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Speaker 2: I do want to get to our guest. I'm so
Speaker 2: excited that she is back with us. Let's get to it.
Speaker 2: Kranima Puri. She's managing director at HPS Investment Partner's large
Speaker 2: global private credit lender, head of liquid credit, portfolio manager
Speaker 2: for the multi asset credit strategies. Why do they even
Speaker 2: let you come to this? Aren't you busy right now?
Speaker 2: To see you and you're looking wonderful. It's great to
Speaker 2: see you. Help me put in makes sense about what's
Speaker 2: going on in banking. I think we just we keep thinking.
Speaker 2: We get through a compared of twenty four hours. How
Speaker 2: are you assessing it in your world?
Speaker 3: A couple of things, So I think one is we
Speaker 3: were asked this question on the panels as well, so
Speaker 3: you know, in terms of trying to frame what's going
Speaker 3: on in the market, it almost feels like for some
Speaker 3: period of time there's been a Q feel to it,
Speaker 3: right so equity ball has gone down, valuations have gone up,
Speaker 3: there's been infusions of liquidity. Yet everyone's talking about a recession.
Speaker 3: So it seems a little bit tricky to square that.
Speaker 3: I would say we when we think about the state
Speaker 3: of the world, we do think there's you know, there's
Speaker 3: a lot of talk around recession, a lot of talk
Speaker 3: around hard landing, soft landing. I'm not sure it matters.
Speaker 3: Our view is that we're going to live in a
Speaker 3: higher rate environment for some sustained period of time. And now,
Speaker 3: whether that's five percent or four and a half percent,
Speaker 3: I'm not sure it matters. It's not two percent, And
Speaker 3: our view is the road.
Speaker 2: Doubt about it, right, no doubt about it.
Speaker 3: It seems so, I don't they'd have to have a really,
Speaker 3: really bad recession to have rates get pushed down that much,
Speaker 3: which would not be good for credit spreads. So we
Speaker 3: think that you're in a sustained period of higher rates.
Speaker 3: We think that you're in a sustained period of elevated inflation.
Speaker 3: And jobs have been good. So that means that labor
Speaker 3: market's so strong and we're seeing it in corporates.
Speaker 2: Is that kind of a thank god labor market is
Speaker 2: still strong.
Speaker 3: I think it's strange. You know, the S and P
Speaker 3: as of a couple of days ago is up nine percent,
Speaker 3: but the vast majority of that that number was a
Speaker 3: function of seven stocks. Yeah again, so right, four hundred
Speaker 3: and ninety three stocks were flattered in in the S
Speaker 3: and P five hundred. So anyway, so I think, you know,
Speaker 3: sustained rate environment, that's a bit higher sustained margin pressure
Speaker 3: as a result of inflation, and so we'd think that,
Speaker 3: you know, it's a little bit of a tricky market
Speaker 3: to navigate.
Speaker 2: What's the smart conversation about FED policy? We go back
Speaker 2: and forth and we like, I feel like if that's
Speaker 2: going to do what it's going to do ultimately when
Speaker 2: it meets, But what is the smart thinking about what
Speaker 2: the FED says and does?
Speaker 3: In your view, I think that it's pretty I think
Speaker 3: the Fed's been very transparent. So I don't think my
Speaker 3: view is different than sort of what they've said, which
Speaker 3: is they're likely to raise rates time.
Speaker 2: It is right, it's a kind a few But are
Speaker 2: they right to in terms of that inflation? Do you
Speaker 2: think so at the risk of economic fallout or more?
Speaker 3: I think that I think they've said it. I think
Speaker 3: they're fighting inflation. I think that the job market continues
Speaker 3: to be strong. They've talked about one more hike. Maybe
Speaker 3: there's a second hike in June. Maybe not so. I
Speaker 3: think that I'm not sure it matters that much. On
Speaker 3: the margin, a quarter basis point doesn't really make a difference.
Speaker 3: I think the question sort of the outlier questions that
Speaker 3: we're focused on, and we we don't have good answers
Speaker 3: to our impact of QT right, impact of debt ceiling,
Speaker 3: impact of federal deficit growing over time as a result
Speaker 3: of raid environments. So I think those are kind of
Speaker 3: the bigger questions and how that kind of kind of
Speaker 3: kind of plays into what the effective FED funds rate
Speaker 3: looks like.
Speaker 2: It's interesting a lot of people have said, you know,
Speaker 2: it's not about the debt ceiling. It's about the amount
Speaker 2: of debt that the US keeps accumulating and the cost
Speaker 2: of cost and the cost of servicing it. Right, that's right,
Speaker 2: and dealing with it. I mean, what what is it? Yeah?
Speaker 2: I mean what could that mean? Ultimately?
Speaker 3: The best thing I read recently was a Goldman report
Speaker 3: and they sort of said, look, you know, you're at
Speaker 3: a six percent deficit and you could get to twenty
Speaker 3: percent deficit in ten years because so much of that
Speaker 3: is the compounding impact of.
Speaker 2: Right right, So yeah, but problematic, yeah, potentially economics like, okay,
Speaker 2: we know the scenarios, all right, so what are you
Speaker 2: doing in this environment? Where are the opportunity? It's bad
Speaker 2: news done, so there are opportunities, There are opportunities credit equities.
Speaker 3: We think credits far more compelling. Within credit, we traffic
Speaker 3: primarily in corporate credit, which has been doing really well,
Speaker 3: which has been doing moment. By the way, equities have
Speaker 3: to do, right SB nine percent yields a four percent,
Speaker 3: loans drop four percent.
Speaker 2: Yeah.
Speaker 3: So but within corporate credit, I think we would bifurcated
Speaker 3: into investment grade high yield loans investment grade high yield.
Speaker 3: We think spreads are still tight, Okay, we think that.
Speaker 3: I mean, there's just a sort of fun fact is
Speaker 3: over the over the last several of ten years plus
Speaker 3: eleven twelve years since the GFC GDP has grown and
Speaker 3: roughly two to two and a half, high yield spreads
Speaker 3: were north of five hundred over in that growth environment
Speaker 3: and uh and investments that's remarkable.
Speaker 4: Yeah.
Speaker 3: Yeah, So highield spreads today are sort of for sixty
Speaker 3: four seventy over and a zero to one and a
Speaker 3: half percent growth environment, So we think that hild spreads
Speaker 3: are not representative of sort of slowing growth. I would say, yeah,
Speaker 3: we think the loan market at six hundred over is
Speaker 3: sort of interesting. Yeah, you know, it turns out six
Speaker 3: hundred over plus a four to five percent base rate,
Speaker 3: that's a that's a lot of carry, if you will. Yeah, uh,
Speaker 3: And so you know, depending on if you can sort
Speaker 3: of if those companies can navigate earning ten to eleven percent,
Speaker 3: is a pretty good place to sit. Now that six
Speaker 3: hundred over applies a five percent of ault rate, so
Speaker 3: you know, and I would say implicit in that is
Speaker 3: we don't believe the Fed's going to pivot quickly, yeah,
Speaker 3: because so much of that yield is driven by base rates.
