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Speaker 1: Hello, Welcome to the Credit at WEEKI Monkets Pubcasts. My

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Speaker 1: name is James Crumby. I'm a senior at AS at Bloomberg.

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Speaker 2: And I'm David Haven's, a senior credit analyst of Bloomberg Intelligence.

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Speaker 2: This week, we're very pleased to welcome Angela Rafino, head

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Speaker 2: of Special Situations in North America as well as corporate

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Speaker 2: special Situations in Europe at Bane Capital.

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Speaker 3: Angelo, how are you. I'm great, good see you guys. Excellent.

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Speaker 2: It's great to be with you and and all of

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Speaker 2: you out there. And these are interesting times. Indeed, Angelo,

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Speaker 2: you've been around the block a few times. You're a Bane,

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Speaker 2: You've been at Brookfield engaged in music royalties, which is

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Speaker 2: obviously interesting to a lot of different people. Brigade JP Morgan, So,

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Speaker 2: I'm sure that you've got a lot of thoughts about

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Speaker 2: what's going on in the marketplace today and what is

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Speaker 2: accurate what's inaccurate.

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Speaker 3: About private credit. Well, there's certainly a lot to talk about.

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Speaker 3: I'll venture my best to give you a view and

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Speaker 3: we'll chat it out.

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Speaker 1: As you say, David, we are going through a bit

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Speaker 1: of a storm at the moment with blue oil in

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Speaker 1: the spotlight and growing concern about private markets, particularly their

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Speaker 1: exposure to software loans. Jamie Diamond got everyone on edge

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Speaker 1: last year with comments about cockroaches and has weighed in

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Speaker 1: again this week saying lenders are doing dumb things to

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Speaker 1: try and induce returns. He's also making comparisons to pre

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Speaker 1: crisis credit excesses. So let's start there, Angelou. How worried

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Speaker 1: should we really be about credit markets right now? And

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Speaker 1: how serious is the software problem? Well, let's break it

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Speaker 1: down into a few pieces. So credit markets at large,

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Speaker 1: I think are reasonably healthy. That's not to say they're

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Speaker 1: priced correctly, but they're reasonably healthy. We've gone through a

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Speaker 1: long period of deleveraging of corporate balance sheets, a lot

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Speaker 1: of cash on balance sheets. Leverage levels, as I noted,

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Speaker 1: have come down some stamps over the past few years.

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Speaker 3: So by and large, a pretty good economy. Real GDP

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Speaker 3: growth north to two percent, probably north of two and

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Speaker 3: a half percent this year by some forecasts. Things things

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Speaker 3: seem reasonable. The issue lies, I think, within some specific subsectors.

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Speaker 3: The overlay of what AI can be doing to business

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Speaker 3: models that are were tried and true in the past

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Speaker 3: and make change in the future. And certainly then the

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Speaker 3: context of pricing, right, where does value actually lie within

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Speaker 3: the credit markets today? Last I checked, we're sitting, you know,

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Speaker 3: roughly a little over three hundred on a spread to

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Speaker 3: worse basis, so certainly near the tights, not at the tights,

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Speaker 3: but but tight. And I don't think that that reflects

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Speaker 3: the tails where we're seeing in the market today, certainly

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Speaker 3: as a function of just what is going on in

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Speaker 3: the AI ecosystem. You brought up software, we can we

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Speaker 3: can get into that and debate that out. But price

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Speaker 3: credit does feel priced for perfection, and it also has

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Speaker 3: had a long tail of money come into it over

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Speaker 3: the last five years, really on the back of insurance

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Speaker 3: related investment. And anytime we get into a world of

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Speaker 3: structured credit, you start to see behaviors that that price

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Speaker 3: credit at different levels than it may have been in

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Speaker 3: the past, which can which can lead to disruptions. So

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Speaker 3: I do think we're at a period where the economy overall,

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Speaker 3: as I noted, is feeling fine. We will go through

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Speaker 3: cycles credit price for perfection, and then let's let's talk

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Speaker 3: a bit about some of the sector specific risks we're seeing. Yeah,

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Speaker 3: that that sounds good.

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Speaker 2: Let's let's uh, well, we definitely want to get into software,

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Speaker 2: I mean, and the implications that AI may or may

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Speaker 2: not have on software and tech. But uh, before we

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Speaker 2: get into that, just given what's sort of come up

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Speaker 2: over the past week or so, you know, with with

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Speaker 2: gates going up and an awful lot of adverse press

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Speaker 2: about restrictions of of you know, withdrawals from from funds, which,

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Speaker 2: by the way, to me is a credit analyst, I

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Speaker 2: look at the ability to withdraw funds and have restrictions

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Speaker 2: on the on the withdrawal of funds is actually a

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Speaker 2: positive thing from a credit perspective because it does reduce

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Speaker 2: the risk of a run on the bank at some

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Speaker 2: of the some of these private BDC funds.

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Speaker 3: But what I want.

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Speaker 2: To sort of suss out from you is is there

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Speaker 2: seems to be maybe a bit of dissonance between the

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Speaker 2: way that maybe some parts of the retail market are

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Speaker 2: viewing private credit and the way that the institutional.

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Speaker 3: Side is viewing things. So what's your perspective on that. Well,

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Speaker 3: you're bringing up the right dynamic, and we haven't had

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Speaker 3: this amount of retail money in a private asset class,

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Speaker 3: and really I don't think in history typically retail invested

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Speaker 3: in credit through liquid products, so when they wanted their money,

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Speaker 3: they got it out, whether it was overnight through a

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Speaker 3: mutual fund or an ETF. You know instantaneously. The dynamic

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Speaker 3: of being gated, as you noted, is going to be

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Speaker 3: new to people. There's a couple of things to push

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Speaker 3: and pull out there. I think on the perspective of

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Speaker 3: a retail investor, they tend to move where money goes,

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Speaker 3: whether it's going into an asset class or going out

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Speaker 3: in the asset class. It is a bit of a

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Speaker 3: herd mentality. You brought up the positive nature of gates.

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Speaker 3: I kind of laughed at that because I think it

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Speaker 3: really depends on which side of the coin you're on.

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Speaker 3: It's certainly in some ways healthy for how it can

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Speaker 3: manage liquidity and risk coming in and out of an

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Speaker 3: asset class, But if you're that investor who wants their

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Speaker 3: money back, it's going to be pretty uncomfortable. And I

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Speaker 3: think we'll ultimately test what it means to be a

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Speaker 3: retail investor at scale in a private asset class, right

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Speaker 3: we just again haven't haven't seen that, so it is

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Speaker 3: a bit uncertain. The way people think about it from

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Speaker 3: a private perspective is that they believe substantial locked up

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Speaker 3: money is underlying the system to date, and then that

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Speaker 3: should keep it its sound. I think that is bid

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Speaker 3: and true and really going to encompass the largest part

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Speaker 3: of the credit markets. But as we see the retail

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Speaker 3: money keep piling up, which has been the three year trend,

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Speaker 3: you're going to start to test the limits of what

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Speaker 3: that really means and how that ultimately bleeds into sales

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Speaker 3: of portfolios, what that means to marks and an as

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Speaker 3: a class that it has been insulated by the fact

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Speaker 3: that the marks are private. So a lot to unpack there.

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Speaker 3: Let's let's see and pull out a few of those strings.

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Speaker 3: But that's high level how I think about it.

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Speaker 1: I mean, just also just sort of taking a bit

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Speaker 1: deferent to the software point because you know, Beaninge, along

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Speaker 1: with a lot of other alternative syphilons, have been very

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Speaker 1: active lending to software over the last i'd say five years,

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Speaker 1: and there were some quite you could say aggressive loans

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Speaker 1: made that's say, five years ago, when when rates were

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Speaker 1: near zero and you know, leverage was quite high in

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Speaker 1: some of those deals. But is this a real sort

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Speaker 1: of reckoning for that sector right now? Are there really

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Speaker 1: bigger problems that we should be worried about.

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Speaker 3: Look, I do think everybody has to take a step

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Speaker 3: back and think about how the business model is going

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Speaker 3: to exist, coexist with AI and change. I do believe

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Speaker 3: that a lot of the money and these SaaS products

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Speaker 3: is sticky. It will it will serve a purpose, and

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Speaker 3: it really sets up for people who don't want to

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Speaker 3: necessarily build these these programs the software themselves. So I

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Speaker 3: think there's a role for it in the future. But

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Speaker 3: what's clear to me is that growth rates are going

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Speaker 3: to change. I think the pricing dynamic is going to

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Speaker 3: be challenged. If you show up and you're going to

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Speaker 3: ask for your typical year over year prices increase, I

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Speaker 3: would expect that to be a challenging conversation and that

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Speaker 3: will ultimately iner to the multiple and thus the enterprise

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Speaker 3: value that these credits can support. We did see a

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Speaker 3: period with very over leverage software valuations that led into

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Speaker 3: the private credit markets, and a lot of that is

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Speaker 3: going to be coming do as you cycle through the

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Speaker 3: five year seven year maturity stack of those vintage buyouts

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Speaker 3: that are coming to the forefront. So I do think

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Speaker 3: we are going to see real pressure in this space.

