WEBVTT - Day Two, Part One at the Milken Global Conference 0:00:01.360 --> 0:00:05.680 This is Bloomberg Business Wait inside from the reporters and 0:00:05.880 --> 0:00:09.440 editors who bring you America's most trusted business magazine, plus 0:00:09.520 --> 0:00:13.680 global business, finance and tech news. The Bloomberg Business Week 0:00:13.720 --> 0:00:18.960 Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio. 0:00:20.079 --> 0:00:22.119 I do want to get to our guest. I'm so 0:00:22.239 --> 0:00:24.840 excited that she is back with us. Let's get to it. 0:00:25.520 --> 0:00:29.160 Kranima Puri. She's managing director at HPS Investment Partner's large 0:00:29.200 --> 0:00:32.720 global private credit lender, head of liquid credit, portfolio manager 0:00:32.720 --> 0:00:34.760 for the multi asset credit strategies. Why do they even 0:00:34.800 --> 0:00:36.640 let you come to this? Aren't you busy right now? 0:00:37.400 --> 0:00:41.560 To see you and you're looking wonderful. It's great to 0:00:41.560 --> 0:00:44.959 see you. Help me put in makes sense about what's 0:00:44.960 --> 0:00:47.080 going on in banking. I think we just we keep thinking. 0:00:47.159 --> 0:00:49.839 We get through a compared of twenty four hours. How 0:00:49.880 --> 0:00:52.080 are you assessing it in your world? 0:00:54.120 --> 0:00:56.720 A couple of things, So I think one is we 0:00:56.720 --> 0:00:58.480 were asked this question on the panels as well, so 0:00:58.600 --> 0:01:00.639 you know, in terms of trying to frame what's going 0:01:00.640 --> 0:01:03.000 on in the market, it almost feels like for some 0:01:03.040 --> 0:01:05.039 period of time there's been a Q feel to it, 0:01:05.440 --> 0:01:09.240 right so equity ball has gone down, valuations have gone up, 0:01:09.319 --> 0:01:13.840 there's been infusions of liquidity. Yet everyone's talking about a recession. 0:01:13.920 --> 0:01:16.480 So it seems a little bit tricky to square that. 0:01:17.720 --> 0:01:19.520 I would say we when we think about the state 0:01:19.560 --> 0:01:21.920 of the world, we do think there's you know, there's 0:01:21.959 --> 0:01:24.000 a lot of talk around recession, a lot of talk 0:01:24.040 --> 0:01:26.600 around hard landing, soft landing. I'm not sure it matters. 0:01:27.600 --> 0:01:29.600 Our view is that we're going to live in a 0:01:30.840 --> 0:01:34.000 higher rate environment for some sustained period of time. And now, 0:01:34.040 --> 0:01:36.600 whether that's five percent or four and a half percent, 0:01:36.680 --> 0:01:39.720 I'm not sure it matters. It's not two percent, And 0:01:39.760 --> 0:01:40.759 our view is the road. 0:01:40.800 --> 0:01:43.480 Doubt about it, right, no doubt about it. 0:01:43.480 --> 0:01:45.800 It seems so, I don't they'd have to have a really, 0:01:46.040 --> 0:01:50.880 really bad recession to have rates get pushed down that much, 0:01:51.680 --> 0:01:54.800 which would not be good for credit spreads. So we 0:01:54.840 --> 0:01:56.919 think that you're in a sustained period of higher rates. 0:01:57.360 --> 0:02:00.400 We think that you're in a sustained period of elevated inflation. 0:02:02.080 --> 0:02:04.720 And jobs have been good. So that means that labor 0:02:04.720 --> 0:02:06.840 market's so strong and we're seeing it in corporates. 0:02:07.000 --> 0:02:09.679 Is that kind of a thank god labor market is 0:02:09.720 --> 0:02:10.280 still strong. 0:02:12.000 --> 0:02:14.720 I think it's strange. You know, the S and P 0:02:14.840 --> 0:02:16.560 as of a couple of days ago is up nine percent, 0:02:16.639 --> 0:02:22.000 but the vast majority of that that number was a 0:02:22.040 --> 0:02:25.800 function of seven stocks. Yeah again, so right, four hundred 0:02:25.800 --> 0:02:28.160 and ninety three stocks were flattered in in the S 0:02:28.160 --> 0:02:30.160 and P five hundred. So anyway, so I think, you know, 0:02:30.280 --> 0:02:33.240 sustained rate environment, that's a bit higher sustained margin pressure 0:02:33.560 --> 0:02:35.800 as a result of inflation, and so we'd think that, 0:02:35.960 --> 0:02:38.000 you know, it's a little bit of a tricky market 0:02:38.080 --> 0:02:38.600 to navigate. 