3: it should be orders of magnitude larger than the corporate market,
Speaker 3: which is consistent with its contribution to the overall economy.
Speaker 1: I guess my question should then be more focused on
Speaker 1: just direct lending and the excess demand for limited number
Speaker 1: of deals. We've had conversations along the lines of, yes,
Speaker 1: you know, as long as you are pro as long
Speaker 1: as you've got some experience, you know what you're doing,
Speaker 1: you'll be fine. But all this new money, you know,
Speaker 1: this potentially tourist money, may not be doing those those
Speaker 1: great deals. They may be getting themselves into trouble. Risk
Speaker 1: could be building because it's private, we can't see it.
Speaker 1: Is that Is that a concern futile?
Speaker 3: There's definitely been significant flow of capital into the market
Speaker 3: if you talk about corporate direct lending specifically, A lot
Speaker 3: of that has gone into the upper part of the
Speaker 3: middle market and issuers who have both public and private
Speaker 3: execution alternatives. So I think you're going to see some
Speaker 3: volatility of share shift between those markets based on how
Speaker 3: open the public capital markets are. We're seeing that today
Speaker 3: and a lot of deals that were done by private
Speaker 3: credit over the past twelve months are being you know,
Speaker 3: refinanced in the public market. So I think I think
Speaker 3: you're gonna you're you're going to you're gonna see that
Speaker 3: that's going to be relatively cyclical from a risk perspective. Look,
Speaker 3: I think there are advantages that private capital has. One
Speaker 3: locked up nature of the capital, right, the primary risk
Speaker 3: outside of lending to good companies is effectively matching your
Speaker 3: assets and liabilities private capital, given the structure of these funds,
Speaker 3: even the retail funds having certain liquidity gates and tender mechanisms,
Speaker 3: do pretty good job of matching assets and liabilities. If
Speaker 3: you're able to do that, you could really focus on
Speaker 3: making good loans to good companies. And another benefit in
Speaker 3: that regard that that private credit investors have is is
Speaker 3: just the the the fee structure, the incentive structure. Many
Speaker 3: of these funds have incentive fees which naturally align compensation
Speaker 3: and with performance and the underlying manager as well, which
Speaker 3: you don't typically get at banks and or public market.
Speaker 1: Okay, you're also kind of, you know, having to take
Speaker 1: a long term view on these on these borrowers, which
Speaker 1: for macro reasons that we've discussed you know, earlier in
Speaker 1: the podcast, are quite difficult because of you know, the
Speaker 1: very turbulent policymaking and and all the other things that
Speaker 1: are going on. Is that complicating your your investment decisions
Speaker 1: and the process around it, Like, how can you see
Speaker 1: very far into the future given all of the all
Speaker 1: of the volatility.
Speaker 3: Yeah, we try to focus on on cash flows, fundamental
Speaker 3: cash flows. So if that means on the corporate side,
Speaker 3: focusing on companies that have very diversified revenue base, could
Speaker 3: have long term contracts in place, high degree of recurring revenue,
Speaker 3: predictable cost structures, less reliant on consumer spending, more reliant
Speaker 3: on corporate op x as opposed to capex. So it
Speaker 3: gets down to the nature of the cash flows that
Speaker 3: we're underwriting outside of corporate. If you're looking at the
Speaker 3: asset based space broadly, if that's residential, consumer, et cetera,
Speaker 3: many of these cash flows are shorter duration in nature.
Speaker 3: Their loan portfolios, they're amortizing rapidly, you're not depending on
Speaker 3: sale of an asset to get your money back. So
Speaker 3: I think these are these are benefits, the shorter duration,
Speaker 3: the kind of nature of the revenue, the defense of
Speaker 3: nature of the revenue.
Speaker 2: One of the issues that we're facing in the public
Speaker 2: market is that yields have basically come down a lot,
Speaker 2: what spreads have tightened a lot as well? In I
Speaker 2: guess return in the private credit market aren't maybe as
Speaker 2: significant as they were a couple of years ago. So
Speaker 2: can you maybe talk about what type of returns you're
Speaker 2: expecting this year? And so linked to that has been
Speaker 2: the issue of a potential rise in defaults because rates
Speaker 2: stay higher for longer. Is that a concern in the
Speaker 2: issuers that you look at or does private credit allow
Speaker 2: you to manage those potential defaults in a different way.