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Speaker 3: It won't be as bad as it is appearing to

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Speaker 3: be today, and what's being discussed and of course is

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Speaker 3: front and center and feels emotional for people. But I

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Speaker 3: do think we're going to see real stress in the market.

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Speaker 3: And this is typically the way credit cycles have been

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Speaker 3: playing out over the last decade. Right, If we go

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Speaker 3: back two or three decades, you tend to see big

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Speaker 3: macro and do cycles that really took down the market

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Speaker 3: as a whole. I've been investing now for twenty three years.

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Speaker 3: I only remember one cycle in my real investing career

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Speaker 3: like that, which was the GFC the last call it

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Speaker 3: fifteen years or so. Of credit cycles have been very

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Speaker 3: sector specific, whether it was energy, So I think software

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Speaker 3: will be no different, and we will see a full

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Speaker 3: credit cycle as the reckoning really comes to resize capital

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Speaker 3: structures to the earnings power of these business models. But

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Speaker 3: it won't be as bad as it's it's bill to be.

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Speaker 1: Right now, do you have any idea what the default

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Speaker 1: rate might be in that sector? I mean we're talking

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Speaker 1: about sort of low, you know, four to five and

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Speaker 1: leverage loans is kind of what we'd see for this.

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Speaker 3: No, my guess is it's gonna it's going to be

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Speaker 3: significantly more than that multiples. It could you could see

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Speaker 3: this peak at you know, high single digits, low double digits.

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Speaker 3: That wouldn't surprise me by by any means. But it's

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Speaker 3: really hard to put a lens to that without having

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Speaker 3: a full grasp of the entirety of the market.

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Speaker 2: Maybe just a quick follow on to to the software discussion,

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Speaker 2: what are the pros and cons from a credit perspective

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Speaker 2: of software? You know, like sort of we hear a

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Speaker 2: lot in the press and just sort of general discussion

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Speaker 2: out there. Oh, software is going to get killed. But

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Speaker 2: software has got a lot of defenses, doesn't it. You know,

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Speaker 2: the nature of the contracts, the mission critical element of

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Speaker 2: some of the software. Even though AI might be able

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Speaker 2: to do things that the existing software can do, it

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Speaker 2: might be difficult to root it out because of the

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Speaker 2: way that it's integrated into systems.

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Speaker 3: I agree with that. Look. I mean, at the end

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Speaker 3: of the day, there's a reason and people often take

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Speaker 3: these type of big, broad based valuation techniques to the extreme,

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Speaker 3: but there's a reason why software businesses are often talked

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Speaker 3: about as an arr multiple, right, so there is a

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Speaker 3: reoccurring revenue component of that. I think what's a challenge

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Speaker 3: now is is the business model even going to support

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Speaker 3: reoccurring revenue if somebody else can do it for you,

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Speaker 3: you know, cheaper, faster, and you don't need an intermediary.

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Speaker 3: If you think about the other aspects that are interesting

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Speaker 3: about software as a sector. Historically it's upwards of ninety

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Speaker 3: percent gross margins. It's pure free cash flow conversion. So

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Speaker 3: you have a really pure business model, which is why

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Speaker 3: it attracted so much money from the LBO community just

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Speaker 3: given the kind of perfect KPIs it supports for a

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Speaker 3: buyout if you wanted something and it was perceived to

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Speaker 3: have secular growth, low cap X, high free cash flow conversion,

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Speaker 3: reoccurring revenue. I mean, you're checking every box that somebody

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Speaker 3: who is looking to do a bio would typically want

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Speaker 3: to see. The question is how many of those features

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Speaker 3: will continue. I think for sure the business models are

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Speaker 3: not going to change if they exist in their normal

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Speaker 3: form as we historically know them, from that cash flow conversion,

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Speaker 3: from the high gross margin percentage. But how much of

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Speaker 3: that is taken in house, is built by individuals themselves,

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Speaker 3: by companies themselves, is up for question. I do believe

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Speaker 3: that a lot of this software served real purpose. A

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Speaker 3: lot of it is not that expensive. There's subscriptions that

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Speaker 3: are very embedded in broad corporate ecosystems. We're talking a

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Speaker 3: couple hundred thousand dollars a year, and you have to

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Speaker 3: think about just what is the maintenance to hire an

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Speaker 3: engineer to do that, How does it actually play out

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Speaker 3: in a day in, day out basis. It's no different

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Speaker 3: than consuming a service. So to think that at the

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Speaker 3: end of the day, we're all just going to decide

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Speaker 3: that because we have an agent who can do this

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Speaker 3: for us, that we want to leverage that for everything

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Speaker 3: with no intermediary I don't believe that will happen. Do

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Speaker 3: I think that the price tag for it will come down? Sure?

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Speaker 3: Do I think the leverage associated with contract renewals, duration

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Speaker 3: of contracts are going to change? Yes, all those things

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Speaker 3: will make it a less attractive investment for both sponsors

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Speaker 3: and for lenders. And thus anybody who has significant exposure

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Speaker 3: to it via their historical investments is going to have

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Speaker 3: to really think about that. And we're going to see

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Speaker 3: challenge refinancings for sure. If you just look multiple stuff

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Speaker 3: come down for your average business something around nineteen times ibadad.

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Speaker 3: Now we're sitting at rynd fourteen fifteen times. So when

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Speaker 3: you start to lose twenty plus percent of your ev overnight,

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Speaker 3: that's going to be challenged the next time you show

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Speaker 3: up and need to get money, especially when people are

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Speaker 3: historically over allocated to the asse class, so they're not

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Speaker 3: going to be proactively looking to add.

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Speaker 1: And the fair is saying right now, a little b

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Speaker 1: it's about the unknown. And you know the private nature

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Speaker 1: of private credit makes everyone a bit you know, they

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Speaker 1: assume the worst is is it necessarily worse in private

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Speaker 1: credit because you know when we talk to private credit people,

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Speaker 1: they say, well, they've got more access to documents, they

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Speaker 1: see more information, they have the to covenants, all this stuff.

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Speaker 1: But is the selfware problem worse essentially in private credit.

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Speaker 2: No.

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Speaker 3: I think that is something that's often over debated and

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Speaker 3: over pushed, this notion that private credit is some significantly

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Speaker 3: more mishandled or worse asset class. I mean, you have

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Speaker 3: the same dynamic and broadly syndicated loans as you do

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Speaker 3: in private credit. Often you have you know, better liquidity

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Speaker 3: dynamics in a ten year locked up draw down fun

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Speaker 3: So you know there's a comment on that earlier. I

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Speaker 3: do think there are barriers to kind of manage some

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Speaker 3: of that. I think this dynamic exists at large. This

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Speaker 3: is just classic credit cycle where a sector received undue

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Speaker 3: attention and enormous amounts of money. There's now been a

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Speaker 3: flying the ointment, if you will, which is challenging the

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Speaker 3: perception today. Let's call it that. It's the perception today

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Speaker 3: of what the longevity of that asset class and of

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Speaker 3: that sector will be over time. And that's going to

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Speaker 3: have real implications for leverage, capital structures, leverage cuts both ways. Right,

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Speaker 3: It's fun on the way up, it's really painful on

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Speaker 3: the way down. And this is this is going to

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Speaker 3: have some real, real issues over the coming years.

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Speaker 1: You know, credit does have a strong bid you know

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Speaker 1: that spreads out very tight. There is more demand evidently

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Speaker 1: than supply. But is there potential for this to spread

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Speaker 1: in terms of contagion across credit markets if the software

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Speaker 1: thing really does spiral.

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Speaker 3: Yeah. So, I mean we've been seeing the headlines and

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Speaker 3: you know, every day it seems like there's another sector

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Speaker 3: that comes understorm from the AI risk associated with it.

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Speaker 3: I do think there's a lot of baby with the

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Speaker 3: bath order here. Certain sectors like software have real acute

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Speaker 3: issues that are going to need to be addressed. There's others,

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Speaker 3: whether it's registered investment advisors that I think are getting

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Speaker 3: undue pressure, where there's a real relationship required, there's a

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Speaker 3: nuanced sell in that is going to be a longstanding

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Speaker 3: driver of that relationship and how the business model is

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Speaker 3: monetized over time. So as always, there will be opportunity.

