1 00:00:10,720 --> 00:00:14,000 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:14,120 --> 00:00:15,480 Speaker 1: I'm Tracy Alloway. 3 00:00:15,200 --> 00:00:15,840 Speaker 2: And I'm Joe. 4 00:00:15,840 --> 00:00:17,200 Speaker 3: Why isn't thal Joe. 5 00:00:17,239 --> 00:00:20,279 Speaker 1: It's a new year, Happy New Year, Happy New Year. 6 00:00:20,840 --> 00:00:23,640 Speaker 1: This is our first podcast recording of the year, and 7 00:00:23,680 --> 00:00:25,720 Speaker 1: I think it's fair to say that we are going 8 00:00:25,800 --> 00:00:29,400 Speaker 1: into a different environment in terms of sentiment than we 9 00:00:29,400 --> 00:00:33,480 Speaker 1: were going into twenty twenty three. So this time last year, 10 00:00:33,840 --> 00:00:37,920 Speaker 1: everything was very pessimistic. Lots of people were expecting recession. 11 00:00:38,440 --> 00:00:41,440 Speaker 1: The hills were alive with the sounds of inverted yield 12 00:00:41,479 --> 00:00:44,520 Speaker 1: curves and things like that. This year feels a little 13 00:00:44,520 --> 00:00:47,040 Speaker 1: bit better. Stalks are up, lots of talk about a 14 00:00:47,080 --> 00:00:50,239 Speaker 1: soft landing. Of course, the irony is that if there 15 00:00:50,280 --> 00:00:53,040 Speaker 1: is going to be a recession, and you know one 16 00:00:53,080 --> 00:00:55,440 Speaker 1: hundred percent chance there will be a recession in the future, 17 00:00:55,720 --> 00:00:58,400 Speaker 1: it's closer than ever, and yet we feel a lot 18 00:00:58,440 --> 00:00:59,160 Speaker 1: better about it. 19 00:00:59,440 --> 00:01:00,000 Speaker 3: Yeah, it is. 20 00:01:00,000 --> 00:01:03,560 Speaker 2: It's funny the optimism that we really felt in December 21 00:01:03,560 --> 00:01:06,240 Speaker 2: about soft landings and bull markets and raids coming down 22 00:01:06,280 --> 00:01:12,000 Speaker 2: in normalization. Interestingly enough, we're recording this January third so far, 23 00:01:12,240 --> 00:01:14,440 Speaker 2: I guess this is we're looking at. We've had a 24 00:01:14,480 --> 00:01:17,360 Speaker 2: few down days but you know whatever, a few days 25 00:01:17,360 --> 00:01:18,679 Speaker 2: here there, it doesn't make a big difference. 26 00:01:18,959 --> 00:01:22,600 Speaker 1: I call it profit taking Joe profit But anyway, you know, 27 00:01:22,959 --> 00:01:25,880 Speaker 1: New Year, New Themes to discuss. 28 00:01:25,319 --> 00:01:27,600 Speaker 3: Taking profits, I wish. 29 00:01:28,280 --> 00:01:31,160 Speaker 1: But one of the things that's still with us is 30 00:01:31,280 --> 00:01:35,360 Speaker 1: this concern about whether or not the economy can escape 31 00:01:35,400 --> 00:01:38,720 Speaker 1: the full force of these very dramatic interest rate hikes 32 00:01:38,880 --> 00:01:41,520 Speaker 1: that we've seen over the past couple of years, whether 33 00:01:41,600 --> 00:01:44,560 Speaker 1: or not there's still a shoe to drop. 34 00:01:44,680 --> 00:01:47,480 Speaker 2: Basically, yeah, you know, it gets to the lags debate. 35 00:01:47,600 --> 00:01:50,120 Speaker 2: We talked about it with Anna Wong at the end 36 00:01:50,160 --> 00:01:54,400 Speaker 2: of twenty twenty three. The market expects rate cuts, obviously, 37 00:01:54,560 --> 00:01:57,600 Speaker 2: some people think as soon as March. Unclear when or 38 00:01:57,680 --> 00:02:00,680 Speaker 2: if that will be. That theoretically is taking off some 39 00:02:00,720 --> 00:02:04,040 Speaker 2: of the pressure from markets, particularly credit markets. But yeah, 40 00:02:04,040 --> 00:02:06,760 Speaker 2: we had this really big rise in raids. Some people 41 00:02:06,840 --> 00:02:09,600 Speaker 2: think that the lagged effect still has yet to come, 42 00:02:09,880 --> 00:02:13,079 Speaker 2: and so sort of trying to understand what's changed from 43 00:02:13,120 --> 00:02:15,240 Speaker 2: when we were etserped to when we're at five percent, 44 00:02:15,600 --> 00:02:17,880 Speaker 2: I think is still an important conversation to. 45 00:02:17,840 --> 00:02:21,600 Speaker 1: Have, absolutely, and in my mind one of the big 46 00:02:21,639 --> 00:02:24,400 Speaker 1: areas of concerns, And it also goes to the idea 47 00:02:24,440 --> 00:02:27,480 Speaker 1: of what's changed over the past few years has to 48 00:02:27,480 --> 00:02:31,600 Speaker 1: be private credit. Ye. Right, We've seen this absolute swelling 49 00:02:32,200 --> 00:02:35,560 Speaker 1: of this particular asset class at a time when interest 50 00:02:35,639 --> 00:02:38,440 Speaker 1: rates have been going up, and there's still lots of 51 00:02:38,480 --> 00:02:41,959 Speaker 1: concern over whether or not this new source of funding 52 00:02:42,680 --> 00:02:46,840 Speaker 1: basically knows what it's doing right, Like are these managers, 53 00:02:46,880 --> 00:02:50,880 Speaker 1: are these investors like getting it right? But then the 54 00:02:50,960 --> 00:02:53,480 Speaker 1: other thing I keep thinking about, and we've sort of 55 00:02:53,680 --> 00:02:56,080 Speaker 1: talked a little bit about this, but this idea of 56 00:02:56,120 --> 00:03:00,160 Speaker 1: the macro impact of private credit. If you have a 57 00:03:00,200 --> 00:03:03,560 Speaker 1: body of money that is now one point three trillion 58 00:03:03,880 --> 00:03:07,560 Speaker 1: or one point six trillion outstanding, depending on which estimate 59 00:03:07,600 --> 00:03:11,680 Speaker 1: you're looking at, that is more or equivalent to the 60 00:03:11,720 --> 00:03:14,760 Speaker 1: size of the entire junk created corporate bond market. So 61 00:03:14,800 --> 00:03:18,280 Speaker 1: there's basically this like new pool of money in the 62 00:03:18,440 --> 00:03:21,560 Speaker 1: economic system at a time when interest rates are going 63 00:03:21,639 --> 00:03:24,680 Speaker 1: up and we're not really sure what impact it's having. 64 00:03:24,800 --> 00:03:27,200 Speaker 2: And I'll just add on to that. Part of the 65 00:03:27,360 --> 00:03:30,160 Speaker 2: interest obviously is Okay, what does it mean for this 66 00:03:30,240 --> 00:03:33,240 Speaker 2: cycle a higher rates, et cetera. But this acid class 67 00:03:33,400 --> 00:03:36,680 Speaker 2: that's exploded, it's not going to go away regardless. And 68 00:03:36,960 --> 00:03:40,600 Speaker 2: the expectation is that it's going to overtime continue to grow. 69 00:03:41,160 --> 00:03:43,080 Speaker 2: So I think there was just a lot of need 70 00:03:43,360 --> 00:03:47,000 Speaker 2: and interest, but I would say need to sort of understand, 71 00:03:47,120 --> 00:03:50,400 Speaker 2: as you say, the macro impacts from this space. I'm 72 00:03:50,400 --> 00:03:54,160 Speaker 2: also curious about the source of excess returns. We talked 73 00:03:54,160 --> 00:03:55,960 Speaker 2: about it a little bit, but it's always sort of 74 00:03:55,960 --> 00:03:58,400 Speaker 2: important when thinking about an asset classes, like, Okay, what 75 00:03:58,480 --> 00:04:02,600 Speaker 2: is it specifically that's being exploited here for above average returns? 76 00:04:02,640 --> 00:04:06,080 Speaker 2: How correlated uncorrelated is I think it's still worth trying 77 00:04:06,120 --> 00:04:09,520 Speaker 2: to untangle the impact and the role of this asset class. 78 00:04:09,600 --> 00:04:13,280 Speaker 1: Absolutely so. We've done one episode on this topic. Previously, 79 00:04:13,320 --> 00:04:15,800 Speaker 1: we spoke with Laura Holsen from New Mountain and she 80 00:04:15,920 --> 00:04:18,920 Speaker 1: basically gave us the elevator pitch for why this asset 81 00:04:18,920 --> 00:04:22,760 Speaker 1: class has been growing so dramatically in recent years. But 82 00:04:23,440 --> 00:04:25,719 Speaker 1: in this particular episode, we're going to dig a little 83 00:04:25,760 --> 00:04:28,920 Speaker 1: bit more into the macro impact of private credit, how 84 00:04:28,920 --> 00:04:32,960 Speaker 1: it competes with other types of funding, and per Joe's point, 85 00:04:33,360 --> 00:04:37,080 Speaker 1: where the source of those excess returns is actually coming from. 86 00:04:37,400 --> 00:04:39,880 Speaker 1: And I'm very pleased to say we have the perfect guest. 87 00:04:40,080 --> 00:04:42,279 Speaker 1: We're going to be speaking with Ben Emmons. He's a 88 00:04:42,320 --> 00:04:45,479 Speaker 1: senior portfolio manager at New Edge twelf. Some of you 89 00:04:45,560 --> 00:04:48,480 Speaker 1: might remember that we spoke to him last year about 90 00:04:48,600 --> 00:04:52,680 Speaker 1: the contraction in bank lending after the collapse of Silicon 91 00:04:52,800 --> 00:04:55,760 Speaker 1: Valley Bank and a few others. He's had a very 92 00:04:55,800 --> 00:04:59,520 Speaker 1: wide ranging career. He was at PIMCO for a long time. 93 00:05:00,240 --> 00:05:02,839 Speaker 1: A great person to give us an overview of how 94 00:05:03,000 --> 00:05:06,400 Speaker 1: private credit is interacting with the rest of the financial 95 00:05:06,440 --> 00:05:09,000 Speaker 1: system and the economy. So Ben, thank you so much 96 00:05:09,040 --> 00:05:10,279 Speaker 1: for coming back on all thoughts. 97 00:05:10,680 --> 00:05:12,840 Speaker 4: Tracy Joe, it's great to be back. Happy New Year, 98 00:05:12,880 --> 00:05:13,480 Speaker 4: Thank you for having. 99 00:05:13,360 --> 00:05:15,160 Speaker 2: Me, Happy New Year, Thank you for coming back. 100 00:05:15,279 --> 00:05:19,520 Speaker 1: Yeah, So maybe to begin with tell us, what's your 101 00:05:19,680 --> 00:05:23,280 Speaker 1: particular interest in private credit? You know, sitting at New Edge, 102 00:05:23,520 --> 00:05:28,320 Speaker 1: you're a portfolio manager. What is the offering posed by 103 00:05:28,360 --> 00:05:29,040 Speaker 1: private credit? 