Speaker 3: Yeah? Sure, So let's hit the default credit quality point second.
Speaker 3: But I want to address your question on spread. So
Speaker 3: private market will follow public markets. So just that we've
Speaker 3: seen significant spread compression in public markets, private markets are
Speaker 3: not immune. You know, if you look at the corporate
Speaker 3: middle market direct lending pricing there. I look at our business,
Speaker 3: our portfolio, we're roughly one hundred base points inside of
Speaker 3: of where we were at this time last year, just
Speaker 3: looking at overall spread on new investments. Of course you
Speaker 3: have SOFA coming down as well. You put the two together,
Speaker 3: what might have been an unlevered twelve percent gross return
Speaker 3: is probably closer to ten today, Still very attractive double
Speaker 3: digit return profile relative to what you can get in
Speaker 3: the public markets. Plus you have that the downside protection
Speaker 3: from direct origination, ability to structure documents, get covenant protection,
Speaker 3: et cetera. So you know, pricing pricings certainly come in
Speaker 3: and you know there will be a floor in many
Speaker 3: instances because not all of these borrowers have access to
Speaker 3: the public markets. So I see, you know, you're seeing
Speaker 3: probably more extreme spread compression at the larger end of
Speaker 3: the middle market where many of these borrowers have access
Speaker 3: open access to the broadly syndicated loan markets, so that
Speaker 3: that will put more pressure on pricing.
Speaker 2: And then on defaults. You are going to talk about
Speaker 2: those yep.
Speaker 3: Yeah, look from from a default perspective, I look at
Speaker 3: the past five years, and it hasn't been an environment
Speaker 3: without stress. Right. We went through COVID. We know what
Speaker 3: what impact that had on commercial real estate, hospitality assets
Speaker 3: as an example, and we went through, you know, an
Speaker 3: extremely rapid rise in rates from zero to five hundred
Speaker 3: basis points and the impact that had on you know,
Speaker 3: cost of borrowing, cap rates, and valuations and commercial real
Speaker 3: estate in particular. So you know, there have been pockets
Speaker 3: of severe stress over the past five years. I think
Speaker 3: it's tested the market. Look, look, ultimately you will have
Speaker 3: issuers with with borrowers, and that's why you're set up
Speaker 3: much more effectively to proactively manage those risks as a
Speaker 3: private investor. So getting access one to information ahead of time,
Speaker 3: so you can identify where stresses might be emerging or
Speaker 3: could be emerging in the future. Right should that be
Speaker 3: you know the impact of higher rates on companies borrowing costs.
Speaker 3: Being able to use that information to engage with a
Speaker 3: sponsor or owner in advance of of of really an
Speaker 3: issue becoming to the point where there's a you know,
Speaker 3: payment default as an example. So you know we're able
Speaker 3: to get ahead of issues, right, you can't. You can't
Speaker 3: necessarily avoid it. You try to make good credit decisions.
Speaker 3: But if you're able to do that with good access
Speaker 3: to information to get ahead of potential credit issues, engage
Speaker 3: with the owner. And two very important is as I
Speaker 3: mentioned earlier, the patience you have. You're not a forced seller,
Speaker 3: So anything you do from a fun structure perspective that
Speaker 3: could put you into a position where you might have
Speaker 3: to sell assets to repay to source liquidity for redeeming
Speaker 3: investors or repay leverage is what you need to avoid
Speaker 3: in these situations. If you have the time and you've
Speaker 3: made good credit decisions, you're going to be able to
Speaker 3: work through assets, especially as a creditor with a you know,
Speaker 3: significant equity cushion below you.
Speaker 1: So in direct lending right now to a US corporation,
Speaker 1: how much more would you get by doing it private
Speaker 1: as an investor compared to public markets.
Speaker 3: Yeah, Look, there's a pretty persistent illiquidity premium one hundred
Speaker 3: and fifty two hundred basis points. And even as rates
Speaker 3: both spreads base rates have come in that premiums remain
Speaker 3: fairly persistent historically. Now, now that's just the gross premium
Speaker 3: you're going to get, you know, I do want you've
Speaker 3: got to focus on the downside protection as well. And look,
Speaker 3: the data proves it out from a historical default perspective
Speaker 3: and recoveries, defaults being low, recoveries being higher. Investing in
Speaker 3: privately versus public markets. But intuitively that makes sense. You
Speaker 3: are able to conduct much more robust diligence, You're able
Speaker 3: to have much better access to management. Right you are
Speaker 3: typically the only lender, if not member of a smaller
Speaker 3: like minded club of lenders as opposed to a large syndicate. Right,
Speaker 3: that all is very beneficial from us that.