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Speaker 3: I think there hasn't been a lot of discussion around

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Speaker 3: just what is going to happen from the opportunity that

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Speaker 3: this kind of panic, if you will. I don't know

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Speaker 3: if it's full scale panic yet, but there is a

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Speaker 3: lot of noise i'll call it that in the markets

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Speaker 3: right now we'll bring and so we're very focused on that.

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Speaker 3: Where can we look to see the opportunities that stem

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Speaker 3: But I do think that this will be largely contained

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Speaker 3: to a few specific sectors. I don't think credit at

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Speaker 3: large is going to see of, you know, increases in defaults.

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Speaker 3: Where I started and I do want to go back

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Speaker 3: to is I do think credit is priced for perfection here.

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Speaker 3: So when I look at credit in general, like we

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Speaker 3: have the luxury of being able to do things in

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Speaker 3: public markets and private markets were largely origination business, really

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Speaker 3: partnering with families, founder led companies, sponsors, and public companies.

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Speaker 3: But when I look at the things we can do,

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Speaker 3: there is just a lot more interesting things that touch

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Speaker 3: kind of partnership capital that has a more equity orientation

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Speaker 3: rather than setting up for what will always be credit

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Speaker 3: is a fixed return product. And when you start to

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Speaker 3: see spreads around that three hundred, with the tails the

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Speaker 3: way they sit today, the risk reward just isn't there. Right.

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Speaker 2: I want to get into that subject at sort of

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Speaker 2: hybrid capital, but before we sort of get there, just

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Speaker 2: want to close on one thing on what we're talking

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Speaker 2: about now, the risks to private credit, the.

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Speaker 3: Risk of the sector.

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Speaker 2: You know, I've I've had fielded lots of questions from

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Speaker 2: a lot of different investors and terminal users about this

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Speaker 2: whole software issue, and then obviously over the last week

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Speaker 2: all of this this fun withdrawal discussion from a private

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Speaker 2: BDCs has come up. But in my view, the biggest

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Speaker 2: risk confronting private credit and credit markets in general is

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Speaker 2: a deep and extended recession, which I think is you know,

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Speaker 2: kind of pretty much the way that it always is.

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Speaker 2: Do you think that do you think that's the right view,

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Speaker 2: or do you have a different view of that.

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Speaker 3: No. I think I think that's right. If we generally

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Speaker 3: look there's you haven't ever seen a full blown credit

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Speaker 3: cycle that was multisector that didn't start with a recession,

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Speaker 3: right that or some exogenous shock, even something like the

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Speaker 3: pandemic was relatively short lived. Granted a lot of stimulus

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Speaker 3: money came into kind of calm the situation. But I

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Speaker 3: think that's the right comment that a macroeconomic driven shock

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Speaker 3: or recession is what's going to drive a credit cycle.

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Speaker 3: And I think it's hard to look at what we

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Speaker 3: see today and really paint forward how we see it

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Speaker 3: deep deep recession or recession at least for anything in

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Speaker 3: the next twelve months. As we said, GDP is growing nicely,

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Speaker 3: You're going to have some tax stimulus that comes through

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Speaker 3: to consumers. Corporates are generating cash and still growing. There's

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Speaker 3: an overlay that we can discuss on bare tail cases

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Speaker 3: for AI as it disintermediates industries. But I think it's

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Speaker 3: really hard with conviction to ever say that you can

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Speaker 3: make a large scale bet on that. Do I think

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Speaker 3: you can play in the tails? Somebody tells me they

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Speaker 3: want to buy receivers on short end of the curve

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Speaker 3: because they think the FED could need to cut rates,

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Speaker 3: or they want to buy CDX on you know, ig credit. Like,

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Speaker 3: all these things make sense with the right payouts because

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Speaker 3: what a lot of investors are paid to do is

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Speaker 3: to manage the tails. But when you look at the

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Speaker 3: evidence in front of us today, I don't see the

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Speaker 3: ingredients for a full scale recession to drive a credit cycle.

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Speaker 3: I just don't see it today.

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Speaker 1: One of the things that has sort of come out

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Speaker 1: of this whole blue out situation is the idea that

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Speaker 1: the loans are being sold on to other parties, you know,

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Speaker 1: including their own insurance company. But clos seem to be

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Speaker 1: also another buyer of this stuff, raising the idea that

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Speaker 1: you know, CLO is particularly risky. Clos have been, I

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Speaker 1: have to say, one of the favorite trades of every

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Speaker 1: investor that's been on this show. I know you have

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Speaker 1: a big CLO business, but is there any kind of

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Speaker 1: potential risk there for the clos in terms of these

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Speaker 1: loans being sold out of BDCs and put into other pools.

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Speaker 3: I mean, look that that was a negotiated transaction. I

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Speaker 3: assume I wasn't in the in the details on how

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Speaker 3: that that actually got cut from a pricing perspective. But

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Speaker 3: what I would say is clos have historically been, to

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Speaker 3: your point, a popular trade because it's been a good

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Speaker 3: business model, right, it's been well insulated. Even if we

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Speaker 3: go back to the GFC, recoveries were really strong. As

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Speaker 3: you start to get to your more levered tranches, I

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Speaker 3: do think what we're seeing in sector like software, where

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Speaker 3: people have ten, thirteen, fourteen percent exposure to the sector,

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Speaker 3: could start to pose problems for some of those thin

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Speaker 3: levered equity tranches that were, you know, starting to price

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Speaker 3: around eleven percent. Didn't didn't make a lot of sense

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Speaker 3: to us. So we've we've thought that was a really

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Speaker 3: interesting trade a couple of years ago, last couple of

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Speaker 3: years become much less so. But that's where you will

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Speaker 3: see some of these problems start to incubate. I think

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Speaker 3: the more senior tranches of a COLO are going to

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Speaker 3: fair just fine.

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Speaker 1: Okay, So looking sort of broader at private I know

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Speaker 1: you look at asset based finance, which is a huge

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Speaker 1: area of growth also investment grade private credit. I just

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Speaker 1: kind of wanted to, you know, in that context's got

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Speaker 1: to get your sense of what that actually means, because

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Speaker 1: we have so many discussions around you know, what this market.

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Speaker 1: Some people say it's a forty trillion market and it

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Speaker 1: involves it's about everything you can see around you. But

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Speaker 1: to bame, what does what does this actually mean?

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Speaker 3: Yeah, so we think about our business within special situations

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Speaker 3: is really divided into into two half. We have corporate

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Speaker 3: capital solutions and we have acid based capital solutions. So

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Speaker 3: let's talk about the acid side, which is what you're

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Speaker 3: referring to. We define that really is everything that touches

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Speaker 3: a cash flow producing real good or tangible or tangible asset.

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Speaker 3: So you're right, that is a massive market. There are

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Speaker 3: very varying views on how big it is, but let's

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Speaker 3: just say that they all will note that the market

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Speaker 3: is very large. It's as extremely big pool that was

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Speaker 3: historically dominated by bank balance sheets, and as a result,

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Speaker 3: just the way we saw with corporate credit of tightening regulation,

401
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Speaker 3: stuff started moving off bank balance sheet and going into

402
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Speaker 3: the private markets. That's really been the advent of ABF

403
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Speaker 3: as people call it nowadays, over the last four or

404
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Speaker 3: five years. I think what's funny is for many investors

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Speaker 3: that have been doing this twenty plus years, we often

406
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Speaker 3: you know, snicker and say this is just structured credit.

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Speaker 3: We used to call it structured credit. Now it's called ABF. Yes,

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Speaker 3: it's broadened around the edges, and I think, like all

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Speaker 3: asset classes, it's evolved with technology. Some of the more

410
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Speaker 3: unique financings we've seen around GPUs, some of the structured

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Speaker 3: financings around data centers, this is all just financial technology

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Speaker 3: that is growing with a broad based asset class over time.

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Speaker 3: So starting with that hierarchy of huge market tangible cash

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Speaker 3: flow driven asset investing, we think of it really where

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Speaker 3: we could put mezzanine debt or kind of core debt

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Speaker 3: against a really stable and cash flow generating asset, or

417
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Speaker 3: secondarily create the residual equity underneath that at an attractive yield.