0:02:38.760 --> 0:02:41.040 What's the smart conversation about FED policy? We go back 0:02:41.040 --> 0:02:42.520 and forth and we like, I feel like if that's 0:02:42.560 --> 0:02:44.040 going to do what it's going to do ultimately when 0:02:44.040 --> 0:02:47.080 it meets, But what is the smart thinking about what 0:02:47.120 --> 0:02:48.440 the FED says and does? 0:02:48.520 --> 0:02:50.919 In your view, I think that it's pretty I think 0:02:50.919 --> 0:02:52.799 the Fed's been very transparent. So I don't think my 0:02:52.880 --> 0:02:54.720 view is different than sort of what they've said, which 0:02:54.840 --> 0:02:58.399 is they're likely to raise rates time. 0:02:58.400 --> 0:03:02.040 It is right, it's a kind a few But are 0:03:02.040 --> 0:03:04.320 they right to in terms of that inflation? Do you 0:03:04.320 --> 0:03:07.920 think so at the risk of economic fallout or more? 0:03:08.200 --> 0:03:10.240 I think that I think they've said it. I think 0:03:10.240 --> 0:03:13.840 they're fighting inflation. I think that the job market continues 0:03:13.880 --> 0:03:16.800 to be strong. They've talked about one more hike. Maybe 0:03:16.800 --> 0:03:19.920 there's a second hike in June. Maybe not so. I 0:03:19.960 --> 0:03:21.960 think that I'm not sure it matters that much. On 0:03:21.960 --> 0:03:24.320 the margin, a quarter basis point doesn't really make a difference. 0:03:24.480 --> 0:03:26.960 I think the question sort of the outlier questions that 0:03:27.000 --> 0:03:29.280 we're focused on, and we we don't have good answers 0:03:29.320 --> 0:03:32.680 to our impact of QT right, impact of debt ceiling, 0:03:33.240 --> 0:03:36.200 impact of federal deficit growing over time as a result 0:03:36.240 --> 0:03:38.720 of raid environments. So I think those are kind of 0:03:38.720 --> 0:03:40.840 the bigger questions and how that kind of kind of 0:03:41.040 --> 0:03:43.280 kind of plays into what the effective FED funds rate 0:03:43.320 --> 0:03:43.680 looks like. 0:03:44.080 --> 0:03:46.040 It's interesting a lot of people have said, you know, 0:03:46.120 --> 0:03:48.040 it's not about the debt ceiling. It's about the amount 0:03:48.040 --> 0:03:50.400 of debt that the US keeps accumulating and the cost 0:03:50.400 --> 0:03:53.040 of cost and the cost of servicing it. Right, that's right, 0:03:53.080 --> 0:03:55.840 and dealing with it. I mean, what what is it? Yeah? 0:03:55.960 --> 0:03:58.560 I mean what could that mean? Ultimately? 0:04:00.200 --> 0:04:02.280 The best thing I read recently was a Goldman report 0:04:02.920 --> 0:04:04.400 and they sort of said, look, you know, you're at 0:04:04.400 --> 0:04:06.200 a six percent deficit and you could get to twenty 0:04:06.200 --> 0:04:08.440 percent deficit in ten years because so much of that 0:04:08.560 --> 0:04:10.000 is the compounding impact of. 0:04:10.120 --> 0:04:16.080 Right right, So yeah, but problematic, yeah, potentially economics like, okay, 0:04:16.120 --> 0:04:17.560 we know the scenarios, all right, so what are you 0:04:17.640 --> 0:04:21.040 doing in this environment? Where are the opportunity? It's bad 0:04:21.120 --> 0:04:27.360 news done, so there are opportunities, There are opportunities credit equities. 0:04:27.360 --> 0:04:30.800 We think credits far more compelling. Within credit, we traffic 0:04:30.920 --> 0:04:34.080 primarily in corporate credit, which has been doing really well, 0:04:34.160 --> 0:04:35.960 which has been doing moment. By the way, equities have 0:04:36.000 --> 0:04:38.400 to do, right SB nine percent yields a four percent, 0:04:38.440 --> 0:04:39.280 loans drop four percent. 0:04:39.440 --> 0:04:39.920 Yeah. 0:04:40.080 --> 0:04:42.640 So but within corporate credit, I think we would bifurcated 0:04:42.640 --> 0:04:46.599 into investment grade high yield loans investment grade high yield. 