Speaker 1: Some people would say that the default cycle hasn't really
Speaker 1: you know, you haven't had one that hasn't been the test.
Speaker 1: You haven't had a recession. So how can you prove
Speaker 1: that data? I mean, are you going to find out
Speaker 1: when when the economy turns down? Yeah?
Speaker 3: No, I mean it's back to my point. I think
Speaker 3: the past five years you've had some real pockets of stress.
Speaker 3: It hasn't been a traditional garden variety recession. You know,
Speaker 3: we had COVID and we had a rapid rise in raids.
Speaker 3: But you know what, what did the impact of those
Speaker 3: two events had one? You know, the source of revenue
Speaker 3: for many borrowers shut off overnight if you're you know
Speaker 3: a hotel as an example, right, and you know cost
Speaker 3: of borrowing cash flow, you know, massive impact given the
Speaker 3: rise in rates. I think we've been through a pretty
Speaker 3: stressful ironment.
Speaker 1: Okay, And so this one fifty to two hundred base
Speaker 1: point premium for private against public do you think that
Speaker 1: holds on the liquidity premium alone? Do you think we're
Speaker 1: going to get squashed as everyone pals in more with
Speaker 1: the private side.
Speaker 3: Look, I think there's an element of if that premium
Speaker 3: gets too small, then as an investor, you're going to
Speaker 3: start to question why am I locking my capital up?
Speaker 3: So I think there's a self correcting mechanism.
Speaker 1: Yeah.
Speaker 3: Probably. One of the reasons it's been so historical, been
Speaker 3: so you know, consistent historically, is.
Speaker 1: That one hundred basis points that's too low. I mean,
Speaker 1: what's what's the level that people jump out to.
Speaker 3: Yeah, no, I think that one hundred and fifty to
Speaker 3: two hundred basis point level is good. Now that that's
Speaker 3: only for now. Private credit the universe and the definition
Speaker 3: of what is private credit is expanding, you reference, you know,
Speaker 3: some of those large numbers earlier. Key driver behind the
Speaker 3: growth of the market is also the expansion of investment
Speaker 3: great private credit, where in some instances you're getting a
Speaker 3: fifty basis point pick up to what you can get
Speaker 3: in the corporate high yield market and higher. So as
Speaker 3: you move up quality, that that that premium that that
Speaker 3: you need.
Speaker 1: Well, so sorry, this one fifty that applies to just
Speaker 1: high yield, is it?
Speaker 3: I'm thinking of that as in the context of corporate
Speaker 3: direct lend and what that spread premium has been historically interesting.
Speaker 2: Okay, Matt, you mentioned the pandemic, and definitely it did
Speaker 2: lead to some almost shocking or valuations in real estate
Speaker 2: in particular, which you've also mentioned, not just hotels or offices,
Speaker 2: but even residential even though we stay safe as houses
Speaker 2: and so when we've seen some residential landlords come under
Speaker 2: very significant strain. Looking at the real estate sector now
Speaker 2: at Alion Spernstein, do you still see opportunity given how
Speaker 2: much of a recovery we've seen, at least in the
Speaker 2: public market, or do you think that it's run its
Speaker 2: course and it's time to be looking at other sectors.
Speaker 2: Now that's for real estate in general, and I have
Speaker 2: another question on offices after maybe.
Speaker 3: Yeah. So commercial real estate is a global markets, very
Speaker 3: local market, so you really can't paint it with one
Speaker 3: broad brush. So, plus, there are differences in investment opportunities,
Speaker 3: ranging from on the credit side, on the dead side,
Speaker 3: financing cash flowing stabilized core properties, all through investing in
Speaker 3: opportunistic assets, buying assets at a discount, et cetera. So
Speaker 3: from a market perspective, we're certainly a bottoming in a recovery.
Speaker 3: Right you look at how open. The capital markets are
Speaker 3: for financing commercial real estate, in particular high quality assets.
Speaker 3: You look at transaction volume, you look at property valuations.
Speaker 3: Really across asset classes where we're seeing a recovery, you
Speaker 3: kind of step back and look under the hood. There.