104 00:05:29,800 --> 00:05:32,880 Speaker 4: Yeah, it's driven much by clients interest in demand for 105 00:05:32,920 --> 00:05:36,800 Speaker 4: this asset class, you know, in part maybe because the 106 00:05:36,880 --> 00:05:39,479 Speaker 4: type of clients at New Edge in this case services 107 00:05:39,640 --> 00:05:43,160 Speaker 4: are working in the private credit industry themselves ironically, so 108 00:05:43,160 --> 00:05:47,440 Speaker 4: they're interested in investing out of private credit strategies. But 109 00:05:47,520 --> 00:05:51,240 Speaker 4: it's also i think born out of clients who have 110 00:05:51,320 --> 00:05:55,560 Speaker 4: connection with the companies that these private credit lenders are 111 00:05:55,839 --> 00:05:58,680 Speaker 4: lending to or have some sort of involvement in that, 112 00:05:59,000 --> 00:06:01,720 Speaker 4: and are interested and allocating the effort to this as 113 00:06:01,800 --> 00:06:05,120 Speaker 4: a class as opposed to you know, let's say the 114 00:06:05,200 --> 00:06:08,719 Speaker 4: retail approach of like, well, okay, I heard about private credit. 115 00:06:08,880 --> 00:06:10,920 Speaker 4: There may be an ETF on it, like you know, 116 00:06:11,000 --> 00:06:13,000 Speaker 4: and so let's buy this ETF and and now I 117 00:06:13,120 --> 00:06:15,120 Speaker 4: go to a wealth man's perform like new Egine and 118 00:06:15,160 --> 00:06:17,479 Speaker 4: they will help me with that. That's far less. So 119 00:06:18,000 --> 00:06:20,599 Speaker 4: the investors that we talk to are very involved in 120 00:06:20,640 --> 00:06:24,080 Speaker 4: private credit themselves, So it gives you an interesting angle 121 00:06:24,160 --> 00:06:26,919 Speaker 4: on it because once you are starting to talk to 122 00:06:26,960 --> 00:06:29,280 Speaker 4: these clients, you know, you have to really learn about 123 00:06:29,279 --> 00:06:32,120 Speaker 4: what this aesca class truly is about. You know, it's 124 00:06:32,200 --> 00:06:35,440 Speaker 4: far less an asked class about the way we're trading 125 00:06:35,480 --> 00:06:37,719 Speaker 4: public markets. You know, if you look at treasury bonds, 126 00:06:37,760 --> 00:06:40,560 Speaker 4: that's not what private credit is really, how it is 127 00:06:40,600 --> 00:06:43,440 Speaker 4: traded or how it is functioning. So I find it 128 00:06:43,440 --> 00:06:47,479 Speaker 4: a really interesting different alternative way of investing as something 129 00:06:47,520 --> 00:06:50,880 Speaker 4: I had not looked at in my career previously, you know, 130 00:06:51,279 --> 00:06:53,320 Speaker 4: until I really started to get into the Vegisa's investment 131 00:06:53,320 --> 00:06:58,120 Speaker 4: advisory business and so interesting the watches to see this unfold. 132 00:06:58,320 --> 00:07:01,599 Speaker 2: So what is it for an investor? You know, you 133 00:07:01,600 --> 00:07:05,720 Speaker 2: think about overall portfolio. People have some equity, and they 134 00:07:05,760 --> 00:07:08,920 Speaker 2: have some maybe risk free government debt, et cetera, and 135 00:07:09,080 --> 00:07:12,760 Speaker 2: whatever it is. What is it about private credit? What 136 00:07:12,800 --> 00:07:14,680 Speaker 2: does it deliver for a portfolio? 137 00:07:15,480 --> 00:07:19,120 Speaker 4: So the one it is truly diversification, and it is 138 00:07:19,200 --> 00:07:23,040 Speaker 4: an asset class that's traditionally non correlated to equity or 139 00:07:23,120 --> 00:07:26,840 Speaker 4: fixed income, even though you know all of the loans 140 00:07:26,840 --> 00:07:29,520 Speaker 4: that are in the devocredit funds are off based off 141 00:07:29,720 --> 00:07:32,200 Speaker 4: the secured overnight funding rate, that's the self rate, right, 142 00:07:32,240 --> 00:07:34,640 Speaker 4: So there's there is obviously a connection with interest rates, 143 00:07:35,280 --> 00:07:38,920 Speaker 4: but it has been long term uncorrelated based upon how 144 00:07:39,000 --> 00:07:42,160 Speaker 4: the returns have behaved relative to returns and equities and 145 00:07:42,200 --> 00:07:45,840 Speaker 4: fixed income. I think what the tracks people is that 146 00:07:46,520 --> 00:07:50,040 Speaker 4: the loans that are being issued by those private lenders, 147 00:07:50,440 --> 00:07:53,480 Speaker 4: you know, they have been at extreme low default rates 148 00:07:53,520 --> 00:07:57,520 Speaker 4: for a really long period of time. Now, I always 149 00:07:57,600 --> 00:07:59,840 Speaker 4: talk to the private credit managers with a bit of 150 00:07:59,880 --> 00:08:03,320 Speaker 4: a caution here because coming from a world of total 151 00:08:03,360 --> 00:08:07,760 Speaker 4: return and fixed income training, you take immediately set back well, okay, 152 00:08:07,880 --> 00:08:09,920 Speaker 4: load the faults. Really, I mean so. 153 00:08:10,640 --> 00:08:15,000 Speaker 1: I yesh, it's sort of true of every new asset class, right, like, oh, 154 00:08:15,040 --> 00:08:17,960 Speaker 1: the history is limited, so there aren't many defaults exactly. 155 00:08:18,040 --> 00:08:20,720 Speaker 4: So that's exactly a very good point. That's one reason. 156 00:08:21,200 --> 00:08:23,560 Speaker 4: On the other hand, it's about you know, okay, the 157 00:08:23,600 --> 00:08:27,000 Speaker 4: individual companies that they lend to have had a good 158 00:08:27,080 --> 00:08:29,520 Speaker 4: credit history so far, at least in many of the funds. 159 00:08:29,520 --> 00:08:31,800 Speaker 4: If we looked at that's been the case. Very little 160 00:08:31,800 --> 00:08:36,520 Speaker 4: impairments that have happened. Second, the private lenders are in control, 161 00:08:36,559 --> 00:08:39,400 Speaker 4: so they set the covenance. It's not like a bank 162 00:08:39,559 --> 00:08:44,760 Speaker 4: involved or another intermediary that is controlling the contract. It's 163 00:08:44,800 --> 00:08:49,920 Speaker 4: really Blue Out Blackstone KKR. Those companies. They set the 164 00:08:50,040 --> 00:08:54,360 Speaker 4: terms and they also are very good at enforcing those terms. 165 00:08:54,480 --> 00:08:58,360 Speaker 4: And think it gives clients a confidence that these loans 166 00:08:58,400 --> 00:09:01,360 Speaker 4: are staying current and we're not get any major impairments 167 00:09:01,360 --> 00:09:05,000 Speaker 4: of anything. Now, what I think otherwise is I think 168 00:09:05,000 --> 00:09:07,800 Speaker 4: of attraction to clients is that you know, it is 169 00:09:08,200 --> 00:09:11,400 Speaker 4: an astraclass that is not out on the screen. It 170 00:09:11,520 --> 00:09:16,840 Speaker 4: is privately managed and traded. Private credit funds are nothing 171 00:09:16,920 --> 00:09:19,839 Speaker 4: like a mutual fund of etfor or hedgephone manager they 172 00:09:19,880 --> 00:09:23,000 Speaker 4: are very selective in how they pick their different companies 173 00:09:23,000 --> 00:09:25,480 Speaker 4: to lend to. I think all of those things play 174 00:09:25,520 --> 00:09:29,400 Speaker 4: a role in why investors are interested in this aska class. 175 00:09:29,640 --> 00:09:32,080 Speaker 1: So a lot of this reminds me of the debate 176 00:09:32,240 --> 00:09:37,360 Speaker 1: around cove Light in sort of like the middle twenty tens, 177 00:09:37,520 --> 00:09:40,640 Speaker 1: when there was an explosion in cove Light bonds or 178 00:09:41,080 --> 00:09:45,520 Speaker 1: a dramatic deterioration in the amount of protections that investors 179 00:09:45,520 --> 00:09:48,320 Speaker 1: were demanding in order to lend to companies. And I 180 00:09:48,320 --> 00:09:50,360 Speaker 1: remember that time. There was an argument sort of for 181 00:09:50,640 --> 00:09:54,280 Speaker 1: and against. So you know, some people were arguing, this 182 00:09:54,320 --> 00:09:57,960 Speaker 1: is terrible. This is the result of the search for yield. 183 00:09:58,040 --> 00:10:01,600 Speaker 1: It basically means people will lend to anywhere they can 184 00:10:01,640 --> 00:10:03,520 Speaker 1: get a return, and they're not going to ask for 185 00:10:03,600 --> 00:10:08,280 Speaker 1: any protections because they're just desperate to get any sort 186 00:10:08,280 --> 00:10:11,920 Speaker 1: of yield. But then the offsetting argument was that, well, 187 00:10:11,960 --> 00:10:16,439 Speaker 1: actually it sounds bad. Cove Light sounds bad. The idea 188 00:10:16,440 --> 00:10:19,600 Speaker 1: of investors giving up protections sounds bad. But if something 189 00:10:19,640 --> 00:10:23,480 Speaker 1: were to happen, if there were a recession, then it 190 00:10:23,520 --> 00:10:25,600 Speaker 1: could end up being a good thing because it means 191 00:10:25,640 --> 00:10:29,760 Speaker 1: companies have more flexibility to refinance. They don't have as 192 00:10:29,760 --> 00:10:32,640 Speaker 1: many restrictions around what they can do. So I always 193 00:10:32,640 --> 00:10:35,720 Speaker 1: remember there were sort of pros and cons to the 194 00:10:35,760 --> 00:10:38,680 Speaker 1: cove light argument, and it feels similar in private credit, 195 00:10:39,920 --> 00:10:40,360 Speaker 1: maybe to. 196 00:10:40,320 --> 00:10:43,400 Speaker 4: An extent ration. But I would say the managers that 197 00:10:43,440 --> 00:10:45,880 Speaker 4: we've spoken with, and you know, we talked to over 198 00:10:45,880 --> 00:10:49,319 Speaker 4: one hundred managers in that space, what we've read from 199 00:10:49,320 --> 00:10:52,200 Speaker 4: most of those governance they're not lights. They're actually stricter, 200 00:10:53,440 --> 00:10:57,559 Speaker 4: and I think it is because of the personal relationships 201 00:10:57,600 --> 00:11:00,360 Speaker 4: that these private lenders have of the company that they're 202 00:11:00,440 --> 00:11:03,240 Speaker 4: lending to. And they told us that we've actually got 203 00:11:03,240 --> 00:11:06,960 Speaker 4: an examples they've shown also, you know, uh, a presentation 204 00:11:07,080 --> 00:11:10,640 Speaker 4: of the different companies that are actually we are in 205 00:11:10,720 --> 00:11:14,199 Speaker 4: the fund right who are basically let's say, long term 206 00:11:14,240 --> 00:11:19,280 Speaker 4: standing relationship between say a Blackstone and that company itself. 