Speaker 2: But does that then lead to a lot more defaults?
Speaker 2: Ultimately focused on my real estate pal yesterday were saying,
Speaker 2: you know, I think we're going to obviously see more problems,
Speaker 2: especially in the middle market space, but also talked about
Speaker 2: bankruptcies and company bankruptcies. I mean, I don't know how
Speaker 2: to when when someone says, you know, on an M
Speaker 2: and A panel SVP felt like Bear Stearns or this
Speaker 2: is beginning to you Charlie Sharf saying bank shouldn't be
Speaker 2: unconditionally required to kind of cover the failures of others.
Speaker 2: All of a sudden feels like the momentum is getting
Speaker 2: a little bit more negative. But is it just momentum
Speaker 2: which can change, or is it something more real. I'm
Speaker 2: kind of going back to that.
Speaker 3: I think sentiment is more cautious. I do believe that.
Speaker 2: Enough to change actions.
Speaker 3: Guess well, the question is, so you've already in credit
Speaker 3: markets fun flows have been negative, right, So how you
Speaker 3: and loan funflows have been negative. There hasn't been a
Speaker 3: whole lot of issuance, so the market's been healthy and strong,
Speaker 3: somewhat driven by the raid environment by the way, as well,
Speaker 3: right right, in terms of default. And you asked the question,
Speaker 3: I think we're of the view that you know, could
Speaker 3: fall to increase someone. Yes, there's two hundred billion plus
Speaker 3: or minus loan maturities in the next couple of years.
Speaker 3: I think that the bigger issue that we're concerned about
Speaker 3: is not as much maturities because healthy companies, double B companies,
Speaker 3: they're gonna get refinanced.
Speaker 2: They're gonna be fine.
Speaker 3: They're gonna be fine. I think we're more focused on
Speaker 3: they'll be you know, exchanged. You know, there'll be a
Speaker 3: lot of liability management transactions. We've started to see those.
Speaker 3: Those can be pretty darn painful. So that's sort of
Speaker 3: one bucket, and there'll be a bigger downgrade cycle and
Speaker 3: that's already started. So there's so much dispersion in the
Speaker 3: market based on credit quality, and you're seeing that in
Speaker 3: our markets play out today as it is.
Speaker 2: Does this cycle remind you of anything? I mean, we've
Speaker 2: gone through a lot, you know, I think Great Financial Crisis,
Speaker 2: dot com boom.
Speaker 3: I think what surprises What surprises me the most about
Speaker 3: this cycle is how spreads have remained tighter than one
Speaker 3: would think they should be. And I don't know if
Speaker 3: that's a function of there's a lot of money out there.
Speaker 3: People are of the view that we can sort of
Speaker 3: companies can weather the storm. Growth will slow, but maybe
Speaker 3: won't fall out of bed, and we're not going to
Speaker 3: have a hard hard landing. And there hasn't been a
Speaker 3: lot of supply. So there's a lot of reasons, but
Speaker 3: a lot of those reasons tend to be more technically driven, yeah,
Speaker 3: than corporate driven.
Speaker 2: Well, yeah, it's interesting in terms of well, so then
Speaker 2: how much of the negative news maybe minus the deficit
Speaker 2: in that stuff is already factored in your.
Speaker 3: View, So I don't believe that that much of it
Speaker 3: is factored into credit spreads. And I say that just
Speaker 3: because credit spreads at a high yield to four seventy over.
Speaker 3: While it's a good absolute yield, that absolute yield is
Speaker 3: fifty percent base rate driven, and so I think that
Speaker 3: you got to get a little bit wider on spreads.
Speaker 2: What gets us to representilate just all these things that
Speaker 2: you just kind of the worry list, if you will.
Speaker 3: Look, it takes time for a higher rate environment to
Speaker 3: flow through, and it's it's early days still and we're
Speaker 3: starting to see it.
Speaker 2: I think someone was reminding us yesterday too, the same
Speaker 2: thing that we're not there folks, in terms of what
Speaker 2: the Fed's done and its impact.
Speaker 3: Right, Yeah, it takes some time. So I think over
Speaker 3: the course of the year, you're going to see margin degradation,
Speaker 3: leverage numbers are still ticking up, downgrade cycles are real, right,
Speaker 3: and macro things around QT and debt ceiling. And by
Speaker 3: the way, what if you know, you have a lot
Speaker 3: of foreigners that buy treasuries, and there's a lot of
Speaker 3: high rates and a whole different number of sovereign regions.
Speaker 3: Now what if that money flows back to their own regions?
Speaker 3: So I think you have enough stuff floating that there
Speaker 3: might be some volatility that might push spreads out.
Speaker 2: A little bit more, but manageable.
Speaker 3: I think so, because the truth is, when you start
Speaker 3: at eight, nine ten in credit, you got a long
Speaker 3: way down before you're losing money now, right, there's room
Speaker 3: for error.
Speaker 2: One thing I wanted to ask you, because I know
Speaker 2: from some of the notes we've got a couple of
Speaker 2: minutes left here. When you look at earnings that we've
Speaker 2: gone through so far, how has it been looking in
Speaker 2: terms of what we're seeing in the balance sheets.
Speaker 3: I think it's a very mixed bag. I don't think
Speaker 3: there's a blanket statement. There's not a blanket answer to that.
Speaker 3: You know, the S and P for example, earnings were
Speaker 3: pretty solid, right, so people sort of forget the numbers
Speaker 3: now like seventy or eighty percent the company sort of
Speaker 3: either met or exceeded their numbers.
Speaker 2: We've been managed well, no, but that's fair. It's a metric.
Speaker 3: Yeah, it's a metric. I think that in the levered
Speaker 3: credit world that we operate in, there's been a tremendous
Speaker 3: amount of dispersion in terms of numbers and outlooks. And
Speaker 3: I will say in certain sectors. You know, healthcare is
Speaker 3: a good example of that, and certainly in the World
Speaker 3: War Oping, you know, we're still seeing labor costs are high. Yeah,
Speaker 3: they're really really high. And so when you look at
Speaker 3: these numbers and you look at where margins have gotten heard,
Speaker 3: it seems like it's going to be tricky and it's
Speaker 3: going to take time for inflation to come through the
Speaker 3: system or alternatively for top line to grow your way
Speaker 3: out right, And so we do think that things are
Speaker 3: going to be a little bit fragile.
Speaker 2: Just got twenty twenty five seconds. Do you think a
Speaker 2: year from now at Milkin will be having a similar
Speaker 2: conversation It will be more out of some of the
Speaker 2: stress just quickly.
Speaker 3: I think time is your friend, and I think a
Speaker 3: year from now is a long time from now. So
Speaker 3: there's a lot that can happen in terms of sort
Speaker 3: of normalizing the world.