Speaker 3: You take office as an example, there still is a
Speaker 3: bifurcation in terms of in that asset class. You have
Speaker 3: high quality, new vintage, highly immanetized buildings, which are highly
Speaker 3: financible capital markets today, public and private. You compare that
Speaker 3: with with older office buildings, which still might be in
Speaker 3: a challenging situation from a leasing current future leasing perspective,
Speaker 3: that will continue to have challenges.
Speaker 2: You basically sound quite positive on the outlook for select
Speaker 2: office real estate, if I can say that. But one
Speaker 2: of the issues I guess with those high quality, super
Speaker 2: efficient newer buildings is that everyone seems to be looking
Speaker 2: at them. So the margins, I guess might be squeezed,
Speaker 2: the returns might be much lower. So at what point
Speaker 2: do you think people will start to look at those
Speaker 2: sort of see lower tier offices and other real estate
Speaker 2: because the returns on the top tier are so squeezed.
Speaker 3: Yeah, I mean, look from our perspective, We've got a
Speaker 3: global strategy. We've got a footprint in the US and Europe,
Speaker 3: so we finance across property types, and we also have
Speaker 3: the flexibility to provide both on the performing, high quality
Speaker 3: you know, core core plus type of financing all the
Speaker 3: way through opportunistic. So I think important in the market
Speaker 3: particular today is having a broad strategy. You're not focused
Speaker 3: on one particular asset class, where you could really pivot
Speaker 3: to where where the opportunity is and where you see
Speaker 3: the best relative value for your investors.
Speaker 2: Another question, also focused on real estate. You mentioned obviously
Speaker 2: you are a truly global player, but a lot of
Speaker 2: the comparison this day these days has been US versus
Speaker 2: the rest of the world. So considering the real estate sector,
Speaker 2: where do you think the greater opportunity is within the
Speaker 2: US or maybe there are other geographies where people should
Speaker 2: be looking at private credit real estate.
Speaker 3: Yes, so on the real estate side, again, I would
Speaker 3: anchor back to the markets being extremely local. Local location matters,
Speaker 3: But I think Europe is an interesting place to be
Speaker 3: right now from a commercial real estate debt perspective. It
Speaker 3: is a market that is less efficient than the US
Speaker 3: in terms of providers of capital right, So you get
Speaker 3: a benefit there. Now, I think you've still given that
Speaker 3: smaller you know, kind of universe of private capital suppliers
Speaker 3: you can you know, on the margin those transactions, you know,
Speaker 3: get get better structure, get better terms, better covenants in place.
Speaker 3: Again a supply demand dynamic which makes you know you're
Speaker 3: particularly attractive. You know that that's that that's that's one.
Speaker 3: That's one perspective.
Speaker 2: And just within Europe, are there specific countries that ALIGNE
Speaker 2: spent ting has been looking at or sub sectors maybe.
Speaker 2: I mean we've seen quite a significant recovery in the
Speaker 2: more sector in shopping for instance, and we even had
Speaker 2: one issue where upgraded recently. Is that an area that
Speaker 2: you're looking at or is it more at the offices
Speaker 2: that we mentioned.
Speaker 3: Yeah, I would say, just stepping back, we we do
Speaker 3: have a broad mandate in terms of end market. It's
Speaker 3: one of the areas that we we have found attractive
Speaker 3: continue to find attractive. You know, speaking of Europe, is
Speaker 3: is in multifamily particular assisted living. So you've got real
Speaker 3: benefit you know, tailwind aging population as individuals move from
Speaker 3: single family homes, uh and and progress. Right, there's there's
Speaker 3: an attractive supply demand imbalance and the assisted living side.
Speaker 3: We think that's an interesting space from a commercial real
Speaker 3: estate perspective.
Speaker 2: And within assisted living, are there specific countries that you
Speaker 2: think offer greater opportunity than others. The other issue with
Speaker 2: assisted living is the amount of regulation of course, so
Speaker 2: there are standard of course in terms of the type
Speaker 2: of facility and so on, and sometimes I guess that
Speaker 2: can affect your margins. Is that a concern when you're
Speaker 2: looking at these social housing? Were those types of housing provided?
Speaker 3: Yeah, all all concerns. Look in terms of all things
Speaker 3: we focus on. In terms of the markets, I would say,
Speaker 3: you know, UK is the largest, but we gotta we
Speaker 3: have a full European footprint. We actively look at opportunities
Speaker 3: in the continent as well.