207 00:11:19,840 --> 00:11:22,160 Speaker 4: So I'm trying to get us that the covenants are 208 00:11:22,200 --> 00:11:25,920 Speaker 4: sort of maybe like customized governance. They certainly don't do 209 00:11:26,120 --> 00:11:28,640 Speaker 4: to us as light. You know, there's a very strict 210 00:11:28,640 --> 00:11:33,160 Speaker 4: control on payments of interest and it's about trying to 211 00:11:33,280 --> 00:11:36,320 Speaker 4: you know, really help the company move ahead. So there's 212 00:11:36,480 --> 00:11:39,520 Speaker 4: much of a i think also a private equity aspect 213 00:11:39,600 --> 00:11:42,480 Speaker 4: to this, and that's typical in private credit anyway, where 214 00:11:42,520 --> 00:11:45,040 Speaker 4: you have a sponsor that it's involved in the structure 215 00:11:45,080 --> 00:11:48,720 Speaker 4: of private credit fund. But having that private equity approach 216 00:11:49,320 --> 00:11:53,240 Speaker 4: gives these companies that sort of, let's say, empower those 217 00:11:53,240 --> 00:11:55,880 Speaker 4: companies to do the right thing with that money and 218 00:11:56,080 --> 00:11:59,720 Speaker 4: invest in the right way. And therefore the governance, although 219 00:11:59,720 --> 00:12:02,640 Speaker 4: they look really strict, are not necessarily going to be 220 00:12:02,679 --> 00:12:05,760 Speaker 4: at some moment like, Okay, you can't pay off those loans, 221 00:12:06,040 --> 00:12:08,160 Speaker 4: We're going to, you know, really put the screws on 222 00:12:08,480 --> 00:12:10,280 Speaker 4: this company if we're going to take the keys right 223 00:12:10,320 --> 00:12:14,720 Speaker 4: at lily and and therefore the company becomes totally impaired 224 00:12:14,720 --> 00:12:17,960 Speaker 4: and dysfunctional. That doesn't seem to be the case so far, 225 00:12:18,760 --> 00:12:21,679 Speaker 4: even though from what I read, those governants there are 226 00:12:21,760 --> 00:12:25,960 Speaker 4: strict compared to say, clos where that governant light showed 227 00:12:26,040 --> 00:12:27,120 Speaker 4: up in the mid to twenty. 228 00:12:26,920 --> 00:12:45,160 Speaker 1: TENHS for now, So what what cause a company to 229 00:12:45,679 --> 00:12:49,440 Speaker 1: decide to go the private route versus you know, either 230 00:12:49,480 --> 00:12:52,200 Speaker 1: issue a bond or take out a loan from a 231 00:12:52,240 --> 00:12:53,520 Speaker 1: bank in the public market. 232 00:12:54,120 --> 00:12:56,920 Speaker 4: So I did announcers on the b credit fund, for example, 233 00:12:56,920 --> 00:13:01,600 Speaker 4: from Blackstone, and all those are in there are non listed. 234 00:13:02,040 --> 00:13:05,160 Speaker 4: All of those companies have what we from our conversations 235 00:13:05,160 --> 00:13:07,640 Speaker 4: with them, have no interest in going public at all. 236 00:13:08,360 --> 00:13:10,840 Speaker 4: And Thirdly, what I did find, and I did say 237 00:13:10,880 --> 00:13:14,640 Speaker 4: that to Blackstone, about ten percent or so of that pool, 238 00:13:15,120 --> 00:13:17,720 Speaker 4: there's very little information I can find on these companies, 239 00:13:17,960 --> 00:13:20,000 Speaker 4: and I go online, I don't see much of any 240 00:13:20,080 --> 00:13:23,040 Speaker 4: kind of information. So some of our really really private, 241 00:13:23,120 --> 00:13:27,200 Speaker 4: private type companies we talk about literally like services companies 242 00:13:27,200 --> 00:13:30,720 Speaker 4: a car wash or some technology services company like that 243 00:13:30,760 --> 00:13:34,760 Speaker 4: you've never heard of before. And so these companies I 244 00:13:34,800 --> 00:13:37,240 Speaker 4: think are no also not in the position to just 245 00:13:37,280 --> 00:13:40,400 Speaker 4: go to the public markets unless there's a bank that 246 00:13:40,559 --> 00:13:43,560 Speaker 4: is really that easy in terms of his lending standards, 247 00:13:43,600 --> 00:13:46,839 Speaker 4: that is willing to give these companies money or allow 248 00:13:46,880 --> 00:13:49,720 Speaker 4: them to come to market. On the other hand, I mean, 249 00:13:49,960 --> 00:13:53,040 Speaker 4: some of these companies may be in a position where 250 00:13:53,559 --> 00:13:55,640 Speaker 4: they get better and better revenues, they get more traction, 251 00:13:55,760 --> 00:13:58,320 Speaker 4: get more attention to their business model, and at some 252 00:13:58,360 --> 00:14:00,320 Speaker 4: point some big investor compans like, hey, look, you know, 253 00:14:00,559 --> 00:14:03,640 Speaker 4: we can help you go public and raise equity. We've 254 00:14:03,679 --> 00:14:06,199 Speaker 4: not found those examples in these pools so far. 255 00:14:06,600 --> 00:14:09,679 Speaker 2: How much of the rise of this acid class, in 256 00:14:09,720 --> 00:14:13,400 Speaker 2: your view, is simply about scale and capacity within the banks, 257 00:14:13,480 --> 00:14:16,280 Speaker 2: or maybe lack thereof, because if the story is right, 258 00:14:16,600 --> 00:14:20,480 Speaker 2: the companies are not listed, they're not particularly well known, so, 259 00:14:20,600 --> 00:14:22,840 Speaker 2: like you know, you're sort of starting from scratch on 260 00:14:22,960 --> 00:14:27,800 Speaker 2: due diligence or familiarity. Perhaps the covenants are bespoke. In 261 00:14:27,840 --> 00:14:31,000 Speaker 2: many cases, as you've described, they're tailored, so that obviously 262 00:14:31,040 --> 00:14:35,080 Speaker 2: takes legwork on the part of whoever is making lending decisions. 263 00:14:35,480 --> 00:14:37,480 Speaker 2: So is this like a story of like essentially going 264 00:14:37,520 --> 00:14:41,080 Speaker 2: to post Dodd Frank world where like banks are constrained, 265 00:14:41,200 --> 00:14:45,240 Speaker 2: et cetera, that essentially it just makes more sense for 266 00:14:45,760 --> 00:14:47,880 Speaker 2: in many cases for a third parties who have the 267 00:14:47,920 --> 00:14:51,920 Speaker 2: capacity and scale to specialize and find in creating that relationship. 268 00:14:52,360 --> 00:14:55,880 Speaker 4: That's spot on, Joe. I think the outer part of 269 00:14:55,920 --> 00:14:59,520 Speaker 4: that story is that as banks have skilled back ye 270 00:15:00,000 --> 00:15:04,200 Speaker 4: dedicated market, that created a void, and I think that 271 00:15:04,320 --> 00:15:07,960 Speaker 4: was part of the story too, of these companies automatically 272 00:15:07,960 --> 00:15:11,520 Speaker 4: getting towards a private lender as supposed to going to 273 00:15:11,640 --> 00:15:14,120 Speaker 4: it let's say mid size or smaller bank trying to 274 00:15:14,160 --> 00:15:16,880 Speaker 4: get a loan or business loan. But as I mentioned, 275 00:15:16,880 --> 00:15:21,600 Speaker 4: the personal aspect that found really fascinating of how personal 276 00:15:21,640 --> 00:15:25,440 Speaker 4: relationships they've had. Now, any private banker has this right 277 00:15:25,520 --> 00:15:27,240 Speaker 4: if you go to I don't think of any of 278 00:15:27,280 --> 00:15:31,000 Speaker 4: the major banks there's a personal relationship. But I think 279 00:15:31,080 --> 00:15:35,880 Speaker 4: in this case it's very driven by personal long term relationships. 280 00:15:36,280 --> 00:15:40,680 Speaker 4: So that void of the banks, not you know, lendings 281 00:15:40,680 --> 00:15:44,320 Speaker 4: as much in that syndicated loan channel, is one reason 282 00:15:44,320 --> 00:15:46,480 Speaker 4: why there is a lot of demand for private lending. 283 00:15:46,920 --> 00:15:48,960 Speaker 4: On the other hand, it's really the personal relationships. I 284 00:15:49,000 --> 00:15:49,760 Speaker 4: think that's driving it. 285 00:15:50,160 --> 00:15:53,760 Speaker 2: Tracy, it still strikes me as perverse that the banks 286 00:15:53,800 --> 00:15:57,080 Speaker 2: that failed in twenty twenty three were like the banks 287 00:15:57,080 --> 00:16:00,320 Speaker 2: where they actually took like private relationships seriously. Like it 288 00:16:00,360 --> 00:16:01,760 Speaker 2: sort of bothered me. It's like, oh, this is like 289 00:16:01,760 --> 00:16:04,040 Speaker 2: what I think like bankers should be, like really getting 290 00:16:04,080 --> 00:16:07,680 Speaker 2: to know the clients, bespoke offerings that isn't just like 291 00:16:07,720 --> 00:16:08,760 Speaker 2: some generic website. 