Speaker 2: Or a year from now just look at like the
Speaker 2: last year, right, and stuff thank you, Thanks for your
Speaker 2: patience while we talked about the craziness in regionals. It's
Speaker 2: always good to talk.
Speaker 3: With you too.
Speaker 2: Prinima Priori. She's Maaging director at HPS Investment Partners. Joining
Speaker 2: us here at Milkin.
Speaker 1: You're listening to the Bloomberg Business Week Podcast. Catch us
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Speaker 2: First Republics troubles. You know, we thought that that was
Speaker 2: all taken care of following the takeover by JP Morgan.
Speaker 2: We've been talking about the regionals today under a lot
Speaker 2: of pressure, which we know kind of complicates further the
Speaker 2: plan for what the FED needs to do tomorrow at
Speaker 2: its meeting. We've been talking a lot about a credit
Speaker 2: crunch here at Bloomberg. So let's get to it because
Speaker 2: our next guest sure to have some thoughts. Armand Panosian.
Speaker 2: He is head of Performing Credit and portfolio manager at
Speaker 2: the alt investment manager oak Tree Capital Investments, roughly one
Speaker 2: hundred and seventy two billion in assets under management. Welcome, Welcome,
Speaker 2: How are you great?
Speaker 5: Great? Thank you for having me here.
Speaker 2: How's the environment and what are some of the conversations
Speaker 2: you're having or wanted to have or ask people here
Speaker 2: at Milkin.
Speaker 5: Yeah, the Milkin Conference has been quite balanced in terms
Speaker 5: of perspectives on investors as to whether they should be
Speaker 5: bearish or bullish. I think the consensus appears that there
Speaker 5: are more reasons to be cautious or bearish in the
Speaker 5: short term and probably optimistic in the long run. About
Speaker 5: the US economy, I think not enough conversation has had
Speaker 5: about the benefits of inflation in the long run, and
Speaker 5: I think some businesses and sectors are going to do
Speaker 5: well in the US and the medium to long term.
Speaker 2: Meaning what the ability to raise prices or what.
Speaker 5: The ability to raise prices inflation in a short period
Speaker 5: of time causes volatility and performance, But in the long run,
Speaker 5: the dollars of profit of businesses that are strong and
Speaker 5: are able to pass through those cost increases with enough
Speaker 5: time results in an increase in the actual nominal dollars
Speaker 5: of profit when you actually do have inflation, which means
Speaker 5: that if you have fixed liabilities in terms of quantum,
Speaker 5: then you're able to repay those liabilities easier over a
Speaker 5: three to five seven year period. In the short run, obviously,
Speaker 5: with the higher cost of borrowing, there is an expectation
Speaker 5: of elevated default rates there.
Speaker 2: Well, let's talk about the implications of what we're seeing
Speaker 2: after the collapse of Silicon Valley and two other banks,
Speaker 2: and then first Republic of course of JP Morgan, seeing
Speaker 2: PacWest Western Alliance. I'm sure people have been saying this
Speaker 2: to you, just really under a lot of pressure. How
Speaker 2: do you read it? Is it? Have we moved from
Speaker 2: it's just a few isolated banks a crisis of banks,
Speaker 2: to a bank crisis.
Speaker 5: I think it's very early in that process. Unfortunately for
Speaker 5: the banks. I think the behavior for especially some of
Speaker 5: the smaller and medium sized regional banks is going to
Speaker 5: become more volatile and more pressured over time. We're seeing
Speaker 5: it in real estate. Initially a lot of those banks
Speaker 5: are heavy borrowers and small balance loans and commercial real estate.
Speaker 5: There are leasing issues, there are completion issues, and I
Speaker 5: think that as those banks test the waters to see
Speaker 5: where they could transact in those loans, where they could
Speaker 5: clear a portfolio of those loans, they will find that
Speaker 5: opportunistic investors want cheaper prices than they're willing to offer
Speaker 5: than they're willing to get. Reset on valuations, there will
Speaker 5: be a big reset and there will be a hole
Speaker 5: in some number of those bank balance sheets as a
Speaker 5: result of that trend.
Speaker 2: Actually, that's what I was going to say. Who eats
Speaker 2: the reset?
Speaker 5: It would be the banks. And then the question becomes
Speaker 5: whether they're regulator Not all of them are Federal Reserve
Speaker 5: regulator banks, some of them are occ banks. Their regulators
Speaker 5: will have to decide which they allow to fail, and
Speaker 5: they which they save or plug.
Speaker 2: The gap arment, does it only get worse? As you know,
Speaker 2: tomorrow's the FED meeting, right we are expecting the Fed
Speaker 2: to raise rates again. We'll see what A. Powell and
Speaker 2: company have to say about monetary policy going forward. But
Speaker 2: they've also said we're going to keep rates high for
Speaker 2: a longer time. So that just exacerbates the situation.
Speaker 5: It does. And if you look historically, when you have
Speaker 5: seen periods of rate rises, which haven't been many in
Speaker 5: the last thirty years, but if you look historically, usually
Speaker 5: it takes twelve to eighteen months to feel the pain
Speaker 5: of that rate increase.
Speaker 2: Same thing we were just talking about with our last guests,
Speaker 2: and you're minding us. It takes a while.
Speaker 5: It takes a long time. And in fact, if you
Speaker 5: look at the pace of the sofur curve, which we
Speaker 5: look at a lot in corporate direct lending, as it's
Speaker 5: usually corporate direct lending is priced that a is spread
Speaker 5: to sofur. Sofur didn't get to four percent until about
Speaker 5: supt October of twenty twenty two, so we're only about
Speaker 5: six seven months into that impact on the corporate directs
Speaker 5: got to move up, right, It's well, the pain will
Speaker 5: be felt more and more and more as as you
Speaker 5: do have sort of tepid growth and performance of businesses.
Speaker 5: A lot of businesses are challenged still in terms of
Speaker 5: their cost structures because of inflation, and so the higher
Speaker 5: cost of borrowing for floating rate borrowers, like in real estate,
Speaker 5: like in some corporate direct loans, will create elevated defaults
Speaker 5: and issues in the next few quarters.
Speaker 2: What does it mean for opportunities in terms of you guys, right,
Speaker 2: you're known for looking for value.
Speaker 5: Yes, well, if you have dry powder, the investing environment
Speaker 5: over the next year or two is going to be
Speaker 5: more attractive than what it was in the past five years. Now,
Speaker 5: this is specifically about credit, not necessarily about equity. I
Speaker 5: think actually credit probably outperforms equity in the next three
Speaker 5: to four years, and that's just not been true over
Speaker 5: the last you know, fifteen years of easy money. So
Speaker 5: I think when we look at our portfolio, the higher
Speaker 5: cost of credit because of the higher cost of credit. Yes,
Speaker 5: the lower cost of credit since the global financial crisis
Speaker 5: has really inflated a lot of asset bubbles, including in
Speaker 5: private equity, technology, real estate. Obviously, as you see rates
Speaker 5: rise and stay higher for longer and even persistently longer,
Speaker 5: like in multiples of years, potentially you should see a
Speaker 5: deflation of those same asset bubbles. And that creates an
Speaker 5: opportunity for I think, well healed credit investors that structure
Speaker 5: debt appropriately, that invest conservatively, find less cyclical businesses or
Speaker 5: even countercyclical businesses, And with the banks stepping away and
Speaker 5: the regulator stepping in, it's creating an opportunity for private investory.