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Speaker 3: Why that appeals to us is it's an equity like return,

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Speaker 3: but underwriting a credit like profile. And that is the

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Speaker 3: aviation leasing asset class where we have a ten billion

421
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Speaker 3: dollar plus business. That's the royalties you and I were

422
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Speaker 3: chatting earlier about in music, in healthcare and others where

423
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Speaker 3: you can create really interesting derivative credit returns several hundred

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Speaker 3: basis points of spread wider and what's nice is you're

425
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Speaker 3: actually devoid of a lot of what we're talking about

426
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Speaker 3: on this corporate side. We see that in other parts

427
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Speaker 3: of our business. But in the asset side, there's there's

428
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Speaker 3: different risks to manage different opportunity. But it's basically US

429
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Speaker 3: is it ABS, but it's just private. Is that the difference? Yeah, Well,

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Speaker 3: I mean, look again, people will define ABF as both

431
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Speaker 3: public and private. So there's the more syndicated approach of

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Speaker 3: you know, the historical desk to desk securitized loans and

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Speaker 3: bonds that are coming to market. Then there's the Fury

434
00:22:29,600 --> 00:22:32,760
Speaker 3: two market, which is private IG. You reference that those

435
00:22:32,800 --> 00:22:37,520
Speaker 3: are loans that are privately placed against corporates that could

436
00:22:37,560 --> 00:22:40,840
Speaker 3: be some of your largest corporates in the world, that

437
00:22:40,880 --> 00:22:43,639
Speaker 3: could be more mid sized corporates, but generally are falling

438
00:22:43,640 --> 00:22:46,560
Speaker 3: in that IG bucket. And then there's this entire universe

439
00:22:47,359 --> 00:22:50,359
Speaker 3: that is developing. There are some of the larger shops

440
00:22:50,359 --> 00:22:53,120
Speaker 3: are trading this data associated with it, and there are

441
00:22:53,160 --> 00:22:56,480
Speaker 3: individuals like ourselves who are interested in helping put a

442
00:22:56,560 --> 00:23:00,640
Speaker 3: package together where we are effectively putting a structure security

443
00:23:00,640 --> 00:23:03,880
Speaker 3: together for a large corporate where we ultimately own that

444
00:23:04,000 --> 00:23:07,560
Speaker 3: first loss residual tranch, but your risk is really to

445
00:23:07,920 --> 00:23:11,800
Speaker 3: an excellent IG investment grade credit and there are substantial

446
00:23:11,800 --> 00:23:14,080
Speaker 3: buyers for the senior part of that risk. There are

447
00:23:14,119 --> 00:23:17,000
Speaker 3: other players like ourselves who will want to own the

448
00:23:17,040 --> 00:23:20,960
Speaker 3: more junior tranches. We saw that with the meta financing

449
00:23:21,280 --> 00:23:23,760
Speaker 3: against the large data center deal. There's been a number

450
00:23:23,760 --> 00:23:26,639
Speaker 3: of use cases for this and it's going to grow

451
00:23:27,280 --> 00:23:28,639
Speaker 3: rapidly over the coming years.

452
00:23:29,000 --> 00:23:33,040
Speaker 2: Who are the end users for the yield that these

453
00:23:33,080 --> 00:23:33,760
Speaker 2: products are.

454
00:23:33,600 --> 00:23:36,639
Speaker 3: Able to generate? And when you say end users, I

455
00:23:36,680 --> 00:23:40,200
Speaker 3: mean I think it's twofold. So there are total return

456
00:23:40,240 --> 00:23:44,080
Speaker 3: investors like ourselves who are interested in What I'll say

457
00:23:44,119 --> 00:23:47,639
Speaker 3: is that residual equity and a large scale private IG trade.

458
00:23:48,040 --> 00:23:52,320
Speaker 3: The end user from a counter party perspective is anyone

459
00:23:52,400 --> 00:23:57,479
Speaker 3: who wants equity treatment from a rating agency which has

460
00:23:57,480 --> 00:23:59,960
Speaker 3: been able to be achieved through some of the structure

461
00:24:00,160 --> 00:24:06,000
Speaker 3: year without getting a balance sheet levered with more debt.

462
00:24:06,080 --> 00:24:09,640
Speaker 3: So it's an efficient form of capital structured to achieve

463
00:24:10,040 --> 00:24:14,359
Speaker 3: a ratings outcome, but still facing a counterparty with tremendous

464
00:24:14,359 --> 00:24:17,200
Speaker 3: credit worthiness. So I don't get worried. You know, often

465
00:24:17,200 --> 00:24:20,240
Speaker 3: when we go down the path of structured credit and

466
00:24:20,280 --> 00:24:22,800
Speaker 3: we can all go back to the CDO days and

467
00:24:22,880 --> 00:24:25,199
Speaker 3: CDO squares, and anytime you start to get into this

468
00:24:25,280 --> 00:24:28,639
Speaker 3: derivative financial technology, things get a little murky, and I

469
00:24:28,640 --> 00:24:31,199
Speaker 3: think we should all perk up and think about the risks.

470
00:24:31,240 --> 00:24:34,280
Speaker 3: But when you're facing some of the largest corporates in

471
00:24:34,320 --> 00:24:37,120
Speaker 3: the world, and in many ways borrowing their balance sheet

472
00:24:37,320 --> 00:24:41,280
Speaker 3: to achieve a highly structured deal meets their objectives, meets

473
00:24:41,280 --> 00:24:45,080
Speaker 3: the return profile of an investor, I don't see a

474
00:24:45,080 --> 00:24:47,280
Speaker 3: lot of risk in these private IG traits. I think

475
00:24:47,280 --> 00:24:49,960
Speaker 3: that's actually one of the more sound parts of the market.

476
00:24:50,560 --> 00:24:55,600
Speaker 2: In this private IG market it, I mean, it seems

477
00:24:55,640 --> 00:24:58,040
Speaker 2: to run into the tens of trillions of dollars. Maybe

478
00:24:58,119 --> 00:25:00,800
Speaker 2: can just sort of provide some of your thoughts on

479
00:25:00,840 --> 00:25:05,760
Speaker 2: the dimensions of the addressable market and where that market exists.

480
00:25:05,800 --> 00:25:09,560
Speaker 2: Is it mainly in the US? Is it a global market.

481
00:25:10,359 --> 00:25:12,320
Speaker 3: It's certainly a global market. We've seen a lot of

482
00:25:12,359 --> 00:25:17,399
Speaker 3: these investments in Europe nell as well as the US.

483
00:25:17,440 --> 00:25:19,639
Speaker 3: We haven't seen a lot of in Asia yet, but

484
00:25:19,840 --> 00:25:21,919
Speaker 3: it will come to that market. We're a big player

485
00:25:21,920 --> 00:25:25,240
Speaker 3: there and we're talking to folks about it. So I

486
00:25:25,280 --> 00:25:28,199
Speaker 3: think the addressable market is going to be tremendous. I

487
00:25:28,240 --> 00:25:31,800
Speaker 3: think what will happen is pricing associated with this will

488
00:25:31,800 --> 00:25:36,800
Speaker 3: compress materially. As we've seen spreads generally, you know, one

489
00:25:36,880 --> 00:25:39,320
Speaker 3: hundred and fifty to two hundred and fifty basis points

490
00:25:39,359 --> 00:25:43,240
Speaker 3: wide of the observable tradeable debt of some public tradeable

491
00:25:43,280 --> 00:25:46,080
Speaker 3: debt of some of these large corporates of which they

492
00:25:46,080 --> 00:25:49,800
Speaker 3: were handing to investors for the ease of purpose, the

493
00:25:49,800 --> 00:25:52,760
Speaker 3: structuring expertise to come and deliver a five billion, a

494
00:25:52,800 --> 00:25:56,400
Speaker 3: ten billion dollars twenty billion dollar deal. As this get

495
00:25:56,480 --> 00:25:59,560
Speaker 3: as this technology gets more and more familiar, as it

496
00:25:59,600 --> 00:26:02,960
Speaker 3: works way through corporate boards and management teams, and more

497
00:26:03,000 --> 00:26:06,119
Speaker 3: and more investors step up to want to participate, we

498
00:26:06,119 --> 00:26:10,960
Speaker 3: should see those spreads shrinks significantly. I've been surprised at

499
00:26:11,600 --> 00:26:14,160
Speaker 3: the sustainability they've had over the last eighteen months. We're

500
00:26:14,200 --> 00:26:16,440
Speaker 3: just starting to see them compress the last six. But

501
00:26:16,600 --> 00:26:19,960
Speaker 3: we talked about, you know, companies like Verizon, which everyone

502
00:26:20,000 --> 00:26:22,560
Speaker 3: knows yields at what nineteen percent of something which just

503
00:26:22,560 --> 00:26:24,920
Speaker 3: seems too good to be true. But on the other

504
00:26:24,960 --> 00:26:27,800
Speaker 3: side is that why would Verizon's CFO even entertain such

505
00:26:27,840 --> 00:26:30,920
Speaker 3: a financing when they can go to the IG bummuckt

506
00:26:31,000 --> 00:26:33,760
Speaker 3: and burrow very very tight spreads. Yeah, I don't know

507
00:26:33,800 --> 00:26:36,680
Speaker 3: the specific deal you're talking about there, but I case

508
00:26:36,720 --> 00:26:39,119
Speaker 3: in point. I think when people often hear some of

509
00:26:39,119 --> 00:26:43,200
Speaker 3: the yields associated with this, they're thinking about that first

510
00:26:43,240 --> 00:26:46,800
Speaker 3: loss trunch that I'm discussing. So if you originate I'm

511
00:26:46,840 --> 00:26:49,199
Speaker 3: just throwing a number out there, a billion dollars, and

512
00:26:49,280 --> 00:26:52,399
Speaker 3: it's at a certain spread to a private or to

513
00:26:52,440 --> 00:26:58,240
Speaker 3: a IG company's publicly visible bonds, then you can go

514
00:26:58,320 --> 00:27:01,639
Speaker 3: and place the senior risks. You have this unlevered spread

515
00:27:01,640 --> 00:27:04,000
Speaker 3: you're getting for a billion dollars of risk. You can

516
00:27:04,080 --> 00:27:06,680
Speaker 3: trunch that up as you would like. Maybe you put

517
00:27:06,720 --> 00:27:09,000
Speaker 3: eighty percent in your insurance company, or by the way,

518
00:27:09,040 --> 00:27:11,439
Speaker 3: you sell that to investors who want that risk, they

519
00:27:11,520 --> 00:27:13,480
Speaker 3: just like being able to get a large allocation of

520
00:27:13,520 --> 00:27:17,479
Speaker 3: it they see at priced attractively versus those publicly traded bonds.