292 00:16:08,800 --> 00:16:10,880 Speaker 1: There's a difference between getting to know the clients and 293 00:16:10,920 --> 00:16:12,280 Speaker 1: doing whatever they want you to do. 294 00:16:12,400 --> 00:16:14,640 Speaker 2: I guess that's it, but it still feels like man like, 295 00:16:15,040 --> 00:16:16,960 Speaker 2: I think that's what bankers should be doing, but I 296 00:16:16,960 --> 00:16:19,040 Speaker 2: guess apparently not, that's not what the market said. 297 00:16:19,200 --> 00:16:21,840 Speaker 1: Well, I mean, just going back to the regulation, I 298 00:16:21,840 --> 00:16:25,560 Speaker 1: mean a lot of this was by design. I remember 299 00:16:25,600 --> 00:16:28,320 Speaker 1: when the leverage lending guidelines came out again in the 300 00:16:28,360 --> 00:16:30,760 Speaker 1: mid twenty tens. That was back when the market was 301 00:16:30,800 --> 00:16:34,040 Speaker 1: going absolutely haywire, and the regulators came out and said, 302 00:16:34,040 --> 00:16:36,520 Speaker 1: hold on, you guys have to like take a breath 303 00:16:36,520 --> 00:16:38,760 Speaker 1: here and stop doing so many things that are risky, 304 00:16:39,400 --> 00:16:42,960 Speaker 1: basically forcing that activity into what we used to refer 305 00:16:43,040 --> 00:16:45,200 Speaker 1: to as the shadow banking system. I don't see that 306 00:16:45,280 --> 00:16:46,880 Speaker 1: term as much as I used to, but that is 307 00:16:46,960 --> 00:16:50,240 Speaker 1: exactly what private credit is, of course. But just on 308 00:16:50,280 --> 00:16:53,280 Speaker 1: this note, I remember there was a really interesting chart. 309 00:16:53,360 --> 00:16:55,000 Speaker 1: I think I put it in one of the All 310 00:16:55,040 --> 00:16:58,800 Speaker 1: Thoughts newsletters maybe a couple months back, but it showed 311 00:16:59,040 --> 00:17:04,520 Speaker 1: commercial and industrial bank lending in the US versus USGDP, 312 00:17:05,400 --> 00:17:09,119 Speaker 1: and for most of the history of that time series, 313 00:17:09,160 --> 00:17:12,520 Speaker 1: they pretty much moved together. So if there are more 314 00:17:12,760 --> 00:17:17,479 Speaker 1: commercial and industrial loans, then GDP tends to be growing. 315 00:17:17,880 --> 00:17:20,800 Speaker 1: But over the past couple of years they've kind of decoupled, 316 00:17:21,480 --> 00:17:24,040 Speaker 1: and in my mind, it really raises the question of, like, 317 00:17:24,320 --> 00:17:27,600 Speaker 1: what is driving GDP growth. If it isn't bank lending, 318 00:17:27,640 --> 00:17:29,720 Speaker 1: you know, maybe it's government funding. We've seen a lot 319 00:17:29,720 --> 00:17:33,479 Speaker 1: of infrastructure spending and things like that, but maybe it 320 00:17:33,560 --> 00:17:37,560 Speaker 1: is also the more than one trillion dollars of private 321 00:17:37,600 --> 00:17:39,320 Speaker 1: credit that now exists. 322 00:17:39,880 --> 00:17:42,240 Speaker 4: I think that's right, because you know the fact that 323 00:17:42,280 --> 00:17:46,679 Speaker 4: it is one point three trillion dollars going to lily 324 00:17:46,720 --> 00:17:49,480 Speaker 4: companies that making twenty five to fifty one hundred million 325 00:17:49,560 --> 00:17:53,200 Speaker 4: dollars of gross revenues a year. That's part of the 326 00:17:53,240 --> 00:17:57,679 Speaker 4: really the small mid size backbone of America that's driving 327 00:17:57,720 --> 00:18:01,480 Speaker 4: GDP and again doing reach own these companies. From the 328 00:18:01,480 --> 00:18:05,120 Speaker 4: information that I've found on it is, you can really 329 00:18:05,160 --> 00:18:07,639 Speaker 4: tell like their business models have expanded very rapidly of 330 00:18:07,760 --> 00:18:11,760 Speaker 4: last several years. In part I think is the infusion 331 00:18:11,800 --> 00:18:15,560 Speaker 4: of private credit and the availability of private credit. Again 332 00:18:15,680 --> 00:18:18,160 Speaker 4: to that question of Joe like that if the availability 333 00:18:18,240 --> 00:18:21,520 Speaker 4: is from private lenders not from banks, it does eventually 334 00:18:21,560 --> 00:18:24,800 Speaker 4: do show up in GDP, maybe not because of the 335 00:18:24,880 --> 00:18:28,000 Speaker 4: commercial and industrial loan contractions you're see in there, but 336 00:18:28,520 --> 00:18:31,880 Speaker 4: through the other channel of private credit extension. I think 337 00:18:31,920 --> 00:18:36,359 Speaker 4: also that the impact in itself of leveraging gearing in 338 00:18:36,400 --> 00:18:40,840 Speaker 4: the financial markets is actually none by from private credit. 339 00:18:40,880 --> 00:18:44,679 Speaker 4: There has been one colo now issues of Blackstone's bi 340 00:18:44,800 --> 00:18:47,760 Speaker 4: credit fund that was very very recently. It was about 341 00:18:47,760 --> 00:18:50,720 Speaker 4: a five hundred million dollar deal. They took the most 342 00:18:51,520 --> 00:18:53,280 Speaker 4: I think that the best loans that they had in 343 00:18:53,280 --> 00:18:56,480 Speaker 4: their fund and bundled them together and sold them to 344 00:18:56,520 --> 00:19:00,640 Speaker 4: investors at a very i think, very tight spread compared 345 00:19:00,680 --> 00:19:04,000 Speaker 4: to where high yielders and anything else, so very conservative. 346 00:19:04,480 --> 00:19:06,720 Speaker 4: But as not much more of that is happening yet. 347 00:19:06,760 --> 00:19:09,280 Speaker 4: So if you think of impact from private credit on 348 00:19:09,320 --> 00:19:12,400 Speaker 4: the economy, we go through leverage and securitization as an example, 349 00:19:12,480 --> 00:19:15,600 Speaker 4: so that maybe the next stage in the future, as 350 00:19:15,640 --> 00:19:18,560 Speaker 4: Blackstone sort of tipped the waters there and figured out, hey, 351 00:19:18,640 --> 00:19:22,119 Speaker 4: there is investor demand instead of direct into our fund, 352 00:19:22,280 --> 00:19:26,080 Speaker 4: we can securitize. If that were to pick up that securitization, 353 00:19:26,160 --> 00:19:28,640 Speaker 4: I would think you're going to get an even more 354 00:19:28,680 --> 00:19:32,600 Speaker 4: compounded effect from this, and then maybe the fears about 355 00:19:32,640 --> 00:19:35,959 Speaker 4: the risk of private credit will become more justified. Right 356 00:19:36,000 --> 00:19:40,520 Speaker 4: because I'm maybe jumping ahead of another question, but you 357 00:19:40,560 --> 00:19:42,800 Speaker 4: know the risk if you think of macro impact on 358 00:19:42,840 --> 00:19:45,600 Speaker 4: the economy and you think of risk, I would think 359 00:19:45,800 --> 00:19:48,080 Speaker 4: the real risk of private credit is that the leverage, 360 00:19:48,280 --> 00:19:50,960 Speaker 4: yeah that's in these funds, which tends to be about 361 00:19:51,000 --> 00:19:54,240 Speaker 4: one and a half two times is sort of most 362 00:19:54,280 --> 00:19:57,120 Speaker 4: of the funds that have that sort of leverage that 363 00:19:57,119 --> 00:20:01,040 Speaker 4: that gets compounded by securitization the loans in the funds, 364 00:20:01,359 --> 00:20:04,040 Speaker 4: and we haven't gotten to that stage yet. So the 365 00:20:04,119 --> 00:20:07,359 Speaker 4: actual leverage itself, I think relatively low. If you compare 366 00:20:07,400 --> 00:20:10,760 Speaker 4: it to the public markets take investment grade leverage is 367 00:20:10,760 --> 00:20:14,800 Speaker 4: still three four times. Yeah, earnings is supposed to one 368 00:20:14,880 --> 00:20:15,479 Speaker 4: or two times. 369 00:20:15,720 --> 00:20:18,119 Speaker 2: I've brought this up in a few different conversations, but 370 00:20:18,200 --> 00:20:20,639 Speaker 2: always blows my mind. So I keep asking the same question. 371 00:20:20,720 --> 00:20:24,520 Speaker 2: But people like the fact that it's not on a screen. 372 00:20:25,320 --> 00:20:28,960 Speaker 2: You mentioned that, And so there's this attraction to prices 373 00:20:29,000 --> 00:20:31,200 Speaker 2: that I guess you don't have to look at every day. 374 00:20:31,240 --> 00:20:34,200 Speaker 2: And if the market's read one day and the stock 375 00:20:34,280 --> 00:20:37,440 Speaker 2: market's down two percent, but you look at your privacy easy. 376 00:20:37,240 --> 00:20:39,000 Speaker 1: To be diversified if you're not traded. 377 00:20:39,080 --> 00:20:42,520 Speaker 2: Yeah, there's like, oh, hey, my credit exposure was totally fat, 378 00:20:42,560 --> 00:20:45,280 Speaker 2: even though like implicitly like that's a lie. I mean, 379 00:20:45,320 --> 00:20:47,320 Speaker 2: we all know, but like, here's what I don't get 380 00:20:47,320 --> 00:20:50,320 Speaker 2: about that. So A, like, is that real like that 381 00:20:50,440 --> 00:20:54,680 Speaker 2: premium that people pay for the appearance of non diversification, 382 00:20:55,040 --> 00:20:57,440 Speaker 2: And b it seems to me that the people who 383 00:20:57,440 --> 00:21:00,080 Speaker 2: should really like pay up for the privilege of not 384 00:21:00,119 --> 00:21:03,359 Speaker 2: having to look at their quotes. Are like individual retail 385 00:21:03,400 --> 00:21:05,920 Speaker 2: investors who are like prone to panic and selling it 386 00:21:06,000 --> 00:21:07,880 Speaker 2: the worst time and buying at the top, et cetera. 387 00:21:08,280 --> 00:21:12,240 Speaker 2: But for the sophisticated investor, which I imagine most people 388 00:21:12,240 --> 00:21:14,440 Speaker 2: who are like allocating to private credit, you know, they're 389 00:21:14,440 --> 00:21:16,639 Speaker 2: not mom and pop. They're you know, they're people with 390 00:21:16,960 --> 00:21:20,520 Speaker 2: moving serious money and sophisticated, like they're pros at this. 391 00:21:20,600 --> 00:21:23,879 Speaker 2: Shouldn't they like be able to bear to look at 392 00:21:23,880 --> 00:21:25,879 Speaker 2: their portfolio on a day to day basis? Why do 393 00:21:25,920 --> 00:21:27,080 Speaker 2: they need to not have the screen? 