Speaker 2: Is it just in banking where those asset bubbles will burst?
Speaker 2: I mean, in many ways we've already had the crypto
Speaker 2: bubble burst. We're seeing it in regional banks. Is there
Speaker 2: real estate we're talking about? Is there something else? Potentially?
Speaker 5: I think we're focused on the banking bubble. We're focused
Speaker 5: on the asset classes that are rate sensitive and therefore
Speaker 5: have benefited from that environment over the last fifteen years. Yeah,
Speaker 5: Obviously globally there are going to be other sector specific,
Speaker 5: commodity specific bubbles, possibly bursting for different reasons, but from
Speaker 5: a rate perspective, it's really a banking issue.
Speaker 2: You guys recently launched a new fund, right, a private
Speaker 2: credit fund, about ten billion dollars. How are you putting
Speaker 2: that to work? How quickly are you putting that to work?
Speaker 6: Well?
Speaker 2: As you said, those who have dry powder, sounds like
Speaker 2: you guys have a fairminat truck.
Speaker 5: We do have dry powder in private credit. It's some
Speaker 5: of the best environments that we've seen today versus in
Speaker 5: the last five years.
Speaker 2: So now the golden age. It's so funny because last
Speaker 2: year people are like, it's the golden era of private credit.
Speaker 2: I'm hearing it this year.
Speaker 5: It was possibly a little early to call it last year,
Speaker 5: but this year, you're generally speaking, first lean privately negotiated
Speaker 5: loans to companies that have a really large equity investment
Speaker 5: from a well healed private equity firm. They're yielding eleven
Speaker 5: to thirteen percent, and you know, appropriately capitalized and cash
Speaker 5: flowing even with the high base rates out there. So
Speaker 5: given that type of return profile, that type of support
Speaker 5: from an equity perspective, it is I wouldn't say necessarily
Speaker 5: the golden age, but it's far better today than it
Speaker 5: was three years ago or two years ago.
Speaker 2: Even And that continues for a while because we still
Speaker 2: haven't felt the long runway or the runway of the
Speaker 2: FED move.
Speaker 5: I think it does continue for a while for a
Speaker 5: few reasons. One, I think the banks have taken a
Speaker 5: step back just given the well, you know, the well.
Speaker 2: Public you see it directly, right, thanks, right, Oh, of.
Speaker 5: Course I think that. I think the only thing saving
Speaker 5: the publicly traded bank loan market from really moving step
Speaker 5: changes down is that there hasn't been a lot of
Speaker 5: new issues. LBO deal volume is down, so the banks
Speaker 5: are kind of not needing to put out capital in
Speaker 5: support of private equity activity, and that's creating a balance
Speaker 5: in the market. That's that has resulted in prices of
Speaker 5: broadly syndicated loans staying near par. But I think if
Speaker 5: there was a sudden need for capital, the banks would
Speaker 5: have a tough time placing it, and as a result,
Speaker 5: the direct lending environment, the direct lending competitive set is
Speaker 5: more actively engaging with private equity sponsors on providing them very,
Speaker 5: very sizable solutions.
Speaker 2: I just said, you've got this new fund ten billion.
Speaker 2: It's a lot. Is it the possibility if it's so
Speaker 2: opportunistic that you guys could do another fund or because
Speaker 2: there's so much out there?
Speaker 5: Yeah, I mean, based on what we're seeing in the market,
Speaker 5: we think we could deploy that capital in a very
Speaker 5: responsible way over about a two to three year period.
Speaker 5: Three So beyond that, it's hard to know. My crystal
Speaker 5: ball is it's decent, but it's not.
Speaker 2: Like, let me just put this to work.
Speaker 5: Hey, yeah, I'll focus on this, and I think it's
Speaker 5: going to be a great vintage.
Speaker 2: But it's all going into finance banks.
Speaker 5: Specifically, it's all going into financing, mainly leverage, buyout, takeovers
Speaker 5: of businesses, really stepping in where the banks are stepping away.
Speaker 2: What and just twenty seconds twenty five? Is it certain
Speaker 2: industries or it's a cross section.
Speaker 5: It's sector agnostic, but there are certain industries that just
Speaker 5: underwrite better using our very conservative underwriting methodologies. Things that
Speaker 5: are less cyclical, less commodity sensitive and not retail sensitive.
Speaker 5: So we like life sciences, we like healthcare, we like
Speaker 5: certain types of aerospace and defense businesses, industrials, consumer, nondiscretionary products.
Speaker 5: And you're busy, very busy, looking at a lot of
Speaker 5: different types of deals. And it's an exciting time for
Speaker 5: credit right now.
Speaker 2: Interesting. I'm so glad we could get some time.
Speaker 5: Thank you, Thank you so much. Good to chat with you.
Speaker 2: Same here Arman Panosi, and he is head of Performing
Speaker 2: Credit portfolio manager at oak Tree Capital Investments.
Speaker 1: Here at Milkin, you're listening to the Bloomberg Business Week podcast.
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Speaker 2: And we have a great guest with us Ida, Global
Speaker 2: head of City Private Banks. She's a member of the
Speaker 2: Global Wealth Management Leadership Team. There, so good to be
Speaker 2: here with you again. You were saying it was your
Speaker 2: seventh year at Milcoine.
Speaker 3: Yes, it is.
Speaker 2: How I don't know do you go from year to year?
Speaker 2: And the pandemic was certainly an interesting time, and I
Speaker 2: don't know, how do you kind of compare it to
Speaker 2: last year in terms of some of the conversations, the
Speaker 2: worries we're still talking recession. I don't know, give me
Speaker 2: an idea.
Speaker 6: Well, you know, it's interesting because the energy level here
Speaker 6: is incredibly high. We've had a huge amount of people
Speaker 6: here at the conferences here.
Speaker 2: It seems a lot more attendance like the pandemic.
Speaker 6: Finally, yeah, exactly, finally back to sort of bau pre
Speaker 6: pre pandemic levels of attendance. And it's really wonderful because
Speaker 6: we are talking about so many topics that are on
Speaker 6: everybody's minds, you know, everything from geopolitical risks, how to invest,
Speaker 6: how to navigate the capital markets, is there going to
Speaker 6: be a recession, all the way to topics like environment
Speaker 6: and healthcare and.
Speaker 2: The cross sectionuality.