521
00:27:17,760 --> 00:27:21,640
Speaker 3: The investor that keeps that first loss residual fifteen percent

522
00:27:21,720 --> 00:27:24,719
Speaker 3: thick piece, let's say, is often earning something in the

523
00:27:24,760 --> 00:27:29,359
Speaker 3: mid teens. And so from a Verizon's CFO perspective, he's

524
00:27:29,480 --> 00:27:34,400
Speaker 3: just focused on the unlevered cost of capital to his business,

525
00:27:34,760 --> 00:27:37,760
Speaker 3: the ratings treatment, how it integrates with the balance sheet.

526
00:27:37,920 --> 00:27:41,840
Speaker 3: Is he able to build his business with effectively capex

527
00:27:42,160 --> 00:27:45,720
Speaker 3: off balance sheet? That is what they are focused on

528
00:27:45,920 --> 00:27:50,439
Speaker 3: the corporates, less so about how the underlying investors are

529
00:27:50,480 --> 00:27:53,240
Speaker 3: trunching up the risk and where somebody wants to place it.

530
00:27:53,240 --> 00:27:55,960
Speaker 3: It is not by any means that somebody's paying nineteen

531
00:27:56,000 --> 00:27:57,159
Speaker 3: percent on the full slugger.

532
00:27:57,720 --> 00:28:02,040
Speaker 1: Okay, other than a aviation, what other sectors do you

533
00:28:02,119 --> 00:28:04,160
Speaker 1: think good for this kind of business right now?

534
00:28:04,560 --> 00:28:06,680
Speaker 3: So when we think about ABF, as I said, we're

535
00:28:06,800 --> 00:28:10,600
Speaker 3: very active in the royalty space. Last summer we did

536
00:28:10,640 --> 00:28:12,680
Speaker 3: a big now almost two billion dollars joint venture with

537
00:28:12,720 --> 00:28:15,639
Speaker 3: Warner Music. We really like the royalty space, specifically music.

538
00:28:15,720 --> 00:28:19,879
Speaker 3: We think that's an AI winner over time. We have

539
00:28:19,920 --> 00:28:22,399
Speaker 3: a fantastic partnership with the management team there and so

540
00:28:22,480 --> 00:28:26,280
Speaker 3: have already upsized that deal. We are looking to leverage

541
00:28:26,320 --> 00:28:29,439
Speaker 3: the excellent expertise we have at Bean in healthcare, so

542
00:28:29,520 --> 00:28:33,119
Speaker 3: to do something along the healthcare royalty path similar to

543
00:28:33,160 --> 00:28:36,679
Speaker 3: what we did with Warner That's something we're under works

544
00:28:36,720 --> 00:28:41,120
Speaker 3: on right now. We are very active in digital infrastructure, so,

545
00:28:41,320 --> 00:28:44,280
Speaker 3: like many investors, see value there We've been quite cautious

546
00:28:44,280 --> 00:28:46,120
Speaker 3: in the US, so most of the stuff we've done

547
00:28:46,200 --> 00:28:49,160
Speaker 3: is ironically in Asia or in Europe. We just don't

548
00:28:49,200 --> 00:28:52,560
Speaker 3: quite have a handle on the supply demand imbalance versus

549
00:28:52,560 --> 00:28:55,719
Speaker 3: the pricing of that risk today in the US. And

550
00:28:55,760 --> 00:28:59,280
Speaker 3: then we're also looking at things across receivables, finance fleet,

551
00:28:59,320 --> 00:29:01,360
Speaker 3: Lee saying, so we can go down the list. We

552
00:29:01,520 --> 00:29:05,200
Speaker 3: just think this market is really large, really attractive. Suits

553
00:29:05,240 --> 00:29:08,480
Speaker 3: well our form of partnership capital where you can think

554
00:29:08,480 --> 00:29:12,440
Speaker 3: about creative structures and generally I'll get back to that

555
00:29:12,520 --> 00:29:16,840
Speaker 3: initial point, seeing much better relative and absolute value versus

556
00:29:17,280 --> 00:29:19,360
Speaker 3: performing credit private or public.

557
00:29:19,400 --> 00:29:21,920
Speaker 1: They're other ones, the music Royalty, which really intreasing me.

558
00:29:22,000 --> 00:29:24,240
Speaker 1: I'm old enough to remember Bowie bones, which were great

559
00:29:24,240 --> 00:29:26,320
Speaker 1: for David Bowie but not so great for investors. Why

560
00:29:26,320 --> 00:29:28,200
Speaker 1: are these different now? What do they work now? And

561
00:29:28,320 --> 00:29:29,120
Speaker 1: you know what's the play?

562
00:29:29,840 --> 00:29:32,600
Speaker 3: Yeah, I think I think it's interesting many many people

563
00:29:32,760 --> 00:29:37,239
Speaker 3: have that historical tug to the Bowie bond. You know,

564
00:29:37,280 --> 00:29:39,120
Speaker 3: this ass a class and I'll call it that now

565
00:29:39,160 --> 00:29:41,200
Speaker 3: because that's what it's become, has gone through its ups

566
00:29:41,200 --> 00:29:42,720
Speaker 3: and downs. You know, if we go back to the

567
00:29:42,800 --> 00:29:45,479
Speaker 3: napster days, people left the music industry for debt. They

568
00:29:45,800 --> 00:29:48,560
Speaker 3: didn't think that there would be a music industry. There

569
00:29:48,600 --> 00:29:51,959
Speaker 3: was copyright infringement. How could you possibly get behind something

570
00:29:52,000 --> 00:29:56,320
Speaker 3: that could be exploited without proper rule of law, and

571
00:29:56,360 --> 00:30:00,440
Speaker 3: so really everybody retreated and you had a the cottage

572
00:30:00,480 --> 00:30:04,040
Speaker 3: industry that built up in the early days of the DSPs.

573
00:30:04,120 --> 00:30:08,080
Speaker 3: DSPs are the broader streaming players, so call it Apple Music, Amazon,

574
00:30:08,360 --> 00:30:11,480
Speaker 3: and Spotify. And they started acquiring these rights with the

575
00:30:11,560 --> 00:30:14,320
Speaker 3: view that well, people actually are paying for music again,

576
00:30:14,840 --> 00:30:18,400
Speaker 3: they see value in categorizing it, having it as its fingertips,

577
00:30:18,440 --> 00:30:22,920
Speaker 3: not needing to pirate things, and valuations were cheap, as

578
00:30:22,960 --> 00:30:27,160
Speaker 3: always happens when money runs runs away, and it actually

579
00:30:27,280 --> 00:30:31,200
Speaker 3: started growing into something with liquidity, and I think liquidity

580
00:30:31,240 --> 00:30:33,840
Speaker 3: is always the beginning of an asset class where you

581
00:30:33,840 --> 00:30:36,560
Speaker 3: can actually see two way flow of money in and out.

582
00:30:37,120 --> 00:30:41,640
Speaker 3: What was interesting during that time was the large music labels,

583
00:30:41,640 --> 00:30:45,360
Speaker 3: which really are the three players. Warner Music, Universal and

584
00:30:45,400 --> 00:30:49,000
Speaker 3: Sony were not as active in acquiring these rights. They

585
00:30:49,000 --> 00:30:51,840
Speaker 3: were very focused on the front label business, so breaking

586
00:30:51,880 --> 00:30:56,120
Speaker 3: new artists, developing those artists and promoting them, and they

587
00:30:56,160 --> 00:30:59,760
Speaker 3: had large, substantial publishing arms. So the arms that actually

588
00:30:59,760 --> 00:31:02,720
Speaker 3: own this content, but it wasn't the focus of their business.