394 00:21:27,920 --> 00:21:30,880 Speaker 4: Yeah? I know, And that actually has happened because if 395 00:21:30,880 --> 00:21:32,680 Speaker 4: it takes step back, yeah and go to the four 396 00:21:32,800 --> 00:21:35,840 Speaker 4: quote of twenty twenty two, they are suddenly this news 397 00:21:35,880 --> 00:21:40,320 Speaker 4: out that institutional investors in Asia were taking their money 398 00:21:40,359 --> 00:21:42,760 Speaker 4: out of Beat Credit, and that was the first news 399 00:21:43,480 --> 00:21:47,879 Speaker 4: of sort of this redemption starting, and that did spill 400 00:21:47,920 --> 00:21:50,000 Speaker 4: over to the US and cause a little bit of 401 00:21:50,000 --> 00:21:53,320 Speaker 4: a nerve, including with some of our clients that we 402 00:21:53,720 --> 00:21:56,920 Speaker 4: got redemption requests. And because it's a gated fund, but 403 00:21:57,000 --> 00:21:58,919 Speaker 4: they only pay out up to five percent of the 404 00:21:58,960 --> 00:22:01,720 Speaker 4: total bull per cord order and it's an an auction 405 00:22:01,840 --> 00:22:04,040 Speaker 4: type basis right, so you don't get your the five 406 00:22:04,040 --> 00:22:06,400 Speaker 4: percent is a pro rade idea, you know, I did 407 00:22:06,440 --> 00:22:10,160 Speaker 4: think made people wary of that. To your point, it's 408 00:22:10,200 --> 00:22:12,600 Speaker 4: not on the screen, it's not mark the market, but 409 00:22:12,640 --> 00:22:15,560 Speaker 4: there are marks clearly, and if you follow the ten 410 00:22:15,640 --> 00:22:19,040 Speaker 4: Q ten K filing every quarter, you can see that 411 00:22:19,119 --> 00:22:20,879 Speaker 4: the change of the value. This is what I do 412 00:22:20,920 --> 00:22:23,640 Speaker 4: obviously because I have to do this for my job. 413 00:22:24,400 --> 00:22:27,040 Speaker 4: And yeah, there's some stresses have built in over the 414 00:22:27,080 --> 00:22:29,640 Speaker 4: last year, and you could tell us from the spreads 415 00:22:29,680 --> 00:22:32,879 Speaker 4: on those loans they were when I started a new 416 00:22:33,000 --> 00:22:36,359 Speaker 4: edge somewhere in the three the five hundred base points 417 00:22:36,400 --> 00:22:39,600 Speaker 4: over sofa more than the fifty percent of the pools 418 00:22:39,640 --> 00:22:41,560 Speaker 4: right now i'm looking at are more like five hundred 419 00:22:41,600 --> 00:22:43,880 Speaker 4: to seven hundred base points over sofa, So that has 420 00:22:43,920 --> 00:22:47,800 Speaker 4: a change has happened. So I think the sophisticated investor 421 00:22:47,840 --> 00:22:51,719 Speaker 4: looks at this similarly, saying I'm getting wider spreads than 422 00:22:51,800 --> 00:22:55,440 Speaker 4: in high almost double now Kearney, and the marks are 423 00:22:55,480 --> 00:22:58,960 Speaker 4: indeed somewhat deteriorating now that the fault rates stay low. 424 00:22:59,119 --> 00:23:01,479 Speaker 4: That's you know, of the total pool, that's how they 425 00:23:01,520 --> 00:23:04,480 Speaker 4: present it. But if you break it out by different sectors, 426 00:23:04,480 --> 00:23:06,320 Speaker 4: and a lot of these, by the way, these private 427 00:23:06,359 --> 00:23:10,760 Speaker 4: credit pools are allocated significantly to software and healthcare, and 428 00:23:10,800 --> 00:23:13,520 Speaker 4: that's where the weaknesses have been in the economy, so 429 00:23:13,560 --> 00:23:16,000 Speaker 4: you can tell that those president only wider than they 430 00:23:16,000 --> 00:23:18,680 Speaker 4: were a year ago. There's also I think from the 431 00:23:18,720 --> 00:23:21,280 Speaker 4: marks on the loans from when I looked at different 432 00:23:21,400 --> 00:23:24,800 Speaker 4: ten K filings, Yeah, there's some default breaters picked up 433 00:23:24,800 --> 00:23:29,119 Speaker 4: there and there's some impairments have been reported. That is 434 00:23:29,160 --> 00:23:33,159 Speaker 4: also showing up again to the covenant and the control 435 00:23:33,720 --> 00:23:35,600 Speaker 4: that seems to be quite tight, and that I think 436 00:23:35,640 --> 00:23:38,879 Speaker 4: why it hasn't been a floodgates of redemptions coming out 437 00:23:38,920 --> 00:23:42,359 Speaker 4: of these funds, but that is ongoing is I think 438 00:23:42,400 --> 00:23:44,440 Speaker 4: it's a sign of that people are looking at the 439 00:23:44,480 --> 00:23:48,800 Speaker 4: ASKA saying we want more transparency and not so much ovagueness. 440 00:23:49,320 --> 00:23:52,520 Speaker 4: I like to better understand what the liquidity truly is. 441 00:23:53,200 --> 00:23:56,600 Speaker 4: And therefore I'm also reserved cautious. So it's not all 442 00:23:56,600 --> 00:23:59,720 Speaker 4: in private credit and it's fantastic and you don't have 443 00:23:59,720 --> 00:24:01,800 Speaker 4: to do it. I think there are just a lot 444 00:24:01,800 --> 00:24:25,360 Speaker 4: of investors that have caution. 445 00:24:18,080 --> 00:24:22,879 Speaker 1: What would be the proximate cause or catalyst for this 446 00:24:22,960 --> 00:24:26,440 Speaker 1: might be an unfair question, but like the doomsday scenario 447 00:24:26,720 --> 00:24:30,080 Speaker 1: in private credit, because I keep thinking, like, okay, one 448 00:24:30,080 --> 00:24:33,960 Speaker 1: of the strengths of the asset class is that in 449 00:24:34,000 --> 00:24:36,840 Speaker 1: some respects it's very liquid and you don't have to 450 00:24:36,880 --> 00:24:39,280 Speaker 1: mark to market on a daily basis, and so you 451 00:24:39,320 --> 00:24:45,040 Speaker 1: can kind of withstand short lived down cycles. But at 452 00:24:45,080 --> 00:24:48,320 Speaker 1: the same time, you know, I imagine if those pressures were 453 00:24:48,359 --> 00:24:52,440 Speaker 1: to build up enough at some point you would have 454 00:24:52,520 --> 00:24:56,240 Speaker 1: to crystallize losses. At some point you would have investors 455 00:24:56,400 --> 00:25:00,480 Speaker 1: running for the gates, per your example. So what would 456 00:25:00,480 --> 00:25:03,040 Speaker 1: be the sort of trigger for that to actually happen. 457 00:25:04,280 --> 00:25:07,920 Speaker 4: That's the burning question on the mind of every client 458 00:25:07,960 --> 00:25:11,879 Speaker 4: I talked to about. And there's different ways to analyze that, 459 00:25:11,960 --> 00:25:15,000 Speaker 4: I think, because on the one hand, it's just as 460 00:25:15,040 --> 00:25:19,080 Speaker 4: I described, there's some level of stresses building into these pulls, 461 00:25:19,200 --> 00:25:20,879 Speaker 4: and in a way you would think that maybe just 462 00:25:20,920 --> 00:25:24,439 Speaker 4: simply how the economy is evolving, it gets overtime software 463 00:25:24,480 --> 00:25:27,320 Speaker 4: and weaker, and you get some impairments, there will be 464 00:25:27,359 --> 00:25:30,359 Speaker 4: some companies that will be behind in payments. On the 465 00:25:30,359 --> 00:25:33,720 Speaker 4: other hand, it's about the liquidity aspect that yes, people 466 00:25:33,720 --> 00:25:36,080 Speaker 4: have tied it up there. Liquidity in that vehicle and 467 00:25:36,119 --> 00:25:39,760 Speaker 4: wanted out. And so that big credit example is one 468 00:25:39,840 --> 00:25:43,280 Speaker 4: example of people trying to maneuver the liquidity out and 469 00:25:43,359 --> 00:25:46,040 Speaker 4: keep redeeming from it with the good news that there's 470 00:25:46,640 --> 00:25:49,280 Speaker 4: all these funds are gated so you don't get a 471 00:25:49,359 --> 00:25:52,399 Speaker 4: run on those funds, because that would be the normal 472 00:25:52,480 --> 00:25:55,359 Speaker 4: financial trigger, right right, I have an edge on a 473 00:25:55,440 --> 00:25:57,880 Speaker 4: ETF out there, and people, Okay, this is wrong, I'm 474 00:25:57,880 --> 00:26:00,720 Speaker 4: pulling all my money out, and that effect on that 475 00:26:00,760 --> 00:26:02,840 Speaker 4: they could have on broader markets. It's not the case 476 00:26:02,840 --> 00:26:05,800 Speaker 4: with private credit funds. But I think that what people 477 00:26:06,080 --> 00:26:10,719 Speaker 4: will look at carefully as the realization that the loans 478 00:26:10,720 --> 00:26:14,320 Speaker 4: that they've extended to these companies, if there are issues 479 00:26:14,359 --> 00:26:18,760 Speaker 4: with fraud cases or other types of issues, that that 480 00:26:18,840 --> 00:26:21,919 Speaker 4: will become a trigger of realization of hey, there's actually 481 00:26:21,960 --> 00:26:25,479 Speaker 4: been some deterioration of lending standards have actually taken place, 482 00:26:25,800 --> 00:26:28,480 Speaker 4: and as a result, invest started to react like they 483 00:26:28,520 --> 00:26:30,960 Speaker 4: started to look at Okay, I'm going to start redeeming 484 00:26:31,080 --> 00:26:34,800 Speaker 4: more from these funds. Now there's little evidence of this curny, 485 00:26:35,240 --> 00:26:37,280 Speaker 4: I think really because of the state of the economy 486 00:26:37,280 --> 00:26:40,439 Speaker 4: where we are, or there's not been much report on 487 00:26:40,520 --> 00:26:42,879 Speaker 4: this yet. I want to mention this because