Speaker 1: How do you stay ahead of the competition? What's your
Speaker 1: edge in terms of you know, private alternatives because everyone
Speaker 1: wants to be there. I think Globin Lusty said that
Speaker 1: there's any going to be ten players left. After all
Speaker 1: it gets shaken out and everybody's acquiring and everybody's you know,
Speaker 1: trying to scale up.
Speaker 3: What do you do and look, it starts with the
Speaker 3: experience we have in the market, so you know our business,
Speaker 3: you know We largely built that from scratch over a
Speaker 3: period of fifteen years through a combination of team liftouts,
Speaker 3: build outs, main acquisition. About two years ago, Carballe Investors
Speaker 3: rebranded ab Carbal Investors. So it starts with having kind
Speaker 3: of the quality of the team investment process, your ability
Speaker 3: to source differentiated transactions and kind of execute them on
Speaker 3: a consistent basis. So, you know, having that team focus
Speaker 3: and that that coverage across markets, right, that allows us
Speaker 3: to you know, grow our relationship with borrowers, execute on
Speaker 3: repeat business and grow the business. Right the reality is over.
Speaker 3: You know, from time to time transactions we're looking at
Speaker 3: will will rhyme. We'll see similar types of companies, issuers, industries, controversies,
Speaker 3: and our experience gives us an edge in the market,
Speaker 3: right in terms of past transactions.
Speaker 2: In that context, do you still think that there's room
Speaker 2: for so called niche or small players, because I guess
Speaker 2: one of the issues with being an asset manager of
Speaker 2: your size approaching a trillion a UM, potentially one of
Speaker 2: the issues might be that you can't be as nimble
Speaker 2: as some others, and perhaps in terms of the size
Speaker 2: of the opportunity for an opportunity to really make a
Speaker 2: difference to your overall return, it has to be quite
Speaker 2: a significant one. So do you think there's there's still
Speaker 2: a room for these niche asset manager or do you
Speaker 2: think we'll continue to see consolidation in the sector.
Speaker 3: I always think that. I think you're always going to
Speaker 3: have certain asset classes that are more niche, more limited
Speaker 3: capacity in nature that you know, warrant smaller specialist firms.
Speaker 3: I think that's going to remain true. I think the
Speaker 3: other trend that you have in the market is, you know,
Speaker 3: as we talked about, one of the key drivers of
Speaker 3: the growth in private credit broadly and the growth of
Speaker 3: corporate private credit, the expansion beyond corporate private credit to
Speaker 3: asset based finance is you know, growth in retail and
Speaker 3: particular growth in uh A insurance capital. So the insurance
Speaker 3: side in particular, given that you're focused on investment grade
Speaker 3: private credit and it's a larger part of the overall
Speaker 3: capital structure, leads to larger scale and to be a
Speaker 3: relevant provider of capital in that market. I do think
Speaker 3: you need you need to be larger. Right You're providing
Speaker 3: solutions to borrowers that include everything from investment grade execution
Speaker 3: through opportunistic, and I think that that does lead to
Speaker 3: needing a larger platform to stay competitive. So I think
Speaker 3: you can have both trends, Like you're still going to
Speaker 3: have very successful specialist niche firms that stick to their
Speaker 3: domain focus manage capacity effectively, and on the other end,
Speaker 3: you're going to have growth of larger private credit firms
Speaker 3: across asset classes with the client base from you know,
Speaker 3: insurance through through institutional and investment grade through opportunistic, which
Speaker 3: necessitates I think the larger scale to compete effectively.
Speaker 1: Then going back to where we started about ETFs, do
Speaker 1: they really make sense for this? I mean there's no liquidity, really,
Speaker 1: no daily liquidity, So how can an ETF work in
Speaker 1: private credit?
Speaker 3: The ETF rapper has various advantages, Now, how successful will
Speaker 3: it be in private credit? I think that's an open question.
Speaker 3: One concern I have as you start to introduce more
Speaker 3: and more liquidity to private credit, to illiquid investments, and
Speaker 3: the provider of that liquidity is going to need to
Speaker 3: be compensated, how much of that illiquidity premium gets eroded?
Speaker 3: And then just from an investor's perspective, are you better
Speaker 3: off in that vehicle or are you better off taking
Speaker 3: public exposure in a pure form. So we talked about
Speaker 3: what is the right Where does the illiquidity premium settle out?
