WEBVTT - This Is the Impact of Billions Flowing Into Private Credit 0:00:10.720 --> 0:00:14.000 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:14.120 --> 0:00:15.480 I'm Tracy Alloway. 0:00:15.200 --> 0:00:15.840 And I'm Joe. 0:00:15.840 --> 0:00:17.200 Why isn't thal Joe. 0:00:17.239 --> 0:00:20.279 It's a new year, Happy New Year, Happy New Year. 0:00:20.840 --> 0:00:23.640 This is our first podcast recording of the year, and 0:00:23.680 --> 0:00:25.720 I think it's fair to say that we are going 0:00:25.800 --> 0:00:29.400 into a different environment in terms of sentiment than we 0:00:29.400 --> 0:00:33.480 were going into twenty twenty three. So this time last year, 0:00:33.840 --> 0:00:37.920 everything was very pessimistic. Lots of people were expecting recession. 0:00:38.440 --> 0:00:41.440 The hills were alive with the sounds of inverted yield 0:00:41.479 --> 0:00:44.520 curves and things like that. This year feels a little 0:00:44.520 --> 0:00:47.040 bit better. Stalks are up, lots of talk about a 0:00:47.080 --> 0:00:50.239 soft landing. Of course, the irony is that if there 0:00:50.280 --> 0:00:53.040 is going to be a recession, and you know one 0:00:53.080 --> 0:00:55.440 hundred percent chance there will be a recession in the future, 0:00:55.720 --> 0:00:58.400 it's closer than ever, and yet we feel a lot 0:00:58.440 --> 0:00:59.160 better about it. 0:00:59.440 --> 0:01:00.000 Yeah, it is. 0:01:00.000 --> 0:01:03.560 It's funny the optimism that we really felt in December 0:01:03.560 --> 0:01:06.240 about soft landings and bull markets and raids coming down 0:01:06.280 --> 0:01:12.000 in normalization. Interestingly enough, we're recording this January third so far, 0:01:12.240 --> 0:01:14.440 I guess this is we're looking at. We've had a 0:01:14.480 --> 0:01:17.360 few down days but you know whatever, a few days 0:01:17.360 --> 0:01:18.679 here there, it doesn't make a big difference. 0:01:18.959 --> 0:01:22.600 I call it profit taking Joe profit But anyway, you know, 0:01:22.959 --> 0:01:25.880 New Year, New Themes to discuss. 0:01:25.319 --> 0:01:27.600 Taking profits, I wish. 0:01:28.280 --> 0:01:31.160 But one of the things that's still with us is 0:01:31.280 --> 0:01:35.360 this concern about whether or not the economy can escape 0:01:35.400 --> 0:01:38.720 the full force of these very dramatic interest rate hikes 0:01:38.880 --> 0:01:41.520 that we've seen over the past couple of years, whether 0:01:41.600 --> 0:01:44.560 or not there's still a shoe to drop. 0:01:44.680 --> 0:01:47.480 Basically, yeah, you know, it gets to the lags debate. 0:01:47.600 --> 0:01:50.120 We talked about it with Anna Wong at the end 0:01:50.160 --> 0:01:54.400 of twenty twenty three. The market expects rate cuts, obviously, 0:01:54.560 --> 0:01:57.600 some people think as soon as March. Unclear when or 0:01:57.680 --> 0:02:00.680 if that will be. That theoretically is taking off some 0:02:00.720 --> 0:02:04.040 of the pressure from markets, particularly credit markets. But yeah, 0:02:04.040 --> 0:02:06.760 we had this really big rise in raids. Some people 0:02:06.840 --> 0:02:09.600 think that the lagged effect still has yet to come, 0:02:09.880 --> 0:02:13.079 and so sort of trying to understand what's changed from 0:02:13.120 --> 0:02:15.240 when we were etserped to when we're at five percent, 0:02:15.600 --> 0:02:17.880 I think is still an important conversation to. 0:02:17.840 --> 0:02:21.600 Have, absolutely, and in my mind one of the big 0:02:21.639 --> 0:02:24.400 areas of concerns, And it also goes to the idea 0:02:24.440 --> 0:02:27.480 of what's changed over the past few years has to 0:02:27.480 --> 0:02:31.600 be private credit. Ye. Right, We've seen this absolute swelling 0:02:32.200 --> 0:02:35.560 of this particular asset class at a time when interest 0:02:35.639 --> 0:02:38.440 rates have been