as this 488 00:26:42,960 --> 00:26:45,920 Speaker 4: podcast gets out there, the private credit fundman as will 489 00:26:45,920 --> 00:26:48,119 Speaker 4: listen to this. One of the complaints I had was 490 00:26:48,200 --> 00:26:52,320 Speaker 4: that the vakeness of the funds is also expressing that 491 00:26:52,680 --> 00:26:56,159 Speaker 4: some of these companies very little information available. So as 492 00:26:56,160 --> 00:26:58,880 Speaker 4: an investor would I would want to know, like if 493 00:26:58,880 --> 00:27:00,639 Speaker 4: I put one dollar in that funds and you're going 494 00:27:00,720 --> 00:27:03,879 Speaker 4: to lend that out to company XYZ that I cannot 495 00:27:03,920 --> 00:27:06,199 Speaker 4: find any information on, I at least want to know 496 00:27:06,240 --> 00:27:09,840 Speaker 4: what that company is really about. So I've been kind 497 00:27:09,840 --> 00:27:13,920 Speaker 4: of messaging this to different managers, but I think this 498 00:27:13,960 --> 00:27:17,200 Speaker 4: is a concern expressly for other investors too, and probably 499 00:27:17,320 --> 00:27:19,879 Speaker 4: is one of those where you say trigger ideas of 500 00:27:20,040 --> 00:27:22,439 Speaker 4: like if it shows up more and more of like 501 00:27:22,480 --> 00:27:25,439 Speaker 4: we're lending to companies that we can find little information on, 502 00:27:25,720 --> 00:27:26,760 Speaker 4: that will be in concerned, right. 503 00:27:26,800 --> 00:27:29,680 Speaker 1: So yeah, and also there is clearly a tension in that, 504 00:27:29,800 --> 00:27:33,159 Speaker 1: Like part of the investment case of this asset class 505 00:27:33,200 --> 00:27:37,800 Speaker 1: is the idea of lenders building really strong relationships with 506 00:27:37,960 --> 00:27:42,159 Speaker 1: private companies doing really good due diligence and very like 507 00:27:42,320 --> 00:27:46,080 Speaker 1: customized deals. But then it's weird if none of that 508 00:27:46,160 --> 00:27:49,680 Speaker 1: work actually shows up for the end investor, like if 509 00:27:49,680 --> 00:27:51,360 Speaker 1: there's no way for you to actually check it out, 510 00:27:51,400 --> 00:27:53,320 Speaker 1: and you're sort of buying into it on blind faith. 511 00:27:53,359 --> 00:27:57,840 Speaker 4: Almost yeah, you're buying into a bull of loans that 512 00:27:57,960 --> 00:28:00,960 Speaker 4: is presented as this is a load of fault vehicle. 513 00:28:01,400 --> 00:28:05,240 Speaker 4: It's very steady and it's yields and payout and therefore 514 00:28:06,040 --> 00:28:08,400 Speaker 4: you don't need to worry about those nuances and details. 515 00:28:09,400 --> 00:28:11,320 Speaker 4: And yet I think as a vestors, you should worry 516 00:28:11,320 --> 00:28:14,120 Speaker 4: about that because you know, in the end, the money 517 00:28:14,119 --> 00:28:16,560 Speaker 4: that you put into that fund gets to those companies, 518 00:28:17,080 --> 00:28:20,480 Speaker 4: and so that due diligence should really matter. And you know, 519 00:28:20,520 --> 00:28:22,720 Speaker 4: you get a lot of assurances that that due diligence 520 00:28:22,760 --> 00:28:25,280 Speaker 4: process is water tight and the covenants are very strict. 521 00:28:25,280 --> 00:28:27,000 Speaker 4: And I have to say, but from what I've read, 522 00:28:27,119 --> 00:28:30,520 Speaker 4: that's true. But we know from subprime lending, we know 523 00:28:30,560 --> 00:28:33,119 Speaker 4: from other types of lending that it could not always 524 00:28:33,119 --> 00:28:36,119 Speaker 4: work out that way, especially if you have an exuberance 525 00:28:36,760 --> 00:28:39,600 Speaker 4: that we're dealing with currenty. So the private credit market 526 00:28:39,640 --> 00:28:42,600 Speaker 4: is in an exuberance face currenty, you know, because everybody's 527 00:28:42,600 --> 00:28:44,560 Speaker 4: focused on a lot and a lot of money is 528 00:28:44,600 --> 00:28:48,400 Speaker 4: being allocated to it, and a lot of nowadays mutual 529 00:28:48,400 --> 00:28:50,920 Speaker 4: fun companies for example, jumping to the opportunity to coming 530 00:28:51,000 --> 00:28:53,720 Speaker 4: very late in that race, and that would be to 531 00:28:53,880 --> 00:28:56,160 Speaker 4: be interested to watch too, right, And how if they're 532 00:28:56,200 --> 00:28:59,400 Speaker 4: starting to become private lenders, you know, what does their 533 00:28:59,480 --> 00:29:03,600 Speaker 4: lending stand practices compared to the experts in that space, say, 534 00:29:03,800 --> 00:29:07,120 Speaker 4: you know, well established firm side Blackstone and KKR and 535 00:29:07,160 --> 00:29:10,440 Speaker 4: Blue Owl, who have years of experience with been lending 536 00:29:10,440 --> 00:29:11,680 Speaker 4: to private companies. 537 00:29:11,880 --> 00:29:16,000 Speaker 2: I guess on some level, this is every credit cycle, right, 538 00:29:16,040 --> 00:29:18,280 Speaker 2: I mean in the sense that at some point people 539 00:29:18,400 --> 00:29:20,640 Speaker 2: want to start lending money to people who can't pay 540 00:29:20,640 --> 00:29:22,479 Speaker 2: it back, and then some people will make a lot 541 00:29:22,520 --> 00:29:24,200 Speaker 2: of money doing that, and then someone will lose a 542 00:29:24,200 --> 00:29:27,120 Speaker 2: lot of money doing that. Can you talk a little 543 00:29:27,120 --> 00:29:32,680 Speaker 2: bit more about the leverage and the fund structure. So 544 00:29:33,080 --> 00:29:37,640 Speaker 2: company X launches a private credit fund, how much is 545 00:29:37,680 --> 00:29:40,800 Speaker 2: it like sort of like equity investors in that fund? 546 00:29:41,160 --> 00:29:43,959 Speaker 2: And then how much would they theoretically like borrow from 547 00:29:44,040 --> 00:29:46,720 Speaker 2: some bank or someone else to like add leverage or 548 00:29:46,880 --> 00:29:48,480 Speaker 2: sort of juice the fund. Like, how does that work? 549 00:29:49,120 --> 00:29:53,440 Speaker 4: Yeah, so you have to sponsor at a private equity firm. Okay, 550 00:29:53,640 --> 00:29:58,960 Speaker 4: that's the main I'd say capital provider and as a 551 00:29:59,080 --> 00:30:02,800 Speaker 4: fund then gets long. It literally is like, yes, they 552 00:30:02,880 --> 00:30:05,959 Speaker 4: use intermediaries the fund, right, because you have ultimately, you know, 553 00:30:06,040 --> 00:30:09,600 Speaker 4: the companies who borrow from that private credit fund, you 554 00:30:09,640 --> 00:30:13,160 Speaker 4: know they're facing essentially a bank. Yeah, the same idea, 555 00:30:13,800 --> 00:30:17,080 Speaker 4: but the private credit fund itself has gets capital backing 556 00:30:17,120 --> 00:30:20,280 Speaker 4: from a private equity firm, but still has to use 557 00:30:21,040 --> 00:30:25,440 Speaker 4: intermediaries to raise the funds for in order to lend. 558 00:30:25,520 --> 00:30:25,680 Speaker 1: Right. 559 00:30:25,760 --> 00:30:29,200 Speaker 4: So now, on the other hand, it's also about I 560 00:30:29,200 --> 00:30:33,120 Speaker 4: think the combination of other types of leverage. So what 561 00:30:33,160 --> 00:30:35,720 Speaker 4: I've noticed was that a lot of these funds do 562 00:30:36,520 --> 00:30:40,840 Speaker 4: partially invest their pull into clos I know, that's obviously 563 00:30:40,880 --> 00:30:43,720 Speaker 4: where the financial leverage to an extent comes from. I 564 00:30:43,960 --> 00:30:46,480 Speaker 4: found that interesting, even though it's a very small portion 565 00:30:46,560 --> 00:30:48,400 Speaker 4: of it tends to be like one to two percent 566 00:30:48,600 --> 00:30:51,400 Speaker 4: of the total pool. But it's it's another, i think, 567 00:30:51,400 --> 00:30:53,880 Speaker 4: another source of their their leverage of funding, if you 568 00:30:53,920 --> 00:30:56,120 Speaker 4: call it. On the other hand, it's a very low 569 00:30:56,200 --> 00:30:59,680 Speaker 4: leverage though I've compared to other lending vehicles that they're 570 00:30:59,720 --> 00:31:01,680 Speaker 4: out there. I mean, if you talk about say the 571 00:31:01,720 --> 00:31:03,920 Speaker 4: total notion of the fund is leveled one to two 572 00:31:03,920 --> 00:31:06,480 Speaker 4: times max, most of them are more like one to 573 00:31:06,560 --> 00:31:06,920 Speaker 4: one and. 574 00:31:06,840 --> 00:31:08,560 Speaker 2: A half, So they're not going crazy. 575 00:31:08,800 --> 00:31:14,719 Speaker 4: No, it's quite conservative. So that's I think, why are 576 00:31:14,800 --> 00:31:17,720 Speaker 4: kinds of not a concern about the leverage unwind idea 577 00:31:17,800 --> 00:31:22,080 Speaker 4: of what we've seen with SPVs during the financial crisis, right, 578 00:31:22,160 --> 00:31:26,040 Speaker 4: some off bounce sheet vehicle fifty nine levers and it 579 00:31:26,080 --> 00:31:29,560 Speaker 4: has to unwind and we get all the disaster that follows. 