Speaker 3: I think it's going to be determined by the end investor,
Speaker 3: and what extra form of compensation in terms of yielder
Speaker 3: return you need to generate for locking your capital up.
Speaker 2: I think there's a view I guess that the lines
Speaker 2: might become increasingly bled between public and private, which goes
Speaker 2: to your point about being adequately compensated to go from
Speaker 2: one to the other. So maybe maybe that's sort of
Speaker 2: one of the risks. But what would you say keeps
Speaker 2: you up at night most looking at alternative credit? Would
Speaker 2: it be that, as in bloodlines between private and public
Speaker 2: or are there other risks that you think that one
Speaker 2: should be aware of.
Speaker 3: Yes, so we talk a lot. There is a lot
Speaker 3: of talk about the blurring line between public and private.
Speaker 3: That the reality for issuers of a certain size, you
Speaker 3: always had that alternative right to choose between public execution
Speaker 3: and private execution. So what we've seen over the past
Speaker 3: three or so years at the large end of the
Speaker 3: corporate private credit market is an example of that. Issuers
Speaker 3: have access to both broadly syndicated markets, private markets, and
Speaker 3: you know, while there are benefit fits to private execution
Speaker 3: in terms of speed, certainty, structural flexibility, when the public
Speaker 3: capital markets are open, the investor demand is there and
Speaker 3: the pricing makes sense, those issuers will make logical economic decisions.
Speaker 3: So I think that that blur, that that gray space continues,
Speaker 3: in particular for larger issuers. We saw it in corporate,
Speaker 3: You're going to see it in other forms of asset
Speaker 3: that asset based finance. You know, if it's a non bank,
Speaker 3: specially finance company looking to finance its origination, do you
Speaker 3: focus on the capital markets, curitization markets, private financing, bank financing,
Speaker 3: It's probably a combination of all three different percentages based
Speaker 3: on where you are in the cycle. So I think
Speaker 3: that I think that continues.
Speaker 1: What kind of questions your clients ask you when you're fundraising?
Speaker 1: I mean, what do they do they get private credit? Now?
Speaker 1: Is it so well known that I mean, I still
Speaker 1: get a lot of confusion, and so what kind of
Speaker 1: questions are they asking you?
Speaker 3: Yeah, no, look to to the to the earlier point.
Speaker 3: We do get the question what what keeps you up
Speaker 3: at nights? A natural question, I think, you know, for
Speaker 3: for me, it gets back to UH, liquidity and ensuring
Speaker 3: that you know, we as private investors are effectively matching
Speaker 3: assets and liability. That the beauty of this asset class
Speaker 3: is the time it gives you right to work out
Speaker 3: of issues should should should they come to should should
Speaker 3: you have them on the credit side. So as as
Speaker 3: we're growing in retail, look, by the way, there there
Speaker 3: the retail vehicles that we have today, the interval funds,
Speaker 3: public non traded BDCs. They have the structural features in place,
Speaker 3: if it's maximum percentage of shares that could be tendered,
Speaker 3: or quarterly gates that are designed to protect existing investors.
Speaker 3: And if we if we look at what happened with
Speaker 3: b read as an example, you know, the the vehicle
Speaker 3: kind of proved its efficacy. Now uh, you know, the
Speaker 3: vehicle proved its efficacy and in terms of protecting and
Speaker 3: the current investors and and gating at the appropriate level
Speaker 3: in terms of other themes as we engage with clients
Speaker 3: that there's definitely uh, there has been a shift in
Speaker 3: focus on liquidity, right that that's not new, what's been
Speaker 3: with us for some time and and and really focusing
Speaker 3: on distributions or or dp I. In addition, to I
Speaker 3: r R as a return metric. So in addition the
Speaker 3: I r R this investment is generated, which may not
Speaker 3: be realized. What are the cash distributions relative to the
Speaker 3: capital I've paid in that I'm seeing? So, uh, we're
Speaker 3: you know, institutional investors are a lot more focused on
Speaker 3: liquidity as transaction volumes have slowed down, repaid inments have
Speaker 3: slowed down, realizations have slowed down. So that's a big,
Speaker 3: a large area of focus. The other the other area
Speaker 3: in private credit broadly would be, you know, one, as
Speaker 3: institutions look to grow their core corporate private credit allocation,
Speaker 3: how do I continue to grow that allocation and do
Speaker 3: in a way that's diversifying. This is where asset based
Speaker 3: finance comes into play, where you can generate comparable returns,
Speaker 3: but generate those returns by taking totally different risks consumer
Speaker 3: versus corporate as an example, do it on a shorter
Speaker 3: duration as well. So you know, the notion of asset
Speaker 3: based finances diversifier a corporate private credit is coming through
Speaker 3: a lot of client conversations as well.