0:04:46.920 --> 0:04:49.480 We think spreads are still tight, Okay, we think that. 0:04:50.000 --> 0:04:51.920 I mean, there's just a sort of fun fact is 0:04:52.600 --> 0:04:55.159 over the over the last several of ten years plus 0:04:55.240 --> 0:04:59.080 eleven twelve years since the GFC GDP has grown and 0:04:59.160 --> 0:05:02.279 roughly two to two and a half, high yield spreads 0:05:02.279 --> 0:05:05.160 were north of five hundred over in that growth environment 0:05:05.720 --> 0:05:08.400 and uh and investments that's remarkable. 0:05:08.520 --> 0:05:08.760 Yeah. 0:05:08.960 --> 0:05:11.680 Yeah, So highield spreads today are sort of for sixty 0:05:11.680 --> 0:05:13.640 four seventy over and a zero to one and a 0:05:13.640 --> 0:05:17.040 half percent growth environment, So we think that hild spreads 0:05:17.040 --> 0:05:22.160 are not representative of sort of slowing growth. I would say, yeah, 0:05:22.480 --> 0:05:24.520 we think the loan market at six hundred over is 0:05:24.520 --> 0:05:27.440 sort of interesting. Yeah, you know, it turns out six 0:05:27.520 --> 0:05:30.400 hundred over plus a four to five percent base rate, 0:05:31.120 --> 0:05:35.960 that's a that's a lot of carry, if you will. Yeah, uh, 0:05:36.200 --> 0:05:38.960 And so you know, depending on if you can sort 0:05:39.000 --> 0:05:42.839 of if those companies can navigate earning ten to eleven percent, 0:05:42.920 --> 0:05:44.520 is a pretty good place to sit. Now that six 0:05:44.640 --> 0:05:46.640 hundred over applies a five percent of ault rate, so 0:05:47.000 --> 0:05:48.640 you know, and I would say implicit in that is 0:05:48.640 --> 0:05:50.800 we don't believe the Fed's going to pivot quickly, yeah, 0:05:50.839 --> 0:05:53.239 because so much of that yield is driven by base rates. 0:05:53.279 --> 0:05:56.799 But does that then lead to a lot more defaults? 0:05:56.920 --> 0:05:59.640 Ultimately focused on my real estate pal yesterday were saying, 0:05:59.640 --> 0:06:01.839 you know, I think we're going to obviously see more problems, 0:06:01.880 --> 0:06:04.320 especially in the middle market space, but also talked about 0:06:04.320 --> 0:06:07.120 bankruptcies and company bankruptcies. I mean, I don't know how 0:06:07.120 --> 0:06:09.599 to when when someone says, you know, on an M 0:06:09.600 --> 0:06:13.040 and A panel SVP felt like Bear Stearns or this 0:06:13.120 --> 0:06:16.320 is beginning to you Charlie Sharf saying bank shouldn't be 0:06:16.440 --> 0:06:19.559 unconditionally required to kind of cover the failures of others. 0:06:19.800 --> 0:06:21.440 All of a sudden feels like the momentum is getting 0:06:21.440 --> 0:06:24.120 a little bit more negative. But is it just momentum 0:06:24.120 --> 0:06:28.560 which can change, or is it something more real. I'm 0:06:28.600 --> 0:06:29.359 kind of going back to that. 0:06:29.440 --> 0:06:33.240 I think sentiment is more cautious. I do believe that. 0:06:34.560 --> 0:06:36.080 Enough to change actions. 0:06:36.960 --> 0:06:39.720 Guess well, the question is, so you've already in credit 0:06:39.800 --> 0:06:42.599 markets fun flows have been negative, right, So how you 0:06:42.800 --> 0:06:45.040 and loan funflows have been negative. There hasn't been a 0:06:45.080 --> 0:06:50.080 whole lot of issuance, so the market's been healthy and strong, 0:06:51.080 --> 0:06:53.680 somewhat driven by the raid environment by the way, as well, 0:06:53.839 --> 0:06:56.680 right right, in terms of default. And you asked the question, 0:06:56.720 --> 0:06:59.840 I think we're of the view that you know, could 0:07:00.040 --> 0:07:03.040 fall to increase someone. Yes, there's two hundred billion plus 0:07:03.120 --> 0:07:06.320 or minus loan maturities in the next couple of years. 0:07:07.000 --> 0:07:08.920 I think that the bigger issue that we're concerned about 0:07:09.000 --> 0:07:12.040 is not as much maturities because healthy companies, double B companies, 0:07:12.080 --> 0:07:13.600 they're gonna get refinanced. 