580 00:31:30,120 --> 00:31:32,640 Speaker 4: That I think is not so much to worry. It's 581 00:31:32,680 --> 00:31:36,040 Speaker 4: more that opakness and the issue about lending to companies 582 00:31:36,080 --> 00:31:39,160 Speaker 4: that although strict covenance, turned out to be issues with 583 00:31:39,240 --> 00:31:41,680 Speaker 4: those companies and we didn't know about that, and therefore 584 00:31:42,360 --> 00:31:44,480 Speaker 4: we're dealing with the deterioration of the pool and we 585 00:31:44,560 --> 00:31:46,920 Speaker 4: have to reassess the risk. And as I mentioned, if 586 00:31:46,960 --> 00:31:49,200 Speaker 4: you could tell from the change of the spreads on 587 00:31:49,240 --> 00:31:51,440 Speaker 4: those loans over the past year, than there's some risk 588 00:31:51,560 --> 00:31:54,400 Speaker 4: is creeptive. So I think that's the bigger risk. But 589 00:31:55,040 --> 00:31:57,840 Speaker 4: back to your original question, I think it's really the 590 00:31:57,840 --> 00:32:01,440 Speaker 4: structure of having this sponsored company providing the majority of 591 00:32:01,480 --> 00:32:04,680 Speaker 4: that capital, which is I think is maybe what gives 592 00:32:04,720 --> 00:32:06,640 Speaker 4: a lot of clients of confidence, like you have a 593 00:32:06,680 --> 00:32:10,440 Speaker 4: private equity company involved, you know, that's that's kind of 594 00:32:10,480 --> 00:32:12,760 Speaker 4: like a choke hold on a particular company, right, because 595 00:32:12,800 --> 00:32:15,680 Speaker 4: private equity is very keen on we want our equity. 596 00:32:16,160 --> 00:32:19,240 Speaker 4: So you're going to have to stick by these covenance 597 00:32:19,280 --> 00:32:21,840 Speaker 4: that we set on these loans, and the moment that 598 00:32:21,880 --> 00:32:24,520 Speaker 4: there's a change there will come in and make changes 599 00:32:24,640 --> 00:32:27,800 Speaker 4: to make sure that you stay current. But there's been 600 00:32:27,800 --> 00:32:30,560 Speaker 4: examples of that they actually have to take in what 601 00:32:30,600 --> 00:32:32,840 Speaker 4: they call the keys of the company. They just can 602 00:32:33,040 --> 00:32:34,480 Speaker 4: the company can no longer do it, and they have 603 00:32:34,520 --> 00:32:37,240 Speaker 4: to take in the keys. I think that's when the 604 00:32:37,280 --> 00:32:41,719 Speaker 4: online process happens and where the private equity manager then 605 00:32:41,800 --> 00:32:44,240 Speaker 4: has to just divest. And I think that's the other 606 00:32:44,360 --> 00:32:47,200 Speaker 4: part of this risk of that those turning in keys 607 00:32:47,880 --> 00:32:51,640 Speaker 4: becomes more problematic wider than this leverage on my So 608 00:32:51,640 --> 00:32:52,800 Speaker 4: the leverage is quite low. 609 00:32:53,680 --> 00:32:57,000 Speaker 1: Is there any way to short private credit? Because well, 610 00:32:57,040 --> 00:32:59,920 Speaker 1: if I think about, you know, like a corporate bond, 611 00:33:00,040 --> 00:33:03,160 Speaker 1: and there are all sorts of ways, you know, primarily 612 00:33:03,240 --> 00:33:06,320 Speaker 1: using derivatives, but I could short like a CDX index 613 00:33:06,440 --> 00:33:09,080 Speaker 1: or something like that, or I could do you know, 614 00:33:09,480 --> 00:33:12,800 Speaker 1: individual like CDs tied to that specific bond. Is there 615 00:33:12,800 --> 00:33:14,200 Speaker 1: something similar for private credit? 616 00:33:14,560 --> 00:33:18,400 Speaker 4: Well, you would have to be back to the financial engineering. 617 00:33:18,840 --> 00:33:21,680 Speaker 4: I think there's three ways to do it. One is 618 00:33:21,680 --> 00:33:25,240 Speaker 4: to short the stock of the company itself, which is, 619 00:33:25,760 --> 00:33:27,600 Speaker 4: you know, if you have shorted the stock of Blackstone, 620 00:33:27,640 --> 00:33:29,760 Speaker 4: that would have not have been a good trade. It 621 00:33:29,840 --> 00:33:32,680 Speaker 4: was pretty bad. There is a there's a senior loan 622 00:33:32,760 --> 00:33:36,240 Speaker 4: ETF out there, that's several of them, So those are 623 00:33:36,280 --> 00:33:39,640 Speaker 4: actually loans that are very similar, if not coming out 624 00:33:39,640 --> 00:33:42,600 Speaker 4: of private credit funds. You could that can be short 625 00:33:42,600 --> 00:33:45,959 Speaker 4: that does. I believe even the private credit ETF in 626 00:33:46,080 --> 00:33:49,720 Speaker 4: there that has invested in the different private credit funds 627 00:33:49,720 --> 00:33:52,120 Speaker 4: and bundled in the ETF. So I guess that's another 628 00:33:52,200 --> 00:33:53,000 Speaker 4: way of. 629 00:33:53,880 --> 00:33:58,400 Speaker 2: Shorting here VPC Right, that's the one, is you private credit? 630 00:33:58,760 --> 00:34:00,680 Speaker 4: But I believe I believe that's the one. But there's 631 00:34:00,720 --> 00:34:04,040 Speaker 4: no derivatives on private credit or anything like that at 632 00:34:04,040 --> 00:34:05,600 Speaker 4: this moment. But yeah, I think. 633 00:34:05,960 --> 00:34:10,080 Speaker 1: I sent an opportunity, maybe just to bring it back 634 00:34:10,120 --> 00:34:12,919 Speaker 1: to the macro impact. I mean, what does it mean 635 00:34:13,280 --> 00:34:16,759 Speaker 1: for the functioning of the economy and the wider financial 636 00:34:16,800 --> 00:34:21,520 Speaker 1: system if we now have this pool of money that 637 00:34:21,680 --> 00:34:25,040 Speaker 1: really wasn't there before, or you know, if it was there, 638 00:34:25,080 --> 00:34:27,359 Speaker 1: it was in a different form, Like what does that 639 00:34:27,440 --> 00:34:29,080 Speaker 1: mean for the future. 640 00:34:30,440 --> 00:34:34,440 Speaker 4: Wow. And one is positive because you know, we found 641 00:34:34,480 --> 00:34:39,440 Speaker 4: an avenue to fund small mid sized companies without having 642 00:34:39,680 --> 00:34:43,200 Speaker 4: banks involved in a way that you know, that could 643 00:34:43,280 --> 00:34:47,759 Speaker 4: lead to more like shot prime lending and financial stresses 644 00:34:48,120 --> 00:34:50,840 Speaker 4: that could ultimately end up into the negative. The detriment 645 00:34:50,880 --> 00:34:54,160 Speaker 4: of those companies, those companies of the private credit markets 646 00:34:54,200 --> 00:34:57,560 Speaker 4: created competition too, you know, so the regional banks are 647 00:34:57,719 --> 00:35:01,160 Speaker 4: in more competition now with those funds, which lowers the 648 00:35:01,200 --> 00:35:04,799 Speaker 4: cost of funding potentially. And as I mentioned, the cost 649 00:35:04,840 --> 00:35:09,319 Speaker 4: of funding, I mean currently that seems quite high if 650 00:35:09,320 --> 00:35:11,840 Speaker 4: you think of you're all in yield on those loans 651 00:35:11,880 --> 00:35:16,040 Speaker 4: being anywhere from eight to eleven to fifteen percent, quite high. 652 00:35:16,480 --> 00:35:18,759 Speaker 4: But I think the other positive of that is, though, 653 00:35:18,840 --> 00:35:21,640 Speaker 4: is that as much as that's high interest, these companies 654 00:35:21,640 --> 00:35:24,800 Speaker 4: have a stable source of funding and are not dealing 655 00:35:24,800 --> 00:35:28,440 Speaker 4: with any other sort of restraints other than their covenant 656 00:35:28,520 --> 00:35:32,200 Speaker 4: on that loan. So therefore they can go back to 657 00:35:32,239 --> 00:35:35,080 Speaker 4: that same source and keep tapping it as long as 658 00:35:35,120 --> 00:35:38,319 Speaker 4: they continue to perform and return the loans, pay off 659 00:35:38,320 --> 00:35:41,960 Speaker 4: the loans, and make money as a company. So the 660 00:35:42,040 --> 00:35:44,919 Speaker 4: macro impact I think is getting more significant. I think 661 00:35:44,960 --> 00:35:49,000 Speaker 4: in that sense, it would be interesting to understand better though, 662 00:35:49,120 --> 00:35:52,720 Speaker 4: of the different areas where this lending is taking place, 663 00:35:53,200 --> 00:35:55,480 Speaker 4: we can think of a coastal areas as usual, just 664 00:35:55,480 --> 00:35:59,440 Speaker 4: like with residential mortgages, you know, because as I mentioned, 665 00:35:59,600 --> 00:36:02,880 Speaker 4: the big component in these pools is technology and software. 666 00:36:03,360 --> 00:36:06,600 Speaker 4: So we know that that's obviously concentrated on east and 667 00:36:06,640 --> 00:36:09,160 Speaker 4: west coast bars and maybe maybe a little bit down south. 668 00:36:10,160 --> 00:36:12,440 Speaker 4: But what would be interesting is that if there's more 669 00:36:12,440 --> 00:36:16,600 Speaker 4: expansion in the industrial area, manufacturing area through private credit, 670 00:36:16,719 --> 00:36:20,560 Speaker 4: that would be I think meaningful in terms of the economy. 671 00:36:20,800 --> 00:36:23,440 Speaker 4: So it is very much a stable source of funding. 672 00:36:23,440 --> 00:36:26,200 Speaker 4: There have available credit to companies that may not be 673 00:36:26,239 --> 00:36:29,920 Speaker 4: able to get that elsewhere. I think that's the macro impact. 674 00:36:30,760 --> 00:36:33,160 Speaker 1: All right, Ben, thank you so much for coming back 675 00:36:33,160 --> 00:36:35,880 Speaker 1: on all thoughts and talking to us. Not bank lending 676 00:36:35,920 --> 00:36:38,560 Speaker 1: this time, but an alternate form of lending. 677 00:36:38,640 --> 00:36:39,279 Speaker 3: Appreciate it. 678 00:36:39,520 --> 00:36:41,399 Speaker 4: Thank you, Tracy, Joe, it's great to be on. 679 00:36:41,320 --> 00:36:55,720 Speaker 3: Thanks for coming back, Joe. 680 00:36:55,840 --> 00:36:57,960 Speaker 1: That was really interesting. There was so much to pick 681 00:36:58,040 --> 00:37:00,399 Speaker 1: out there. One of the things I keep coming back 682 00:37:00,440 --> 00:37:05,000 Speaker 1: to is this idea of like outsourcing the due diligence 683 00:37:05,840 --> 00:37:08,800 Speaker 1: to a private equity company or a sponsor or something 684 00:37:08,840 --> 00:37:10,840 Speaker 1: like that, and it's a bit of a cliche to 685 00:37:11,000 --> 00:37:13,600 Speaker 1: reach for subprime, but Ben did mention it, and it 686 00:37:13,680 --> 00:37:16,080 Speaker 1: sounds a lot like the rating agencies, right, Like you're 687 00:37:16,120 --> 00:37:19,600 Speaker 1: kind of relying on an entity to do that due 688 00:37:19,600 --> 00:37:22,799 Speaker 1: diligence for you, and maybe it'll work out, maybe it'll 689 00:37:22,800 --> 00:37:25,520 Speaker 1: all be fine, but seems like there's a big question 690 00:37:25,560 --> 00:37:25,960 Speaker 1: mark there. 