Speaker 6: I love the cross section and the intersectionality of all
Speaker 6: the different topics as well, like very important.
Speaker 2: Well, it is funny too that we're you know, I
Speaker 2: want well, we're going to talk for session and I
Speaker 2: want to get your outlook the concern again about regional banks,
Speaker 2: because it felt like things had calmed down yesterday, and
Speaker 2: then we looked at things like Western Alliance pack West
Speaker 2: today and again there seems to be nervousness back in
Speaker 2: the market, and I do feel like the tone changed
Speaker 2: a little bit from yesterday here at Milkin. How do
Speaker 2: you see it? How do you factor it in? And
Speaker 2: also the concerns are about commercial real estate, like that's
Speaker 2: kind of the next leg.
Speaker 6: Yeah, well, look, I think we need to let this
Speaker 6: situation play out over the next few days. I mean,
Speaker 6: we're super confident. I think it's just the next few days.
Speaker 2: Well let's see, let's see.
Speaker 6: But we're super confident, and that doesn't change our conviction
Speaker 6: in our banking system, the health of our business. We
Speaker 6: are one of the most global banks in the world.
Speaker 6: We're a globally systemically important bank. We have diverse sources
Speaker 6: of revenues from different businesses around the world, and a
Speaker 6: very very strong balance sheet. So from our perspective, you know,
Speaker 6: we're we're obviously still in very good shape and to
Speaker 6: make sure that we're helping our clients and advising customers.
Speaker 2: It's good to be a big bank right now. I
Speaker 2: say that with all respect. When you look around the
Speaker 2: world though, us versus let's say, outside the United States,
Speaker 2: and I hate to just do those big buckets Europe Asia,
Speaker 2: tell us what you're seeing.
Speaker 6: Well, you know, it's interesting because when you look at
Speaker 6: the emerging markets, they're trading at about a forty percent
Speaker 6: discount to the US. And you think about where the
Speaker 6: US has come over the last decade. It's been a
Speaker 6: ball market, as you know, absolutely, and so the question becomes,
Speaker 6: how do you achieve the growth in the future. Is
Speaker 6: it going to be from the US or is it
Speaker 6: going to be emerging markets? And we think it's a
Speaker 6: balance of making sure you have a global diversified portfolio,
Speaker 6: especially with some of the emerging market opportunities.
Speaker 2: Yeah, and it's funny because I do feel like there's
Speaker 2: some momentum around emerging markets. Again, like for a long time,
Speaker 2: everybody had kind of forgotten it, but it does seem
Speaker 2: is it some of it maybe dollar weakness to some
Speaker 2: extent or what is it?
Speaker 6: Part of it is dollar weakness, and the other part
Speaker 6: is the split and the ongoing bifurcation of the United
Speaker 6: States and China, and that G two bifurcation is creating
Speaker 6: a lot of opportunities for investors around the world. Right
Speaker 6: because as China is growing and continue to grow and
Speaker 6: doing everything they're doing on the digitization and the clean
Speaker 6: energy side, and as the US continues to sort of
Speaker 6: try to be more self sufficient on many of the
Speaker 6: different areas as well, different partners around the world are
Speaker 6: going to benefit from this new global supply chain that's
Speaker 6: going to happen right now.
Speaker 2: That's a positive, you see.
Speaker 6: It is a positive because think about it, Mexico is
Speaker 6: going to benefit from the US, and in China, Southeast Asia,
Speaker 6: I think Thailand, Vietnam, Malaysia, some of those countries are
Speaker 6: going to benefit from the difference in trading patterns, as
Speaker 6: well as India. So you know, you're going to see
Speaker 6: some shifts in the global supply chain, and I think
Speaker 6: that that's going to present some interesting investment opportunities as well.
Speaker 2: I love that you went there because I feel like
Speaker 2: everybody's like globalization it's dead.
Speaker 6: It's going to be different. No, it's going to be different.
Speaker 6: Globalization isn't dead. It's just going to look different. So
Speaker 6: in terms of how investors play it, it's going to
Speaker 6: be different.
Speaker 2: It is going to be different.
Speaker 6: I think it's really important for investors to consider having
Speaker 6: a very global portfolio because those that have been US
Speaker 6: dollar centric and US centric may not be able to
Speaker 6: achieve the same level of returns going forward the next
Speaker 6: ten years. If you don't have those global exposures that
Speaker 6: I mentioned.
Speaker 2: Well, you and I don't know how much you can
Speaker 2: drill down. But when you do, look at Asia, because
Speaker 2: you mentioned you know some of the Southeast nations to this, China,
Speaker 2: there's India. How are you guys thinking about that? Investors
Speaker 2: should play it?
Speaker 6: Well, it's interesting because in China, when you think about
Speaker 6: it now, they just announced their first quarter GDP numbers
Speaker 6: four and a half percent, beating the analyst estimates of
Speaker 6: four percent and estimated to achieve almost a six and
Speaker 6: a half percent GDP growth this year. So the momentum
Speaker 6: in the reopening has been extraordinarily strong. Not to mention
Speaker 6: that travel within the region is already back to pre
Speaker 6: COVID levels, that the consumption story looks very healthy with
Speaker 6: the middle class which is several hundred million people, so
Speaker 6: that consumption story.
Speaker 2: So play Chinese names or play names that are going
Speaker 2: to benefit from that Chinese growth in both and that's
Speaker 2: how we're doing it for our clients. Where don't you
Speaker 2: want to be right now.
Speaker 3: Are you don't want to be?
Speaker 6: You know, it's interesting because we're you know, we're fiduciaries
Speaker 6: for our clients, right, so at the end of the day,
Speaker 6: we're risk managers. Right, We're trying to make sure that
Speaker 6: we construct really global, really diverse portfolio for clients. And
Speaker 6: you know, right now, our view is that the client
Speaker 6: should be forty forty twenty, so forty percent in equities
Speaker 6: and in high quality, divid in paying stocks and specific
Speaker 6: industries that we like.
Speaker 2: I was just talking about that on TV. We were
Speaker 2: talking about strategies, and more and more investment managers are
Speaker 2: looking at what divid in paying stocks, but.
Speaker 6: Divid in paying stocks, also looking at that fixed in
Speaker 6: commonit because the fixed income yields are still incredibly high
Speaker 6: and very attractive, particularly on the enhanced liquidity municipal bonds,
Speaker 6: treasury side. And then the last piece is really looking
Speaker 6: at opportunities in direct investing private equity hedge funds, which
Speaker 6: we think is an enormous opportunity in markets like this
Speaker 6: right where investors are willing to pay that.
Speaker 2: A liquidity premium. I know, what do you make as
Speaker 2: someone who looks at so many different types of investments
Speaker 2: that are out there that increasingly time I come to Milkin,
Speaker 2: it's the private markets, private credit, private corporates. It just
Speaker 2: continues to grow, but useful for investors.