0:07:13.120 --> 0:07:13.760 They're gonna be fine. 0:07:13.760 --> 0:07:16.400 They're gonna be fine. I think we're more focused on 0:07:16.440 --> 0:07:19.080 they'll be you know, exchanged. You know, there'll be a 0:07:19.120 --> 0:07:22.360 lot of liability management transactions. We've started to see those. 0:07:22.440 --> 0:07:24.960 Those can be pretty darn painful. So that's sort of 0:07:25.000 --> 0:07:28.160 one bucket, and there'll be a bigger downgrade cycle and 0:07:28.160 --> 0:07:32.440 that's already started. So there's so much dispersion in the 0:07:32.440 --> 0:07:35.280 market based on credit quality, and you're seeing that in 0:07:35.360 --> 0:07:37.120 our markets play out today as it is. 0:07:37.600 --> 0:07:42.360 Does this cycle remind you of anything? I mean, we've 0:07:42.400 --> 0:07:44.640 gone through a lot, you know, I think Great Financial Crisis, 0:07:44.760 --> 0:07:45.800 dot com boom. 0:07:45.520 --> 0:07:48.560 I think what surprises What surprises me the most about 0:07:48.600 --> 0:07:54.880 this cycle is how spreads have remained tighter than one 0:07:54.880 --> 0:07:58.640 would think they should be. And I don't know if 0:07:58.680 --> 0:08:00.960 that's a function of there's a lot of money out there. 0:08:01.320 --> 0:08:03.120 People are of the view that we can sort of 0:08:03.240 --> 0:08:06.440 companies can weather the storm. Growth will slow, but maybe 0:08:06.520 --> 0:08:09.320 won't fall out of bed, and we're not going to 0:08:09.400 --> 0:08:13.160 have a hard hard landing. And there hasn't been a 0:08:13.160 --> 0:08:15.000 lot of supply. So there's a lot of reasons, but 0:08:15.040 --> 0:08:19.440 a lot of those reasons tend to be more technically driven, yeah, 0:08:19.800 --> 0:08:20.960 than corporate driven. 0:08:21.960 --> 0:08:26.120 Well, yeah, it's interesting in terms of well, so then 0:08:26.360 --> 0:08:30.320 how much of the negative news maybe minus the deficit 0:08:30.560 --> 0:08:32.880 in that stuff is already factored in your. 0:08:32.880 --> 0:08:37.520 View, So I don't believe that that much of it 0:08:37.559 --> 0:08:39.920 is factored into credit spreads. And I say that just 0:08:39.920 --> 0:08:43.920 because credit spreads at a high yield to four seventy over. 0:08:44.440 --> 0:08:48.360 While it's a good absolute yield, that absolute yield is 0:08:48.360 --> 0:08:52.040 fifty percent base rate driven, and so I think that 0:08:52.160 --> 0:08:54.480 you got to get a little bit wider on spreads. 0:08:55.600 --> 0:08:58.080 What gets us to representilate just all these things that 0:08:58.120 --> 0:09:00.280 you just kind of the worry list, if you will. 0:09:01.920 --> 0:09:04.560 Look, it takes time for a higher rate environment to 0:09:04.640 --> 0:09:07.719 flow through, and it's it's early days still and we're 0:09:07.760 --> 0:09:08.679 starting to see it. 0:09:09.960 --> 0:09:12.360 I think someone was reminding us yesterday too, the same 0:09:12.360 --> 0:09:14.400 thing that we're not there folks, in terms of what 0:09:14.400 --> 0:09:15.840 the Fed's done and its impact. 0:09:15.920 --> 0:09:18.600 Right, Yeah, it takes some time. So I think over 0:09:18.640 --> 0:09:22.600 the course of the year, you're going to see margin degradation, 0:09:23.559 --> 0:09:28.160 leverage numbers are still ticking up, downgrade cycles are real, right, 0:09:28.640 --> 0:09:35.000 and macro things around QT and debt ceiling. And by 0:09:35.040 --> 0:09:36.679 the way, what if you know, you have a lot 0:09:36.679 --> 0:09:39.199 of foreigners that buy treasuries, and there's a lot of 0:09:39.280 --> 0:09:42.080 high rates and a whole different number of sovereign regions. 0:09:42.120 --> 0:09:44.960 Now what if that money flows back to their own regions? 0:09:45.160 --> 0:09:47.400 So I think you have enough stuff floating that there 0:09:47.480 --> 0:09:50.040 might be some volatility that might push spreads out. 0:09:49.920 --> 0:09:51.480 A little bit more, but manageable. 