691 00:37:26,120 --> 00:37:28,680 Speaker 2: Yeah, I mean it kind of makes sense to me, 692 00:37:29,000 --> 00:37:33,000 Speaker 2: just intuitively. The banks only have so much scale, right 693 00:37:33,320 --> 00:37:36,400 Speaker 2: and like obviously there's only so much balance sheet that 694 00:37:36,480 --> 00:37:39,520 Speaker 2: banks can allocate, you know, how much they can lend out, 695 00:37:39,800 --> 00:37:42,520 Speaker 2: but there's also like going to just be a constraint 696 00:37:42,560 --> 00:37:45,279 Speaker 2: on how much due diligence and how many relationships they 697 00:37:45,280 --> 00:37:48,160 Speaker 2: can build, and the types of industries that the individual 698 00:37:48,239 --> 00:37:52,479 Speaker 2: bankers at the banks like truly become familiar with enough 699 00:37:52,480 --> 00:37:55,480 Speaker 2: to lend, and particular for smaller companies that may not 700 00:37:55,560 --> 00:37:58,080 Speaker 2: be like you know, megafeed generators or whatever. So I 701 00:37:58,080 --> 00:38:01,279 Speaker 2: guess like intuitively it makes sense that we sort of 702 00:38:01,320 --> 00:38:04,680 Speaker 2: see like the sort of like breakup of the bank 703 00:38:04,760 --> 00:38:07,439 Speaker 2: and that more and more of the credit extension part 704 00:38:07,880 --> 00:38:12,359 Speaker 2: would essentially be from individual specialist companies of various sorts. 705 00:38:12,239 --> 00:38:14,640 Speaker 1: Well, and also going back to the regulation I mean 706 00:38:15,000 --> 00:38:16,839 Speaker 1: again by design. 707 00:38:16,640 --> 00:38:18,360 Speaker 2: Yeah, by design, by design exactly. 708 00:38:18,800 --> 00:38:21,520 Speaker 1: Regulators decided they didn't want banks to take so many 709 00:38:21,600 --> 00:38:23,800 Speaker 1: risks in the aftermath of the two thousand and eight crisis, 710 00:38:23,800 --> 00:38:27,000 Speaker 1: and so they put in restrictions on various types of lending, 711 00:38:27,040 --> 00:38:30,680 Speaker 1: and a lot of that activity got squeezed to private credit, 712 00:38:30,800 --> 00:38:34,359 Speaker 1: business development companies, that type of thing. So it makes 713 00:38:34,360 --> 00:38:37,920 Speaker 1: some sense. And to Ben's point, if we have basically 714 00:38:38,080 --> 00:38:41,920 Speaker 1: established a way for small to medium sized companies to 715 00:38:42,239 --> 00:38:46,040 Speaker 1: get stable funding. This was always a concern in the 716 00:38:46,080 --> 00:38:49,800 Speaker 1: public markets, right that if you're a smaller medium sized company, 717 00:38:50,200 --> 00:38:53,280 Speaker 1: you are probably not going to be issuing a massive 718 00:38:53,520 --> 00:38:56,440 Speaker 1: leverage loan in the same way mega corporation can do it. 719 00:38:56,480 --> 00:38:59,319 Speaker 1: So if there is an alternative, that seems like a 720 00:38:59,360 --> 00:39:04,839 Speaker 1: good thing. However, I still kind of wonder about that, 721 00:39:05,000 --> 00:39:10,319 Speaker 1: like cataclysmic trigger, because it seems like the incentives are 722 00:39:10,400 --> 00:39:14,239 Speaker 1: all really well aligned for the time being. So if 723 00:39:14,280 --> 00:39:17,759 Speaker 1: you're the lender, you can keep blending money because you 724 00:39:17,800 --> 00:39:20,720 Speaker 1: don't want to crystallize a loss and take a default, 725 00:39:20,800 --> 00:39:24,680 Speaker 1: and you have that relationship with the company. But if 726 00:39:24,680 --> 00:39:28,120 Speaker 1: that ever changes, Yeah, and we're talking about companies that 727 00:39:28,160 --> 00:39:31,200 Speaker 1: don't have access to alternative forms of funding. You know, 728 00:39:31,239 --> 00:39:33,000 Speaker 1: they can't go to a bank and get a loan. 729 00:39:33,160 --> 00:39:36,040 Speaker 1: Often that's why they're knocking at private credit store. 730 00:39:36,880 --> 00:39:37,319 Speaker 3: I don't know. 731 00:39:37,840 --> 00:39:40,240 Speaker 1: No, maybe I shouldn't worry about the worst case scenario, 732 00:39:40,360 --> 00:39:41,120 Speaker 1: but no. 733 00:39:41,000 --> 00:39:42,759 Speaker 2: I mean I guess the way I would just sort 734 00:39:42,800 --> 00:39:45,120 Speaker 2: of like I said, and I would maybe like sort 735 00:39:45,160 --> 00:39:48,239 Speaker 2: of go down the middle on this question, which is 736 00:39:48,280 --> 00:39:52,399 Speaker 2: that like the worst case scenario will happen, in other words, 737 00:39:52,440 --> 00:39:54,799 Speaker 2: at some point, because this is like, you know, there 738 00:39:54,800 --> 00:40:00,480 Speaker 2: have been banking cycles and credit cycles and people wearing 739 00:40:00,520 --> 00:40:04,160 Speaker 2: the rose colored goggles probably since the first loan was made. Yeah, 740 00:40:04,280 --> 00:40:07,160 Speaker 2: none of us like really know the timing, but we 741 00:40:07,280 --> 00:40:10,440 Speaker 2: definitely know that there will be some point in which 742 00:40:11,040 --> 00:40:15,719 Speaker 2: lenders basically lend to bad credits make loans. Maybe the 743 00:40:15,840 --> 00:40:19,040 Speaker 2: terms are too nice, maybe the spreads are too narrow, 744 00:40:19,160 --> 00:40:21,120 Speaker 2: Maybe the conditions that no big legs. I mean, we 745 00:40:21,200 --> 00:40:23,320 Speaker 2: know this is a phenomenon, right, I mean, like maybe 746 00:40:23,320 --> 00:40:26,799 Speaker 2: the terms in the conditions, the covenants are solid now, 747 00:40:26,840 --> 00:40:29,640 Speaker 2: but it's only a matter of time before that deteriors 748 00:40:29,680 --> 00:40:33,040 Speaker 2: the longer you go without defaults. This is how it's 749 00:40:33,120 --> 00:40:35,480 Speaker 2: going to work. We don't know the timing, But it 750 00:40:35,560 --> 00:40:38,319 Speaker 2: just seems like no matter what the lending category, at 751 00:40:38,320 --> 00:40:40,919 Speaker 2: some point, someone is going to come along and lend 752 00:40:41,000 --> 00:40:43,640 Speaker 2: to bad borrowers at two favorable prices. 753 00:40:43,680 --> 00:40:45,560 Speaker 1: Well, I guess the thing to watch out for is 754 00:40:45,880 --> 00:40:48,600 Speaker 1: the leverage question, like whether or not you start to 755 00:40:48,600 --> 00:40:52,240 Speaker 1: see leverage bills, yeah, on private credit, at which point 756 00:40:52,360 --> 00:40:54,040 Speaker 1: it would become a systemic. 757 00:40:53,920 --> 00:40:59,239 Speaker 2: Securitization allowing end investors, has been said, securitization allowing them 758 00:40:59,320 --> 00:41:01,600 Speaker 2: to sort of lay on to their own credit. This 759 00:41:01,640 --> 00:41:05,240 Speaker 2: will happen. It will happen. We don't know when it'll happen, eventually, 760 00:41:05,320 --> 00:41:06,520 Speaker 2: because this is what humans do. 761 00:41:08,160 --> 00:41:11,319 Speaker 1: Very philosophical start to the new year. It is true, 762 00:41:11,360 --> 00:41:13,080 Speaker 1: all right, I am just going to say that we 763 00:41:13,120 --> 00:41:15,560 Speaker 1: are going to talk more about private credit, and we 764 00:41:15,640 --> 00:41:19,680 Speaker 1: actually have a really interesting guest lined up, something we've 765 00:41:19,680 --> 00:41:23,680 Speaker 1: never done before. So that ohtally yeah. Hopefully that will 766 00:41:23,719 --> 00:41:27,560 Speaker 1: be out relatively soon after this one. But in the meantime, 767 00:41:27,680 --> 00:41:28,400 Speaker 1: shall we leave it there. 768 00:41:28,480 --> 00:41:29,200 Speaker 2: Let's leave it there. 769 00:41:29,600 --> 00:41:32,600 Speaker 1: This has been another episode of the Odd Thoughts podcast. 770 00:41:32,719 --> 00:41:35,720 Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway 771 00:41:35,880 --> 00:41:37,120 Speaker 1: and I'm Jill Wisenthal. 772 00:41:37,200 --> 00:41:39,920 Speaker 2: You can follow me at the Stalwart. Follow Ben Emmons, 773 00:41:39,960 --> 00:41:44,279 Speaker 2: He's at Marco Madness too. Follow our producers Carmen Rodriguez 774 00:41:44,320 --> 00:41:47,439 Speaker 2: at Carmen armand dash, Ol Bennett at Dashbot and cal 775 00:41:47,520 --> 00:41:50,800 Speaker 2: Brooks at kel Brooks. And thank you to our producer 776 00:41:50,840 --> 00:41:53,680 Speaker 2: Moses On. For more Odd Lots content, go to Bloomberg 777 00:41:53,719 --> 00:41:56,759 Speaker 2: dot com slash odd Logs. We have a blog transcripts 778 00:41:56,760 --> 00:42:00,319 Speaker 2: of all our episodes in the newsletter, and check out 779 00:42:00,320 --> 00:42:04,640 Speaker 2: the discord Discord dot gg slash odd Lots Chat with 780 00:42:04,800 --> 00:42:06,720 Speaker 2: other listeners twenty four seven. 781 00:42:07,480 --> 00:42:10,120 Speaker 1: And if you enjoy odd Lots, if you want to 782 00:42:10,160 --> 00:42:13,839 Speaker 1: hear Joe's philosophy of human behavior, then please leave us 783 00:42:13,880 --> 00:42:33,399 Speaker 1: a positive review on your favorite podcast platform. Thanks for listening.