Speaker 6: It is useful for investors, and we are also seeing
Speaker 6: that trend, particularly with our largest family office clients that
Speaker 6: behave like global institutions.
Speaker 2: They are very.
Speaker 6: Interested in looking at direct deals and direct investment opportunities
Speaker 6: as well as a compliment to the overall portfolio, mainly
Speaker 6: because it's a different return profile, and the return profile
Speaker 6: can be very different from your typical egrets in bonds exposure,
Speaker 6: and you have some interesting and compelling industry and geographic
Speaker 6: opportunities that could be very additive overall.
Speaker 2: All Right, So one thing I do want to ask
Speaker 2: you is the FED policy and FED meeting. Yes, what
Speaker 2: are you thinking around that? And what do you think
Speaker 2: is what is the because I feel like we go
Speaker 2: back and forth, and you know, I keep saying, everybody,
Speaker 2: if it's going to do, what's going to do when
Speaker 2: it means and they're going to look at what's in
Speaker 2: front of them, what's the constructive conversation around FED policy,
Speaker 2: FED decisions and really FED commentary?
Speaker 6: So the FED last year increased rates at the highest
Speaker 6: velocity we've seen in a very long period of time.
Speaker 6: Seven rate heights last year to already this year, and
Speaker 6: another one we expect tomorrow at twenty five basis points.
Speaker 6: But then we think that it's going to teeter off.
Speaker 6: So I think we're going to reach peak rates after
Speaker 6: this next hike, so this next meeting, tomorrow, next meeting,
Speaker 6: and then we think it is going to stay relatively
Speaker 6: flatish and then eventually going to have to come down,
Speaker 6: right as we see some of the unemployment numbers potentially
Speaker 6: going up with the layoffs that are hitting the system
Speaker 6: and the like your research team.
Speaker 2: The strategy note I was looking at last night, it
Speaker 2: says what happens after the FED reaches peak rates to
Speaker 2: play off of that? Not too soon to think about it.
Speaker 6: No, it's not too soon terms of strategy, And no,
Speaker 6: it's not too soon at all. We've been making a
Speaker 6: lot of pivots in our client's portfolios already. We anticipate
Speaker 6: a mild recession in the next quarter or two, okay,
Speaker 6: And you know, we know that typically markets don't bottom
Speaker 6: until the midpoint of a recession, so we think there's
Speaker 6: going to be still some downward pressure on the equity side,
Speaker 6: some volatility in the nearer term. So we've been pivoting
Speaker 6: a lot of the portfolios, as I said, fixed income,
Speaker 6: looking at dividend paying stocks in some unstoppable trend areas
Speaker 6: that we like, which include healthcare, clean energy, as well
Speaker 6: as digitization and deep tech cyber.
Speaker 2: Is that because of AI? Of course deep tech aias
Speaker 2: seriously it is.
Speaker 6: It is because of AI, but it's also because of
Speaker 6: cyber because cyber is probably the number one thing on
Speaker 6: most CEO's minds, and that spending is going to only
Speaker 6: continue there. And then you've also got to think about
Speaker 6: the implications of what fuels that industry and those are semiconductors.
Speaker 2: Really quickly twenty seconds clean tech. Yeah, that is another
Speaker 2: theme that I keep feeling keeps popping up. Is it
Speaker 2: because of some of the government money and the government
Speaker 2: programs or what is it specific?
Speaker 6: You know, it's a combination. It's a combination of this
Speaker 6: is what where we're going to evolve in the future.
Speaker 6: It's the right thing to do for our world, for
Speaker 6: the for the environment. It's going there. So we're going
Speaker 6: to move and transition from fossil fuels to clean energy
Speaker 6: and cleaner sources of energy. So we see a huge
Speaker 6: opportunity in solar in New clear.
Speaker 2: More so than twelve months ago. No similar more so,
Speaker 2: but just we will.
Speaker 6: This evolution is happening and it's going to be an
Speaker 6: unstoppable trend in the next decade.
Speaker 2: As the folks who live in California they see it first.
Speaker 2: Oh absolutely absolutely, thank you so much, so lovely to
Speaker 2: be with you, so great to see you, guys, really
Speaker 2: like you. Idle the globalhead of City Private Bank, member
Speaker 2: of the global wealth Management leadership team over at the company.
Speaker 1: This is Bloomberg Business Wait inside from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine, plus
Speaker 1: global business, finance and tech news. The Bloomberg Business Week
Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: I gotta say. One month ago, on a Bloomberg podcast,
Speaker 2: our next guest noted that aggressive rate hikes from the
Speaker 2: Fed and the ECP we're creating tighter financial conditions and
Speaker 2: more opportunities for distressed investors. This is from Victor Kosla,
Speaker 2: he's chief investment officer, founder of Strategic Value Partners. Roughly
Speaker 2: seventeen billion in assets under management. Welcome, welcome, so nice
Speaker 2: to have you here, Thanks for having me. I have
Speaker 2: to say that Chanai Basik, who you knew well here
Speaker 2: at Bloomberg, we ran into you yesterday and I think
Speaker 2: she said you're a distressed investor, and you said, something
Speaker 2: else has an opportunistic.
Speaker 4: Yes, I said, I bridled that description. Distress.
Speaker 2: Your website says distressed.
Speaker 7: No.
Speaker 2: So tell us about this environment, because we're on a
Speaker 2: day Victor, as you know, where once again the markets
Speaker 2: are rattled, the equity market specifically, I should say, regional
Speaker 2: banks plummeting. We saw some volume behind it. How do
Speaker 2: you kind of look at this scenario, this environment, and
Speaker 2: what's going on and does it potentially get worse? First
Speaker 2: of all, let's start there.
Speaker 4: Since the FED started to hYP rates, since the Ukraine
Speaker 4: War about here or Shogo, Carol said, the markets have
Speaker 4: been grinding grinding down, and the FED is still raising, right,
Speaker 4: the ECB is a year behind the Fed. Possibly inflation
Speaker 4: is just speaking out there. So I think to our
Speaker 4: point of view, as we kind of look forward right now,
Speaker 4: we think we think this is just the early early
Speaker 4: innings of kind of a credit cycle. Now are we going.
Speaker 2: To Is this a a bad credit cycle? Tight credit cycle,
Speaker 2: a bad credit cycle? Yeah?
Speaker 4: Right. I think as we as we look at the
Speaker 4: world today, is you know, we can all have a debate.
Speaker 4: Is it a soft landing? Is it a recession? We
Speaker 4: at SVP we believe it's a recession. But I'll tell
Speaker 4: you what put that on the side for a moment.
Speaker 4: What thirty years I've been investing in opportunistic credit thirty years,
Speaker 4: I've never seen a cycle where the FED was the
Speaker 4: headwind every cycle we've had over the last thirty years.