0:09:52.920 --> 0:09:54.920 I think so, because the truth is, when you start 0:09:54.960 --> 0:09:59.160 at eight, nine ten in credit, you got a long 0:09:59.200 --> 0:10:02.080 way down before you're losing money now, right, there's room 0:10:02.160 --> 0:10:02.480 for error. 0:10:02.960 --> 0:10:04.480 One thing I wanted to ask you, because I know 0:10:04.520 --> 0:10:05.760 from some of the notes we've got a couple of 0:10:05.760 --> 0:10:08.840 minutes left here. When you look at earnings that we've 0:10:08.880 --> 0:10:12.320 gone through so far, how has it been looking in 0:10:12.360 --> 0:10:14.120 terms of what we're seeing in the balance sheets. 0:10:15.960 --> 0:10:17.840 I think it's a very mixed bag. I don't think 0:10:17.880 --> 0:10:20.640 there's a blanket statement. There's not a blanket answer to that. 0:10:21.960 --> 0:10:25.840 You know, the S and P for example, earnings were 0:10:25.880 --> 0:10:30.079 pretty solid, right, so people sort of forget the numbers 0:10:30.120 --> 0:10:32.040 now like seventy or eighty percent the company sort of 0:10:32.080 --> 0:10:34.559 either met or exceeded their numbers. 0:10:34.559 --> 0:10:41.040 We've been managed well, no, but that's fair. It's a metric. 0:10:41.240 --> 0:10:47.280 Yeah, it's a metric. I think that in the levered 0:10:47.320 --> 0:10:51.280 credit world that we operate in, there's been a tremendous 0:10:51.280 --> 0:10:54.160 amount of dispersion in terms of numbers and outlooks. And 0:10:54.200 --> 0:10:58.120 I will say in certain sectors. You know, healthcare is 0:10:58.120 --> 0:10:59.680 a good example of that, and certainly in the World 0:10:59.679 --> 0:11:03.320 War Oping, you know, we're still seeing labor costs are high. Yeah, 0:11:03.320 --> 0:11:06.640 they're really really high. And so when you look at 0:11:06.640 --> 0:11:09.480 these numbers and you look at where margins have gotten heard, 0:11:09.920 --> 0:11:12.520 it seems like it's going to be tricky and it's 0:11:12.520 --> 0:11:15.720 going to take time for inflation to come through the 0:11:15.760 --> 0:11:18.880 system or alternatively for top line to grow your way 0:11:18.920 --> 0:11:21.760 out right, And so we do think that things are 0:11:21.760 --> 0:11:24.320 going to be a little bit fragile. 0:11:24.960 --> 0:11:27.760 Just got twenty twenty five seconds. Do you think a 0:11:27.840 --> 0:11:30.160 year from now at Milkin will be having a similar 0:11:30.200 --> 0:11:33.280 conversation It will be more out of some of the 0:11:33.320 --> 0:11:34.360 stress just quickly. 0:11:35.400 --> 0:11:37.520 I think time is your friend, and I think a 0:11:37.600 --> 0:11:39.760 year from now is a long time from now. So 0:11:39.840 --> 0:11:43.000 there's a lot that can happen in terms of sort 0:11:43.000 --> 0:11:44.080 of normalizing the world. 0:11:44.160 --> 0:11:45.640 Or a year from now just look at like the 0:11:45.720 --> 0:11:48.760 last year, right, and stuff thank you, Thanks for your 0:11:48.800 --> 0:11:51.880 patience while we talked about the craziness in regionals. It's 0:11:51.920 --> 0:11:52.959 always good to talk. 0:11:52.760 --> 0:11:53.480 With you too. 0:11:53.600 --> 0:11:56.720 Prinima Priori. She's Maaging director at HPS Investment Partners. Joining 0:11:56.800 --> 0:11:57.600 us here at Milkin. 0:11:58.640 --> 0:12:02.200 You're listening to the Bloomberg Business Week Podcast. Catch us 0:12:02.240 --> 0:12:05.600 live weekday afternoons from three to six Eastern Listen on 0:12:05.640 --> 0:12:09.679 Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business App, 0:12:09.960 --> 0:12:12.240 or watch us live on YouTube. 0:12:12.920 --> 0:12:15.600 First Republics troubles. You know, we thought that that was 0:12:15.679 --> 0:12:19.640 all taken care of following the takeover by JP Morgan. 