going up, and there's still lots of 0:02:38.480 --> 0:02:41.959 concern over whether or not this new source of funding 0:02:42.680 --> 0:02:46.840 basically knows what it's doing right, Like are these managers, 0:02:46.880 --> 0:02:50.880 are these investors like getting it right? But then the 0:02:50.960 --> 0:02:53.480 other thing I keep thinking about, and we've sort of 0:02:53.680 --> 0:02:56.080 talked a little bit about this, but this idea of 0:02:56.120 --> 0:03:00.160 the macro impact of private credit. If you have a 0:03:00.200 --> 0:03:03.560 body of money that is now one point three trillion 0:03:03.880 --> 0:03:07.560 or one point six trillion outstanding, depending on which estimate 0:03:07.600 --> 0:03:11.680 you're looking at, that is more or equivalent to the 0:03:11.720 --> 0:03:14.760 size of the entire junk created corporate bond market. So 0:03:14.800 --> 0:03:18.280 there's basically this like new pool of money in the 0:03:18.440 --> 0:03:21.560 economic system at a time when interest rates are going 0:03:21.639 --> 0:03:24.680 up and we're not really sure what impact it's having. 0:03:24.800 --> 0:03:27.200 And I'll just add on to that. Part of the 0:03:27.360 --> 0:03:30.160 interest obviously is Okay, what does it mean for this 0:03:30.240 --> 0:03:33.240 cycle a higher rates, et cetera. But this acid class 0:03:33.400 --> 0:03:36.680 that's exploded, it's not going to go away regardless. And 0:03:36.960 --> 0:03:40.600 the expectation is that it's going to overtime continue to grow. 0:03:41.160 --> 0:03:43.080 So I think there was just a lot of need 0:03:43.360 --> 0:03:47.000 and interest, but I would say need to sort of understand, 0:03:47.120 --> 0:03:50.400 as you say, the macro impacts from this space. I'm 0:03:50.400 --> 0:03:54.160 also curious about the source of excess returns. We talked 0:03:54.160 --> 0:03:55.960 about it a little bit, but it's always sort of 0:03:55.960 --> 0:03:58.400 important when thinking about an asset classes, like, Okay, what 0:03:58.480 --> 0:04:02.600 is it specifically that's being exploited here for above average returns? 0:04:02.640 --> 0:04:06.080 How correlated uncorrelated is I think it's still worth trying 0:04:06.120 --> 0:04:09.520 to untangle the impact and the role of this asset class. 0:04:09.600 --> 0:04:13.280 Absolutely so. We've done one episode on this topic. Previously, 0:04:13.320 --> 0:04:15.800 we spoke with Laura Holsen from New Mountain and she 0:04:15.920 --> 0:04:18.920 basically gave us the elevator pitch for why this asset 0:04:18.920 --> 0:04:22.760 class has been growing so dramatically in recent years. But 0:04:23.440 --> 0:04:25.719 in this particular episode, we're going to dig a little 0:04:25.760 --> 0:04:28.920 bit more into the macro impact of private credit, how 0:04:28.920 --> 0:04:32.960 it competes with other types of funding, and per Joe's point, 0:04:33.360 --> 0:04:37.080 where the source of those excess returns is actually coming from. 0:04:37.400 --> 0:04:39.880 And I'm very pleased to say we have the perfect guest. 0:04:40.080 --> 0:04:42.279 We're going to be speaking with Ben Emmons. He's a 0:04:42.320 --> 0:04:45.479 senior portfolio manager at New Edge twelf. Some of you 0:04:45.560 --> 0:04:48.480 might remember that we spoke to him last year about 0:04:48.600 --> 0:04:52.680 the contraction in bank lending after the collapse of Silicon 0:04:52.800 --> 0:04:55.760 Valley Bank and a few others. He's had a very 0:04:55.800 --> 0:04:59.520 wide ranging career. He was at PIMCO for a long time. 0:05:00.240 --> 0:05:02.839 A great person to give us an overview of how 0:05:03.000 --> 0:05:06.400 private credit is interacting with the rest of the financial 0:05:06.440 --> 0:05:09.000 system and the economy. So Ben, thank you so much 0:05:09.040 --> 0:05:10.279 for coming back on all thoughts. 