Speaker 4: You hit a bad cycle, the FED starts to lower rates,
Speaker 4: the easy to ease. It, Yes, to ease because the
Speaker 4: ECB is even more dubbish, right, it starts to and
Speaker 4: it's lowering its increasing rates at the same time. So
Speaker 4: I think, to our point of view, these higher rates,
Speaker 4: these slowing economies, regardless of what happens, soft landing or
Speaker 4: a recession, they are creating an environment where people are
Speaker 4: starting to have problems servicing their debt much higher rates today,
Speaker 4: and those problems, we think just continue to now cascade.
Speaker 4: Are you and please I'm not being I don't think
Speaker 4: I'm being overly glum or so on.
Speaker 7: Yeah, I think most people.
Speaker 4: Would say, look, the next five years, even your classic
Speaker 4: analyst would say, next five years slower economy, economic growth
Speaker 4: than the last five Yeah.
Speaker 2: Economic I heard people talking about one percent Chris ailment
Speaker 2: over your Custer.
Speaker 4: Yeah, so you get slow economic growth, you get much
Speaker 4: higher rates. And oh boy, and by the way, all
Speaker 4: this stuff with you know, First Republic or Silicon Valley
Speaker 4: Bank in the in the overall scheme of things on
Speaker 4: the it's just a little bit of noise.
Speaker 2: Right, yeah, right, But does it get louder though with
Speaker 2: something else like office properties offices?
Speaker 4: Office is not just going to get louder. It's going
Speaker 4: to broom and you you'll hear that sound.
Speaker 2: Yeah, look at that. I even topped your properties in
Speaker 2: your view.
Speaker 4: You know, if you let's just let's just talk about office. Yeah,
Speaker 4: if you look at if you look at office today
Speaker 4: new York City, center of it, thirty five percent of
Speaker 4: all mortgage debt on offices in New York City, twenty
Speaker 4: percent vacancies. You want to rent space in office today,
Speaker 4: effective rents are thirty net. Effective rents after TI after
Speaker 4: capex are thirty percent lower. You put that into your model.
Speaker 4: You you're talking about a fifty percent decline in office values.
Speaker 2: So so you know, fifty percent traumatic, that's a boom.
Speaker 4: Yeah, and so yeah, this won't be some soft noise.
Speaker 2: So what does this mean for you? Guys? What do
Speaker 2: you do? You got from what I understand, Bloomberg did
Speaker 2: a story about a one and a half billion dollar fundraise,
Speaker 2: right for opportunities, maybe a target of close to four billion.
Speaker 2: Is that the case that you're put into Now?
Speaker 4: I can't talk about fundraising.
Speaker 2: You're going to forgive me, Okay, that's fair, But tell
Speaker 2: me in terms of the specific opportunities that are coming
Speaker 2: before you that you want to commit capital to.
Speaker 4: So interesting, So like take like a lot of twenty
Speaker 4: twenty two. As this opportunity changed, we slowed down, by
Speaker 4: the way, cal can I tell you something that people
Speaker 4: always love to talk about, Hey, what a great opportunity.
Speaker 4: The first six months of twenty twenty two, Our focus
Speaker 4: wasn't like, what a great opportunity developing? The first half
Speaker 4: of twenty two was trouble of ian right, it was, yes,
Speaker 4: So because you know, we all have portfolios, yep, and
Speaker 4: you kind of look at them now through through all
Speaker 4: these eyes of the coming the coming issues and the
Speaker 4: coming downturn and credit and you make sure that what
Speaker 4: you have is solid. Right, That's the first thing we
Speaker 4: did as an investor. And then in the second half
Speaker 4: of twenty twenty two, as we were looking around at opportunities, Look.
Speaker 2: I only have we only have about twenty seconds left. Okay,
Speaker 2: but well, so let me tell you it.
Speaker 4: Can I just finish on one?
Speaker 2: Yes?
Speaker 7: Please?
Speaker 4: Right? This is not this is early stage. We invested
Speaker 4: a billion dollars or so in the last nine months
Speaker 4: of twenty twenty two, and we've invested a billion dollars
Speaker 4: in the first four months of twenty twenty three. Normally
Speaker 4: we would be investing two billion in those four months, right,
Speaker 4: So it started.
Speaker 2: So stand by its Victor Krosla, Thank you so much.
Speaker 2: Come back. I'd love to continue this.
Speaker 1: Brom journal.
Speaker 2: How about you let me drive?
Speaker 4: Oh no, no, no, no, who's going to honey?
Speaker 1: Please?
Speaker 7: How do the riding gravels?
Speaker 5: Let's mate, I want to drive.
Speaker 1: It's a good question time. This is the drive to
Speaker 1: the globe.
Speaker 2: Dot com to me, I think we'll buy around.
Speaker 1: On Bloomberg Radio.
Speaker 2: All right, everybody, we've got just under eighteen minutes left
Speaker 2: in today's trading session. It is time for the drive
Speaker 2: to the clothes. Carol Masser live at the Milk and
Speaker 2: Institute Global Conference. We've just met back in our studio,
Speaker 2: but so delighted to have with us on this Tuesday.
Speaker 2: Chris Alman, chief investment officer at cawsts some three hundred
Speaker 2: billion in assets under management. I think more than that
Speaker 2: California State Teachers Retirement System. You know, it's the largest
Speaker 2: teachers retirement system, second largest public pension fund of the nation.
Speaker 2: Chris here at Milk and not too much pressure that
Speaker 2: you have to manage all that.
Speaker 7: And we're sailing to the clothes not dry. We're sailing.
Speaker 2: Chris and I. Before we got started, we're like talking sailing.
Speaker 2: And then we were also looking at what pack Western
Speaker 2: Western Alliance are doing. I mean, I got to start
Speaker 2: there the regionals. How do you factor that in? Is
Speaker 2: that opportunity for you when you see some of these
Speaker 2: names getting beaten up or do you say too soon, too.
Speaker 7: Early distress sellers. I'm more interested in the assets that
Speaker 7: they have to sell to raise capital. We spent a
Speaker 7: lot of time this weekend talking to different companies that
Speaker 7: we're going to bid on assets.
Speaker 2: So for First Republic, for First republic might be sources.
Speaker 7: On a name, come on, Chris, but we didn't win
Speaker 7: the bid, so it's safe to talk about.
Speaker 4: But the.
Speaker 2: Because the assets, the underlying assets were good.
Speaker 7: Parts of them were good. At anytime that you have
Speaker 7: a distressed seller, you know, you know if somebody's selling
Speaker 7: than you want to buy. If they're buying, you want
Speaker 7: to sell. Field War and buffett Atage. So I'm concerned
Speaker 7: that the regional banks are getting hit one after the other.
Speaker 7: I mean, these two banks I've heard names of, but
Speaker 7: you and I were discussing. I didn't even know where
Speaker 7: they were located. I'm surprised that we're having more contagion.
Speaker 7: We just had City Corps CEO here at Milcoinne Yesterday's
Speaker 7: say and JP Morgan's a representatives say everything is fine.