0:12:19.760 --> 0:12:21.760 We've been talking about the regionals today under a lot 0:12:21.800 --> 0:12:24.760 of pressure, which we know kind of complicates further the 0:12:24.760 --> 0:12:26.800 plan for what the FED needs to do tomorrow at 0:12:26.880 --> 0:12:29.360 its meeting. We've been talking a lot about a credit 0:12:29.400 --> 0:12:32.200 crunch here at Bloomberg. So let's get to it because 0:12:32.240 --> 0:12:34.840 our next guest sure to have some thoughts. Armand Panosian. 0:12:34.960 --> 0:12:37.600 He is head of Performing Credit and portfolio manager at 0:12:37.600 --> 0:12:40.760 the alt investment manager oak Tree Capital Investments, roughly one 0:12:40.800 --> 0:12:44.360 hundred and seventy two billion in assets under management. Welcome, Welcome, 0:12:44.400 --> 0:12:45.440 How are you great? 0:12:45.559 --> 0:12:46.800 Great? Thank you for having me here. 0:12:46.920 --> 0:12:49.359 How's the environment and what are some of the conversations 0:12:49.440 --> 0:12:51.600 you're having or wanted to have or ask people here 0:12:51.640 --> 0:12:52.080 at Milkin. 0:12:52.240 --> 0:12:55.120 Yeah, the Milkin Conference has been quite balanced in terms 0:12:55.160 --> 0:12:58.160 of perspectives on investors as to whether they should be 0:12:58.160 --> 0:13:01.839 bearish or bullish. I think the consensus appears that there 0:13:01.880 --> 0:13:04.000 are more reasons to be cautious or bearish in the 0:13:04.120 --> 0:13:07.880 short term and probably optimistic in the long run. About 0:13:07.880 --> 0:13:11.640 the US economy, I think not enough conversation has had 0:13:11.679 --> 0:13:14.080 about the benefits of inflation in the long run, and 0:13:14.080 --> 0:13:17.120 I think some businesses and sectors are going to do 0:13:17.120 --> 0:13:19.120 well in the US and the medium to long term. 0:13:19.000 --> 0:13:21.640 Meaning what the ability to raise prices or what. 0:13:22.040 --> 0:13:24.880 The ability to raise prices inflation in a short period 0:13:24.880 --> 0:13:28.000 of time causes volatility and performance, But in the long run, 0:13:28.080 --> 0:13:30.640 the dollars of profit of businesses that are strong and 0:13:30.679 --> 0:13:33.040 are able to pass through those cost increases with enough 0:13:33.080 --> 0:13:37.439 time results in an increase in the actual nominal dollars 0:13:37.440 --> 0:13:40.000 of profit when you actually do have inflation, which means 0:13:40.000 --> 0:13:42.880 that if you have fixed liabilities in terms of quantum, 0:13:43.280 --> 0:13:45.719 then you're able to repay those liabilities easier over a 0:13:45.800 --> 0:13:48.640 three to five seven year period. In the short run, obviously, 0:13:48.679 --> 0:13:51.239 with the higher cost of borrowing, there is an expectation 0:13:51.320 --> 0:13:52.559 of elevated default rates there. 0:13:52.600 --> 0:13:54.760 Well, let's talk about the implications of what we're seeing 0:13:55.120 --> 0:13:57.680 after the collapse of Silicon Valley and two other banks, 0:13:57.679 --> 0:14:00.319 and then first Republic of course of JP Morgan, seeing 0:14:00.320 --> 0:14:03.040 PacWest Western Alliance. I'm sure people have been saying this 0:14:03.160 --> 0:14:05.520 to you, just really under a lot of pressure. How 0:14:05.559 --> 0:14:08.200 do you read it? Is it? Have we moved from 0:14:08.400 --> 0:14:11.480 it's just a few isolated banks a crisis of banks, 0:14:11.920 --> 0:14:13.160 to a bank crisis. 0:14:15.520 --> 0:14:18.200 I think it's very early in that process. Unfortunately for 0:14:18.240 --> 0:14:21.320 the banks. I think the behavior for especially some of 0:14:21.320 --> 0:14:24.440 the smaller and medium sized regional banks is going to 0:14:24.480 --> 0:14:28.640 become more volatile and more pressured over time. We're seeing 0:14:28.680 --> 0:14:32.720 it in real estate. Initially a lot of those banks 0:14:32.720 --> 0:14:35.760 are heavy borrowers and small balance loans and commercial real estate. 