589
00:31:02,760 --> 00:31:07,800
Speaker 3: So you saw several smaller players actually grow to meaningful

590
00:31:07,800 --> 00:31:11,880
Speaker 3: players in size and scale quite quickly. The markets came

591
00:31:11,920 --> 00:31:14,440
Speaker 3: around to this being a pretty attractive assea class if

592
00:31:14,440 --> 00:31:17,440
Speaker 3: you have a long duration asset upwards of seventy years

593
00:31:17,440 --> 00:31:20,960
Speaker 3: in many cases, stable cash flows, especially in the in

594
00:31:21,040 --> 00:31:25,240
Speaker 3: the vein of seasoned artists, so somebody like Bob Marley,

595
00:31:26,200 --> 00:31:27,960
Speaker 3: you can look at it almost as a toll road.

596
00:31:27,960 --> 00:31:31,520
Speaker 3: There's a reoccurring revenue associated with it, there's a very

597
00:31:31,560 --> 00:31:33,960
Speaker 3: clear picture of what tomorrow looks like. And then there's

598
00:31:34,000 --> 00:31:37,000
Speaker 3: a value add component where you can take an iconic

599
00:31:37,120 --> 00:31:40,400
Speaker 3: artist and work with the estate or with that individual

600
00:31:40,440 --> 00:31:43,760
Speaker 3: to exploit it, bring that art to new fans, and

601
00:31:43,840 --> 00:31:46,720
Speaker 3: have a really substantial growth rate. That was on top

602
00:31:46,760 --> 00:31:49,760
Speaker 3: of the fact that people were paying more for music,

603
00:31:50,120 --> 00:31:52,920
Speaker 3: so you probably pay quite a lot for a number

604
00:31:52,920 --> 00:31:54,680
Speaker 3: of video subscriptions.

605
00:31:54,040 --> 00:31:55,280
Speaker 1: Actually buy final record.

606
00:31:55,280 --> 00:31:59,200
Speaker 3: It's there you go. So most people, you know, we're

607
00:31:59,240 --> 00:32:02,840
Speaker 3: paying eight ninety nine, nine ninety nine for their streaming service,

608
00:32:02,880 --> 00:32:06,160
Speaker 3: and what we've seen is consistent price increases, which just

609
00:32:06,200 --> 00:32:08,760
Speaker 3: inures to the benefits of rights owners. So when you

610
00:32:08,800 --> 00:32:11,680
Speaker 3: think about checking a box for an assea class, something

611
00:32:11,720 --> 00:32:15,120
Speaker 3: that developed into a liquid market. It's got long duration

612
00:32:15,280 --> 00:32:19,240
Speaker 3: cash flows, it's a scarce asset, meaning there's one of

613
00:32:19,320 --> 00:32:23,080
Speaker 3: each of these artists pricing power in your way, and

614
00:32:23,160 --> 00:32:26,360
Speaker 3: a penetration. When I say penetration, that's the volume growth

615
00:32:26,400 --> 00:32:29,280
Speaker 3: of the industry, meaning more people signing up for Spotify

616
00:32:29,320 --> 00:32:33,040
Speaker 3: and Apple Music every day. That's a pretty great package

617
00:32:33,040 --> 00:32:35,880
Speaker 3: of attributes to support NASSA class. Then I'll tie it

618
00:32:35,920 --> 00:32:39,320
Speaker 3: all the way back together with the deepening of the

619
00:32:39,360 --> 00:32:42,360
Speaker 3: asset back markets in wanting to finance this stuff. So

620
00:32:42,480 --> 00:32:45,480
Speaker 3: if you were an early acquirer of music royalties, an

621
00:32:45,480 --> 00:32:49,760
Speaker 3: asset that started with forty or fifty percent LTV, you know,

622
00:32:49,880 --> 00:32:53,480
Speaker 3: six or seven years ago, now you're seeing securitizations done

623
00:32:53,560 --> 00:32:56,440
Speaker 3: that push into the sixty five, sometimes as high as

624
00:32:56,440 --> 00:33:00,360
Speaker 3: seventy percent LTV. That's just all, you know, or to

625
00:33:00,440 --> 00:33:03,120
Speaker 3: the benefit of the equity owners, the artists that are

626
00:33:03,160 --> 00:33:05,960
Speaker 3: participating in this big ass A class. You know, we're

627
00:33:06,000 --> 00:33:09,680
Speaker 3: talking billions and billions of transaction volume each year, and

628
00:33:09,720 --> 00:33:12,400
Speaker 3: as you'd expect, all of the large players have now

629
00:33:12,440 --> 00:33:15,520
Speaker 3: focused on that. The markets have isolated the value in

630
00:33:15,560 --> 00:33:19,120
Speaker 3: many regards of their businesses around the IP. So these

631
00:33:19,160 --> 00:33:22,640
Speaker 3: are IP content heavy businesses and I think somebody like

632
00:33:22,680 --> 00:33:25,960
Speaker 3: Warner is doing a fantastic job as they look to

633
00:33:26,040 --> 00:33:29,840
Speaker 3: exploit their artists alongside them in a positive manner to

634
00:33:29,880 --> 00:33:32,120
Speaker 3: just grow them at above above market rates.

635
00:33:32,240 --> 00:33:35,080
Speaker 2: It's an interesting corn in the market for sure. Another

636
00:33:35,120 --> 00:33:37,440
Speaker 2: area of the market that seems to be seems to

637
00:33:37,480 --> 00:33:39,120
Speaker 2: be on the tip of Airyba's tongue right now are

638
00:33:39,200 --> 00:33:42,560
Speaker 2: data centers and where we're going to be going there.

639
00:33:42,600 --> 00:33:45,040
Speaker 2: What are your your thoughts on that as being sort

640
00:33:45,080 --> 00:33:46,880
Speaker 2: of an attractive class.

641
00:33:47,720 --> 00:33:50,760
Speaker 3: So I am happy to say we were early in

642
00:33:50,840 --> 00:33:54,320
Speaker 3: data centers. You know, Bain made a very substantial investment

643
00:33:54,360 --> 00:33:59,080
Speaker 3: in the largest pan Asian platform now called Bridge. We've

644
00:33:59,120 --> 00:34:02,600
Speaker 3: sold part of It's been a phenomenal, phenomenal investment for

645
00:34:02,640 --> 00:34:06,680
Speaker 3: the firm over many years. We started a platform in

646
00:34:06,720 --> 00:34:10,400
Speaker 3: Europe about eighteen months ago called h Scale, so really

647
00:34:10,440 --> 00:34:15,359
Speaker 3: partnering with local jurisdictions to bring large, large scale data

648
00:34:15,360 --> 00:34:18,520
Speaker 3: centers to the hyperscale community in Europe. We have not

649
00:34:18,719 --> 00:34:21,080
Speaker 3: done a lot in the US. That was a function

650
00:34:21,120 --> 00:34:23,960
Speaker 3: of just seeing so much money come in not having

651
00:34:24,040 --> 00:34:27,480
Speaker 3: had an established platform there and being somewhat uncomfortable with

652
00:34:27,680 --> 00:34:31,520
Speaker 3: just the supply demand equation that we were seeing. And

653
00:34:31,600 --> 00:34:34,279
Speaker 3: as always, you know, we're contemplated at Bay. We'd like

654
00:34:34,320 --> 00:34:36,960
Speaker 3: to take our time, we sat and we're just willing

655
00:34:37,000 --> 00:34:39,880
Speaker 3: to wait and watch this market a little bit. We

656
00:34:39,920 --> 00:34:44,160
Speaker 3: did make several derivative bets which have been great. One

657
00:34:44,239 --> 00:34:47,960
Speaker 3: in a company called Coherent, which provides the optical cables

658
00:34:48,000 --> 00:34:49,759
Speaker 3: to data centers, so kind of when you get into

659
00:34:49,760 --> 00:34:54,040
Speaker 3: the picks and shovels conversation, that's been a fantastic investment

660
00:34:54,040 --> 00:34:58,040
Speaker 3: for our firm, which we recently just exited. A great business,

661
00:34:58,080 --> 00:35:00,600
Speaker 3: great partnership there, and so we found are ways to

662
00:35:00,600 --> 00:35:03,960
Speaker 3: play it, but but not directly. First derivative in the US.