Speaker 7: That was it, First Republican. We should be done now
Speaker 7: we have other names. The regional banks are under pressure,
Speaker 7: but it's more almost a flight of fear and seeing
Speaker 7: capital flow out.
Speaker 2: So tell me what you're doing in this environment. You
Speaker 2: got a lot of money to put to work here.
Speaker 7: We are very neutral. We have been defensive. We have
Speaker 7: been anticipating a tough economy for almost for nine months,
Speaker 7: and we've been wrong because it's been muddling along. And
Speaker 7: I really believe so many people are expecting a recession
Speaker 7: to come up that either it's going to be a
Speaker 7: self fulfilling prophecy in the most anticipated recession in history,
Speaker 7: or maybe we will just muddle along. It's hard to
Speaker 7: say that the Fed's going to pull off a soft landing,
Speaker 7: but the FED will probably stop tomorrow after tomorrow, or
Speaker 7: surely they're not going to pivot. Yeah, but we may
Speaker 7: have almost the worse than a recession, just a slog
Speaker 7: for up to two years, no growth, you know, one
Speaker 7: to below around one percent growth. Yeah, it's good unemployment,
Speaker 7: so good employment, strong market, but an equity market that's
Speaker 7: going sideways.
Speaker 2: So okay, So what are you thinking about? Like I
Speaker 2: was reading some stuff about you specifically, and while VC
Speaker 2: is not something that you guys a big exposure, you've
Speaker 2: been looking at some stuff though. Is that fair?
Speaker 7: We have We've always been trying to We have very
Speaker 7: strong disclosure laws in California that make private equity and
Speaker 7: then specifically venture capital or real challenge. Yeah, yep.
Speaker 2: Do you wish you could to do more?
Speaker 7: Oh? Yeah, without a question. Silicon Valley is right in
Speaker 7: our backyard. We absolutely wish to be a major player.
Speaker 7: They would rather take money from sovereign wealth funds that
Speaker 7: don't ask any questions than from a California public fund
Speaker 7: that asks a lot of questions and wants to know
Speaker 7: what it owns and how they invest in, what their
Speaker 7: fees are, and want to negotiate fees. Those other ones
Speaker 7: are much more happy to take the money, So it's
Speaker 7: for us we're interested in private credit. I have stated
Speaker 7: that we're very worried about real estate, particularly the office
Speaker 7: market Class B and Class C. Thankfully we have a
Speaker 7: wonderful office portfolio with long tenants and good quality seeing.
Speaker 2: No stress, no problems, no worries.
Speaker 7: Well, but the price is just simply because the FED
Speaker 7: one from zero to five high out probably tomorrow in
Speaker 7: nine months, tenth straight rays unheard of since the seventies.
Speaker 7: That's got to cause damage more than just Signature Bank
Speaker 7: and Silicon and First or Public.
Speaker 2: So well, so let me ask you about real estate.
Speaker 2: You talked with the Ft recently getting ready to write
Speaker 2: down the value of assets in your real estate portfolio.
Speaker 2: Of this, I guess it's said fifty two billion dollars
Speaker 2: real estate portfolio. Is that the case?
Speaker 7: It's while we sat down with our real estate consultants
Speaker 7: and just simply because the FED has moved so quickly,
Speaker 7: cap rates have to go up, which means real estate
Speaker 7: values have to come down, and so we were just
Speaker 7: already anticipating. I have a very educated board that asks
Speaker 7: really good, tough questions, and that was their question, what
Speaker 7: happens to our office portfolio. Nobody's fully back in the office.
Speaker 7: How do you figure out values? They're no transactions. The
Speaker 7: conclusion was we would expect right downs in the office portfolio.
Speaker 2: Write downs, but not defaults.
Speaker 7: You're going to see defaults, particularly in the Class C
Speaker 7: and Class BE property, but you're not there, and we
Speaker 7: would be probably interested in being a buyer if you
Speaker 7: could upgrade some of those. But I think that area
Speaker 7: is going to be distressed for a long time period.
Speaker 7: I'm and you're right. I'm more concerned. We're fine, we
Speaker 7: have Class A and fully leased. But what I'm looking
Speaker 7: at is who owns the paper behind those defaults. Will
Speaker 7: we go back to pretend and extend environment like we
Speaker 7: used to see with the banking regulators, because you know,
Speaker 7: they want to solve what we're having. This banking crisis.
Speaker 2: Chris, I do want to ask you about bonds too,
Speaker 2: because from what I understand, you guys have been moving
Speaker 2: into it, increasing your bond investments.
Speaker 7: What specifically, Hey, you know, for the last thirty years
Speaker 7: that I've been as CIO, bonds have been decreasing in
Speaker 7: the portfolios, Shields have been coming down, they bottomed in bounced,
Speaker 7: and so for the first time, fixed income has a return,
Speaker 7: cash has a return. So we're going to slightly start
Speaker 7: increasing or fixed income allegation.
Speaker 2: Short duration or we will extend.
Speaker 7: Out the curve because even when it's inverted, that's probably
Speaker 7: a good time to buy some duration, to buy some
Speaker 7: longer data. We like private credit.
Speaker 2: Can I just ask you who doesn't like private Oh?
Speaker 7: Good lord, that's the thing that worres me. Everybody wants
Speaker 7: to go in.
Speaker 2: Thank you for saying that, because how I sometimes feel
Speaker 2: like three years from now will be at milk and
Speaker 2: being like we all missed it in private correctly, No,
Speaker 2: but I do wonder there's.
Speaker 7: Too much money flowing in and it's all about credit
Speaker 7: and analysis. But it's simply because the banks completely stepped
Speaker 7: out due to the change in regulations.
Speaker 2: So you had is there enough oversize private credit.
Speaker 7: I think you have sophisticated investors who are doing it.
Speaker 7: There will be some default, especially if we do have
Speaker 7: a recession, then some of those companies some of those covenants,
Speaker 7: but a lot of it is collateralized short term loans,
Speaker 7: variable rate loans, so they float, which gives you an
Speaker 7: opportunity to get a decent yield and return on your capital.
Speaker 7: The problem for me is you have to then turn
Speaker 7: around and redeploy the capitol. A lot of people love that,
Speaker 7: but for me, I need to make a long return
Speaker 7: over thirty years, so rolling money constantly is a challenge.
Speaker 2: I just got twenty seconds. You got an equity thing,
Speaker 2: any in the equity area that you like.
Speaker 7: I am still very cautious on equities. I'm shocked at
Speaker 7: Europe and you know, but the US market from milk
Speaker 7: in a year ago, the US market is basically flat,
Speaker 7: and I think, unfortunately we're going to.
Speaker 2: See them going forward. It's an interesting time. Another one, right,
Speaker 2: always good for the book over the trip when we're
Speaker 2: sailing or something.
Speaker 3: I don't know.
Speaker 2: Chris alman over At Calist's chief investment officer, Chris, thank
Speaker 2: you so much, pleasure en closure.
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