0:14:36.600 --> 0:14:40.400 There are leasing issues, there are completion issues, and I 0:14:40.440 --> 0:14:43.520 think that as those banks test the waters to see 0:14:43.520 --> 0:14:45.640 where they could transact in those loans, where they could 0:14:45.640 --> 0:14:49.280 clear a portfolio of those loans, they will find that 0:14:49.960 --> 0:14:52.960 opportunistic investors want cheaper prices than they're willing to offer 0:14:52.960 --> 0:14:55.240 than they're willing to get. Reset on valuations, there will 0:14:55.280 --> 0:14:56.960 be a big reset and there will be a hole 0:14:57.160 --> 0:14:59.280 in some number of those bank balance sheets as a 0:14:59.280 --> 0:15:00.000 result of that trend. 0:15:00.000 --> 0:15:01.280 Actually, that's what I was going to say. Who eats 0:15:01.280 --> 0:15:01.800 the reset? 0:15:02.040 --> 0:15:04.880 It would be the banks. And then the question becomes 0:15:04.880 --> 0:15:07.400 whether they're regulator Not all of them are Federal Reserve 0:15:07.520 --> 0:15:10.720 regulator banks, some of them are occ banks. Their regulators 0:15:10.760 --> 0:15:13.440 will have to decide which they allow to fail, and 0:15:13.160 --> 0:15:14.760 they which they save or plug. 0:15:14.560 --> 0:15:17.000 The gap arment, does it only get worse? As you know, 0:15:17.000 --> 0:15:19.080 tomorrow's the FED meeting, right we are expecting the Fed 0:15:19.120 --> 0:15:21.040 to raise rates again. We'll see what A. Powell and 0:15:21.080 --> 0:15:24.320 company have to say about monetary policy going forward. But 0:15:24.560 --> 0:15:26.920 they've also said we're going to keep rates high for 0:15:26.960 --> 0:15:29.440 a longer time. So that just exacerbates the situation. 0:15:30.280 --> 0:15:32.680 It does. And if you look historically, when you have 0:15:32.760 --> 0:15:36.400 seen periods of rate rises, which haven't been many in 0:15:36.440 --> 0:15:39.320 the last thirty years, but if you look historically, usually 0:15:39.360 --> 0:15:42.280 it takes twelve to eighteen months to feel the pain 0:15:43.080 --> 0:15:44.040 of that rate increase. 0:15:44.160 --> 0:15:45.800 Same thing we were just talking about with our last guests, 0:15:45.880 --> 0:15:47.480 and you're minding us. It takes a while. 0:15:47.600 --> 0:15:49.040 It takes a long time. And in fact, if you 0:15:49.080 --> 0:15:51.520 look at the pace of the sofur curve, which we 0:15:51.560 --> 0:15:53.720 look at a lot in corporate direct lending, as it's 0:15:53.800 --> 0:15:56.240 usually corporate direct lending is priced that a is spread 0:15:56.240 --> 0:15:59.680 to sofur. Sofur didn't get to four percent until about 0:15:59.680 --> 0:16:02.600 supt October of twenty twenty two, so we're only about 0:16:02.600 --> 0:16:06.640 six seven months into that impact on the corporate directs 0:16:06.680 --> 0:16:08.880 got to move up, right, It's well, the pain will 0:16:08.920 --> 0:16:11.800 be felt more and more and more as as you 0:16:11.840 --> 0:16:15.720 do have sort of tepid growth and performance of businesses. 0:16:15.800 --> 0:16:18.160 A lot of businesses are challenged still in terms of 0:16:18.160 --> 0:16:22.120 their cost structures because of inflation, and so the higher 0:16:22.120 --> 0:16:24.880 cost of borrowing for floating rate borrowers, like in real estate, 0:16:25.040 --> 0:16:29.320 like in some corporate direct loans, will create elevated defaults 0:16:29.640 --> 0:16:31.960 and issues in the next few quarters. 0:16:32.040 --> 0:16:34.920 What does it mean for opportunities in terms of you guys, right, 0:16:34.960 --> 0:16:37.440 you're known for looking for value. 