663
00:35:03,880 --> 00:35:09,319
Speaker 1: So kinds of ig privates everyone is excited about. So

664
00:35:09,320 --> 00:35:11,799
Speaker 1: everyone sees the growth potential there, but a lot of

665
00:35:11,840 --> 00:35:16,960
Speaker 1: the kind of drivers are based on you know, new investors,

666
00:35:17,200 --> 00:35:21,120
Speaker 1: the democratization, and that means retail. Retail is not to

667
00:35:21,160 --> 00:35:23,000
Speaker 1: be happy right now with private credit. Given what we

668
00:35:23,080 --> 00:35:26,600
Speaker 1: discussed at the top of the cool how much of

669
00:35:26,640 --> 00:35:28,640
Speaker 1: this current storm do you think how much is that

670
00:35:29,200 --> 00:35:31,560
Speaker 1: undermining the potential for growth of this market.

671
00:35:32,880 --> 00:35:37,600
Speaker 3: Look, I think this continued democratization of alternative assets is

672
00:35:37,960 --> 00:35:40,799
Speaker 3: going to continue. It is something that should have been

673
00:35:40,840 --> 00:35:45,040
Speaker 3: available to retail and high net worth investors. It wasn't

674
00:35:45,080 --> 00:35:48,200
Speaker 3: easy to access. It was hold into a smaller group

675
00:35:48,280 --> 00:35:52,400
Speaker 3: of ultra high networth investors and you know foundations, sovereigns.

676
00:35:53,040 --> 00:35:55,800
Speaker 3: So I think this was inevitable. I think the returns

677
00:35:55,800 --> 00:35:59,439
Speaker 3: will still prove durable and substantial for people over time.

678
00:35:59,480 --> 00:36:01,920
Speaker 3: Are there going to be hiccups, sure, and so I

679
00:36:01,960 --> 00:36:04,759
Speaker 3: think a lot of this is just about at what

680
00:36:04,880 --> 00:36:07,560
Speaker 3: point in the cycle, at what point of the penetration

681
00:36:07,680 --> 00:36:11,200
Speaker 3: of that market do some of the hiccups hit right earlier,

682
00:36:11,239 --> 00:36:14,480
Speaker 3: which we are somewhat early, and that will be more challenging,

683
00:36:14,520 --> 00:36:16,920
Speaker 3: as if your first experience with something stings you a bit,

684
00:36:17,680 --> 00:36:20,040
Speaker 3: it's it's going to just leave a mark and leave

685
00:36:20,080 --> 00:36:22,600
Speaker 3: you a bit scarred for how you weigh in. But

686
00:36:22,680 --> 00:36:25,680
Speaker 3: I think this market is far too big for anything

687
00:36:25,719 --> 00:36:27,880
Speaker 3: to hold it back, and people will always go to

688
00:36:27,920 --> 00:36:34,040
Speaker 3: where returns are. Private markets offer substantial, substantial returns above

689
00:36:34,200 --> 00:36:36,320
Speaker 3: many of the public as to classes, and so it's

690
00:36:36,360 --> 00:36:40,000
Speaker 3: a proper addition to any asset portfolio mix.

691
00:36:40,160 --> 00:36:42,280
Speaker 1: The fundamental we do have this mismatch. I mean, retail

692
00:36:42,440 --> 00:36:44,920
Speaker 1: doesn't really need the liquidy bit they want it and

693
00:36:45,000 --> 00:36:47,400
Speaker 1: if they suddenly get toll they can't have it, then

694
00:36:47,440 --> 00:36:49,160
Speaker 1: they're going to get freaked out as they as they

695
00:36:49,160 --> 00:36:51,160
Speaker 1: have done over the last few days. So you know,

696
00:36:51,200 --> 00:36:54,880
Speaker 1: you'll take you you really investing in long term loans,

697
00:36:55,000 --> 00:36:57,239
Speaker 1: private loans that don't really trade. You know, you don't

698
00:36:57,239 --> 00:37:01,000
Speaker 1: really get good marks on them. It's hard to really suddenly,

699
00:37:01,239 --> 00:37:04,000
Speaker 1: you know, if there is a demand for redemptions, it's

700
00:37:04,000 --> 00:37:06,239
Speaker 1: a fund that you know, we saw it, well, did

701
00:37:06,280 --> 00:37:09,400
Speaker 1: they sell some loans, they got out, they did, okay,

702
00:37:09,520 --> 00:37:11,560
Speaker 1: But if that happens again and again, you know you're

703
00:37:11,640 --> 00:37:14,319
Speaker 1: selling down to maybe loans that are you know, you

704
00:37:14,360 --> 00:37:15,560
Speaker 1: have to take a bit of a discount on you

705
00:37:15,640 --> 00:37:17,360
Speaker 1: start to take some losses and then it sort of

706
00:37:17,400 --> 00:37:20,440
Speaker 1: spirals from there. What what do you do with that

707
00:37:20,520 --> 00:37:23,840
Speaker 1: concept that that you know, the retail money once they liquidy,

708
00:37:23,880 --> 00:37:25,640
Speaker 1: but this this is a product that's long term and

709
00:37:25,640 --> 00:37:26,120
Speaker 1: looked up.

710
00:37:26,680 --> 00:37:29,440
Speaker 3: Yeah, look, you're you're hitting at the inevitable debate. We

711
00:37:29,520 --> 00:37:32,320
Speaker 3: have it all the time. As we have not rushed

712
00:37:32,320 --> 00:37:35,600
Speaker 3: into this market, it's been one that we've watched carefully.

713
00:37:36,560 --> 00:37:40,480
Speaker 3: We wanted to see how early sparks and some trouble

714
00:37:40,520 --> 00:37:44,359
Speaker 3: would play out. I don't think anybody can really tell

715
00:37:44,360 --> 00:37:46,960
Speaker 3: you how retail behaves once they're told they can't have

716
00:37:47,040 --> 00:37:51,359
Speaker 3: their money back. My belief based on everything I've seen,

717
00:37:51,440 --> 00:37:54,960
Speaker 3: is people will always come back to investment opportunity. Right,

718
00:37:55,040 --> 00:37:58,920
Speaker 3: whether it was high valuations in venture capital and twenty

719
00:37:59,080 --> 00:38:02,840
Speaker 3: twenty one and there shortly thereafter, it's not that nobody's

720
00:38:02,840 --> 00:38:05,399
Speaker 3: coming back to the venture market. People will still will

721
00:38:05,440 --> 00:38:08,160
Speaker 3: still make those make those investments, and things are very

722
00:38:08,280 --> 00:38:11,080
Speaker 3: very cyclical. I think it will chill the growth rate

723
00:38:11,120 --> 00:38:14,120
Speaker 3: a little bit. You will certainly see that step back

724
00:38:14,120 --> 00:38:16,560
Speaker 3: from just a rapid pace we've seen the last twenty

725
00:38:16,560 --> 00:38:20,160
Speaker 3: four months in this space. But again I'll go back

726
00:38:20,160 --> 00:38:22,239
Speaker 3: to my statement, I think it's inevitable that we will

727
00:38:22,280 --> 00:38:25,239
Speaker 3: see further penetration here, and it's just the question of

728
00:38:25,640 --> 00:38:27,719
Speaker 3: at what pace, what fits and starts do you have,

729
00:38:27,800 --> 00:38:31,239
Speaker 3: and really how do many of these institutions manage their

730
00:38:31,360 --> 00:38:34,880
Speaker 3: brand around all of this, Because once you bring something

731
00:38:34,920 --> 00:38:37,880
Speaker 3: like this to retail, a product, whether it's private credit,

732
00:38:37,880 --> 00:38:40,560
Speaker 3: whether it's private equity, real estate, this is now a

733
00:38:40,600 --> 00:38:44,919
Speaker 3: consumer product, right, that's what it's turned into. And there's

734
00:38:44,960 --> 00:38:48,040
Speaker 3: brand awareness, there's people's feelings towards it, there's whether there's

735
00:38:48,120 --> 00:38:51,160
Speaker 3: trust there. It's a very different relationship than when you're

736
00:38:51,200 --> 00:38:55,759
Speaker 3: facing a large sovereign or pension who's sophisticated, who's been

737
00:38:55,800 --> 00:38:59,640
Speaker 3: through the trenches and understands the cyclicality of markets, what

738
00:38:59,680 --> 00:39:03,160
Speaker 3: it means means to see whipsawing prices. That that's just

739
00:39:03,200 --> 00:39:05,319
Speaker 3: a very very different dynamic. So I think a lot

740
00:39:05,360 --> 00:39:08,200
Speaker 3: of it is going to behold into communication. How people

741
00:39:08,239 --> 00:39:11,680
Speaker 3: build that trust, how they handle these hiccups, if you will,

742
00:39:12,520 --> 00:39:15,440
Speaker 3: that really determines the long term winners for that aster class.