Speaker 1: Can I ask you, Matt, why you think the best
Speaker 1: relative value is right now? In terms of you know,
Speaker 1: everything you look at there's a ton of stuff. It's
Speaker 1: a huge question. But and with near the end of
Speaker 1: the podcast, but where is the relative value?
Speaker 2: What?
Speaker 1: What do people where should they go?
Speaker 3: Yeah, so I'll answer that question first the kind of
Speaker 3: preface of you know, our strategies we're typically deploying over
Speaker 3: a two to three year period, so given that we're
Speaker 3: not making a specific relative value call at the moment,
Speaker 3: we're looking for good companies, good borrowers, good industries, good
Speaker 3: stable cash flow profiles, and we get our arms around.
Speaker 3: So with that as kind of a background to how
Speaker 3: we're operating and how we're investing. Look, I think parts
Speaker 3: of the private credit market are interesting now in asset
Speaker 3: based finance where we have there there are still you know,
Speaker 3: if it is banks, you know, even an environment where
Speaker 3: regulations will probably become more less restrictive, not more restrictive
Speaker 3: in the US certainly, maybe less so in Europe. Banks
Speaker 3: are increasingly looking for partners that their model is continuing
Speaker 3: to transition to a more capital light originate and distribution
Speaker 3: originate to distribute models. So that's creating interesting opportunities in
Speaker 3: asset based finance for lenders who have a long standing
Speaker 3: footprint in the market. Who understand the underlying asset classes.
Speaker 3: So I think that's a that's a space that we're
Speaker 3: focused on broadly, if it's residential, mortgage, consumer transportation SLTS
Speaker 3: as well, you know SRTs, you know, is we think
Speaker 3: of that as a tool, right, and you know, various
Speaker 3: tools we have to craft a solution for a bank
Speaker 3: or a non bank financial institution. Could be acquiring an
Speaker 3: existing portfolio, could be partnering on future forward flow. It
Speaker 3: could be you know, significant risk transfer SRT. It could
Speaker 3: be you know, executing on a cash basis a securitization
Speaker 3: that allows the bank to to kind of deconsolidate the position.
Speaker 3: So there are a lot of tools not uh, you
Speaker 3: know what you know, our role is is to figure
Speaker 3: out what tool is right to use at at the
Speaker 3: current time.
Speaker 1: Right Where do you think you're being contrarian? Right now?
Speaker 3: Where do I think I'm being contrarian? I don't know
Speaker 3: if it's a contrarian view at at the moment certainly now,
Speaker 3: but you know we are you know, positioning for a
Speaker 3: higher for longer environment from a rate perspective. Now, certainly,
Speaker 3: what what the market has been, you know, pricing in
Speaker 3: has has decreased over time, compared to where we were
Speaker 3: six months ago. But you know, as we look at
Speaker 3: our existing portfolio new investments, we're certainly uh, you know,
Speaker 3: preparing for you know, an environment where rates you know,
Speaker 3: continue to be relatively high for the foreseeable future.
Speaker 1: Do you expect any cuts this year?
Speaker 3: You know, I think, you know, we we we look
Speaker 3: at what the markets implying, it looks pretty modest at
Speaker 3: this point.
Speaker 1: Chance for hike potentially a.
Speaker 3: Hike that would certainly be a surprise and could have
Speaker 3: impacts on the market from a liquidity perspective.
Speaker 1: Great Steff Matt Bess, head of Private Alternatives at Alliance Bernstein.
Speaker 1: It's been a pleasure having you on the credit edge.
Speaker 3: Many thanks great, thank you for having me.
Speaker 1: And of course we're very grateful to Tolu ala Mutu
Speaker 1: from Bloomberg Intelligence. Thanks for joining us again.
Speaker 2: Thank you James, and thank you Matt as well.
Speaker 1: Thanks Toler for more credit analysis. Read all of Tolu's
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