0:16:37.920 --> 0:16:43.720 Yes, well, if you have dry powder, the investing environment 0:16:43.840 --> 0:16:45.600 over the next year or two is going to be 0:16:45.640 --> 0:16:48.680 more attractive than what it was in the past five years. Now, 0:16:48.720 --> 0:16:52.920 this is specifically about credit, not necessarily about equity. I 0:16:52.960 --> 0:16:57.000 think actually credit probably outperforms equity in the next three 0:16:57.040 --> 0:16:59.680 to four years, and that's just not been true over 0:16:59.680 --> 0:17:02.680 the last you know, fifteen years of easy money. So 0:17:03.320 --> 0:17:07.960 I think when we look at our portfolio, the higher 0:17:08.000 --> 0:17:10.160 cost of credit because of the higher cost of credit. Yes, 0:17:10.200 --> 0:17:13.199 the lower cost of credit since the global financial crisis 0:17:13.240 --> 0:17:15.960 has really inflated a lot of asset bubbles, including in 0:17:16.000 --> 0:17:20.879 private equity, technology, real estate. Obviously, as you see rates 0:17:21.000 --> 0:17:25.639 rise and stay higher for longer and even persistently longer, 0:17:25.680 --> 0:17:29.520 like in multiples of years, potentially you should see a 0:17:29.560 --> 0:17:32.600 deflation of those same asset bubbles. And that creates an 0:17:32.600 --> 0:17:39.120 opportunity for I think, well healed credit investors that structure 0:17:39.240 --> 0:17:44.080 debt appropriately, that invest conservatively, find less cyclical businesses or 0:17:44.119 --> 0:17:47.840 even countercyclical businesses, And with the banks stepping away and 0:17:47.880 --> 0:17:51.360 the regulator stepping in, it's creating an opportunity for private investory. 0:17:51.440 --> 0:17:54.480 Is it just in banking where those asset bubbles will burst? 0:17:54.680 --> 0:17:56.960 I mean, in many ways we've already had the crypto 0:17:57.160 --> 0:17:59.880 bubble burst. We're seeing it in regional banks. Is there 0:18:00.680 --> 0:18:03.840 real estate we're talking about? Is there something else? Potentially? 0:18:03.920 --> 0:18:06.440 I think we're focused on the banking bubble. We're focused 0:18:06.440 --> 0:18:09.440 on the asset classes that are rate sensitive and therefore 0:18:09.560 --> 0:18:12.840 have benefited from that environment over the last fifteen years. Yeah, 0:18:12.880 --> 0:18:16.199 Obviously globally there are going to be other sector specific, 0:18:16.320 --> 0:18:20.360 commodity specific bubbles, possibly bursting for different reasons, but from 0:18:20.359 --> 0:18:23.320 a rate perspective, it's really a banking issue. 0:18:23.400 --> 0:18:26.639 You guys recently launched a new fund, right, a private 0:18:26.640 --> 0:18:29.000 credit fund, about ten billion dollars. How are you putting 0:18:29.000 --> 0:18:30.720 that to work? How quickly are you putting that to work? 0:18:30.800 --> 0:18:31.000 Well? 0:18:31.080 --> 0:18:33.119 As you said, those who have dry powder, sounds like 0:18:33.160 --> 0:18:34.320 you guys have a fairminat truck. 0:18:34.440 --> 0:18:36.520 We do have dry powder in private credit. It's some 0:18:36.520 --> 0:18:39.919 of the best environments that we've seen today versus in 0:18:39.960 --> 0:18:40.879 the last five years. 0:18:41.000 --> 0:18:43.640 So now the golden age. It's so funny because last 0:18:43.680 --> 0:18:45.960 year people are like, it's the golden era of private credit. 0:18:46.400 --> 0:18:47.320 I'm hearing it this year. 0:18:47.440 --> 0:18:51.720 It was possibly a little early to call it last year, 0:18:51.760 --> 0:18:55.639 but this year, you're generally speaking, first lean privately negotiated 0:18:55.680 --> 0:18:58.240 loans to companies that have a really large equity investment 0:18:58.280 --> 0:19:01.600 from a well healed private equity firm. They're yielding eleven 0:19:01.640 --> 0:19:06.840 to thirteen percent, and you know, appropriately capitalized and cash 0:19:06.880 --> 0:19:09.320 flowing even with the high base rates out there. So 0:19:10.440 --> 0:19:13.680 given that type of return profile, that type of support 0:19:13.680 --> 0:19:17.160 from an equity perspective, it is I wouldn't say necessarily 0:19:17.200 --> 0:19:19.359 the golden age, but it's far better today than it 0:19:19.440 --> 0:19:21.200 was three years ago or two years ago. 0:19:21.040 --> 0:19:23.280 Even And that continues for a while because we still 0:19:23.280 --> 0:19:25.600 haven't felt the long runway or the runway of the 0:19:25.600 --> 0:19:26.040