743
00:39:15,440 --> 00:39:18,480
Speaker 1: For global investors in the US, to what extent you're

744
00:39:18,480 --> 00:39:21,839
Speaker 1: seeing more of a push to diversify geographically? Is there

745
00:39:22,239 --> 00:39:23,680
Speaker 1: more of a sense that you know, I mean, obviously

746
00:39:23,719 --> 00:39:26,560
Speaker 1: the US is the biggest market, it matters, but there

747
00:39:26,640 --> 00:39:29,200
Speaker 1: is a lot of terminal here. People are getting a

748
00:39:29,200 --> 00:39:33,480
Speaker 1: bit ruffled. There are opportunities in Europe. The European private

749
00:39:33,520 --> 00:39:36,680
Speaker 1: credit people tell us that they are better value in

750
00:39:36,760 --> 00:39:39,760
Speaker 1: relative terms. Do you think that there is a push

751
00:39:39,840 --> 00:39:42,120
Speaker 1: now to you know, broadened geographically.

752
00:39:42,880 --> 00:39:46,760
Speaker 3: Absolutely, and look, this is something that we deeply believe

753
00:39:46,800 --> 00:39:49,200
Speaker 3: in it at BIN. If I just go around the world.

754
00:39:49,280 --> 00:39:52,440
Speaker 3: For instance, we have a mass of franchises I noted

755
00:39:52,440 --> 00:39:55,640
Speaker 3: earlier in Asia across across all of our product as classes.

756
00:39:55,880 --> 00:39:58,400
Speaker 3: Just in our special CIS business alone, we have sixty

757
00:39:58,400 --> 00:40:02,760
Speaker 3: five individuals sitting on a country specific basis, so teams

758
00:40:02,760 --> 00:40:05,680
Speaker 3: from Southeast Asia to Korea, to Australia to Japan. I mean,

759
00:40:05,680 --> 00:40:11,880
Speaker 3: it's a very broad based, deep deep franchise, excellent market

760
00:40:11,880 --> 00:40:15,480
Speaker 3: awareness for what we do. As you also know, it's

761
00:40:15,680 --> 00:40:18,800
Speaker 3: really a two pronged market. It's a control bio market

762
00:40:18,840 --> 00:40:21,440
Speaker 3: and a banked market. There is not a lot of

763
00:40:21,440 --> 00:40:24,920
Speaker 3: private credit in Asia. There's virtually no hybrid capital in Asia,

764
00:40:25,440 --> 00:40:27,880
Speaker 3: and so we see that as just an extremely fruitful

765
00:40:27,880 --> 00:40:31,440
Speaker 3: place for us to work with talented founders public companies

766
00:40:31,480 --> 00:40:34,960
Speaker 3: to do these more structured transactions that achieve an outcome

767
00:40:35,000 --> 00:40:39,200
Speaker 3: for them alongside real operational capabilities. Super deep market for

768
00:40:39,280 --> 00:40:43,200
Speaker 3: us very active in Europe. We have another fifty plus

769
00:40:43,239 --> 00:40:47,680
Speaker 3: person operation specifically within special situations I'm referring to now,

770
00:40:48,080 --> 00:40:50,480
Speaker 3: and we see that market as something that is really

771
00:40:50,520 --> 00:40:53,640
Speaker 3: getting exciting. I know I've heard that many people are

772
00:40:53,680 --> 00:40:57,080
Speaker 3: talking about it, but it is undoubtedly true that the

773
00:40:57,120 --> 00:41:01,560
Speaker 3: market historically lags the US by several years in product innovation,

774
00:41:01,680 --> 00:41:06,160
Speaker 3: and what we're seeing is real demand from corporates, sponsors,

775
00:41:06,280 --> 00:41:09,279
Speaker 3: and family founder led companies for the same type of

776
00:41:09,280 --> 00:41:12,680
Speaker 3: solutions that we had historically deployed in the US and

777
00:41:12,760 --> 00:41:15,359
Speaker 3: in Asia. So when we look at our business today,

778
00:41:15,360 --> 00:41:19,280
Speaker 3: we're extremely happy that it's three pronged, it's equally active

779
00:41:19,400 --> 00:41:22,400
Speaker 3: in all these regions. We've built it as such with

780
00:41:22,640 --> 00:41:25,440
Speaker 3: over now one hundred and seventy five people globally to

781
00:41:25,560 --> 00:41:29,760
Speaker 3: tackle just this with the specific nuances that every country

782
00:41:29,800 --> 00:41:33,920
Speaker 3: and jurisdiction will come with, but we see massive opportunity globally.

783
00:41:34,239 --> 00:41:35,000
Speaker 3: So it sounds like you've.

784
00:41:34,880 --> 00:41:37,680
Speaker 1: Got a lot going on. Where is the best relative value,

785
00:41:37,719 --> 00:41:39,120
Speaker 1: Let's say for the next twelve months. If I had

786
00:41:39,120 --> 00:41:40,720
Speaker 1: a million bucks, I put it in credit.

787
00:41:41,200 --> 00:41:46,120
Speaker 3: Yeah, so relative value is always interesting. I think of

788
00:41:46,280 --> 00:41:49,680
Speaker 3: a portfolio as always wanted to be diversified. We do

789
00:41:49,760 --> 00:41:51,800
Speaker 3: love that our business is as global as I noted,

790
00:41:51,840 --> 00:41:54,040
Speaker 3: and also two pronged, and both the corporate and the

791
00:41:54,080 --> 00:41:56,880
Speaker 3: asset back because like I said, there's always some area

792
00:41:56,960 --> 00:42:00,799
Speaker 3: that is in short supply of capital. Right relative value,

793
00:42:01,160 --> 00:42:03,279
Speaker 3: I'll describe it for you in two ways. Where I

794
00:42:03,320 --> 00:42:07,360
Speaker 3: see the largest depth of opportunity today that is maintained,

795
00:42:07,400 --> 00:42:11,520
Speaker 3: its pricing is in structured corporate opportunities. In the US,

796
00:42:11,760 --> 00:42:14,480
Speaker 3: that market is just booming. Right. We've gone from something

797
00:42:14,520 --> 00:42:17,759
Speaker 3: that was barely an asset class five years ago to

798
00:42:17,920 --> 00:42:22,000
Speaker 3: now a billion dollar transaction being announced almost every month,

799
00:42:22,040 --> 00:42:25,520
Speaker 3: sometimes multiple times a month, with players that aren't even

800
00:42:25,600 --> 00:42:28,360
Speaker 3: really competing against one another. This is just an extremely

801
00:42:28,400 --> 00:42:30,879
Speaker 3: deep market. It's kind of arrived. And when I say

802
00:42:30,880 --> 00:42:35,719
Speaker 3: it's arrived, I mean capital that provides real value added partnership,

803
00:42:35,800 --> 00:42:38,040
Speaker 3: but with all the nuances and bells and whistles of

804
00:42:38,040 --> 00:42:41,680
Speaker 3: a specific bespoke solution to meet the needs of a counterparty.

805
00:42:41,960 --> 00:42:45,200
Speaker 3: So love that opportunity and continue to lean in there.

806
00:42:46,400 --> 00:42:49,400
Speaker 3: We are seeing, though, just as much interesting opportunity in

807
00:42:49,520 --> 00:42:52,040
Speaker 3: some of the mid size stuff we're doing in Asia,

808
00:42:52,200 --> 00:42:55,200
Speaker 3: or some of the stuff we're doing across the sponsor landscape,

809
00:42:55,320 --> 00:42:57,840
Speaker 3: or like we just describe what SMBC in Europe. So

810
00:42:58,400 --> 00:43:01,799
Speaker 3: this is truly a market where we are equally deploying

811
00:43:01,840 --> 00:43:04,480
Speaker 3: across all three regions. That's not always the case, James,

812
00:43:04,480 --> 00:43:06,960
Speaker 3: to your points. Sometimes I'll tell you it's skewed very

813
00:43:07,040 --> 00:43:10,040
Speaker 3: much to Asia or to us when we've looked at

814
00:43:10,080 --> 00:43:12,560
Speaker 3: our deployment the last twenty four months. It's been very

815
00:43:12,640 --> 00:43:15,640
Speaker 3: equally weighted across all those three regions.

816
00:43:15,840 --> 00:43:18,560
Speaker 1: Great stuff. Angelo Rufino with BANKAPSL, thank you so much

817
00:43:18,560 --> 00:43:20,920
Speaker 1: for joining us on the Credit Edge. Thank you, and

818
00:43:20,960 --> 00:43:23,759
Speaker 1: of course very grateful to David Havens with Bloomberg Intelligence.

819
00:43:23,880 --> 00:43:26,320
Speaker 2: Cheers, cheers, great being with you both.

820
00:43:26,320 --> 00:43:28,560
Speaker 1: And for more credit market analysis and insight read all

821
00:43:28,600 --> 00:43:31,520
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822
00:43:31,600 --> 00:43:33,840
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827
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830
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831
00:44:00,160 --> 00:44:02,200
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832
00:44:02,239 --> 00:44:03,520
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