0:05:10.680 --> 0:05:12.840 Tracy Joe, it's great to be back. Happy New Year, 0:05:12.880 --> 0:05:13.480 Thank you for having. 0:05:13.360 --> 0:05:15.160 Me, Happy New Year, Thank you for coming back. 0:05:15.279 --> 0:05:19.520 Yeah, So maybe to begin with tell us, what's your 0:05:19.680 --> 0:05:23.280 particular interest in private credit? You know, sitting at New Edge, 0:05:23.520 --> 0:05:28.320 you're a portfolio manager. What is the offering posed by 0:05:28.360 --> 0:05:29.040 private credit? 0:05:29.800 --> 0:05:32.880 Yeah, it's driven much by clients interest in demand for 0:05:32.920 --> 0:05:36.800 this asset class, you know, in part maybe because the 0:05:36.880 --> 0:05:39.479 type of clients at New Edge in this case services 0:05:39.640 --> 0:05:43.160 are working in the private credit industry themselves ironically, so 0:05:43.160 --> 0:05:47.440 they're interested in investing out of private credit strategies. But 0:05:47.520 --> 0:05:51.240 it's also i think born out of clients who have 0:05:51.320 --> 0:05:55.560 connection with the companies that these private credit lenders are 0:05:55.839 --> 0:05:58.680 lending to or have some sort of involvement in that, 0:05:59.000 --> 0:06:01.720 and are interested and allocating the effort to this as 0:06:01.800 --> 0:06:05.120 a class as opposed to you know, let's say the 0:06:05.200 --> 0:06:08.719 retail approach of like, well, okay, I heard about private credit. 0:06:08.880 --> 0:06:10.920 There may be an ETF on it, like you know, 0:06:11.000 --> 0:06:13.000 and so let's buy this ETF and and now I 0:06:13.120 --> 0:06:15.120 go to a wealth man's perform like new Egine and 0:06:15.160 --> 0:06:17.479 they will help me with that. That's far less. So 0:06:18.000 --> 0:06:20.599 the investors that we talk to are very involved in 0:06:20.640 --> 0:06:24.080 private credit themselves, So it gives you an interesting angle 0:06:24.160 --> 0:06:26.919 on it because once you are starting to talk to 0:06:26.960 --> 0:06:29.280 these clients, you know, you have to really learn about 0:06:29.279 --> 0:06:32.120 what this aesca class truly is about. You know, it's 0:06:32.200 --> 0:06:35.440 far less an asked class about the way we're trading 0:06:35.480 --> 0:06:37.719 public markets. You know, if you look at treasury bonds, 0:06:37.760 --> 0:06:40.560 that's not what private credit is really, how it is 0:06:40.600 --> 0:06:43.440 traded or how it is functioning. So I find it 0:06:43.440 --> 0:06:47.479 a really interesting different alternative way of investing as something 0:06:47.520 --> 0:06:50.880 I had not looked at in my career previously, you know, 0:06:51.279 --> 0:06:53.320 until I really started to get into the Vegisa's investment 0:06:53.320 --> 0:06:58.120 advisory business and so interesting the watches to see this unfold. 0:06:58.320 --> 0:07:01.599 So what is it for an investor? You know, you 0:07:01.600 --> 0:07:05.720 think about overall portfolio. People have some equity, and they 0:07:05.760 --> 0:07:08.920 have some maybe risk free government debt, et cetera, and 0:07:09.080 --> 0:07:12.760 whatever it is. What is it about private credit? What 0:07:12.800 --> 0:07:14.680 does it deliver for a portfolio? 0:07:15.480 --> 0:07:19.120 So the one it is truly diversification, and it is 0:07:19.200 --> 0:07:23.040 an asset class that's traditionally non correlated to equity or 0:07:23.120 --> 0:07:26.840 fixed income, even though you know all of the loans 0:07:26.840 --> 0:07:29.520 that are in the devocredit funds are off based off 0:07:29.720 --> 0:07:32.200 the secured overnight funding rate, that's the self rate, right, 0:07:32.240 --> 0:07:34.640 So there's there is obviously a connection with interest rates, 0:07:35.280 --> 0:07:38.920 but it has been long term uncorrelated based upon how 0:07:39.000 --> 0:07:42.160 the returns have behaved relative to returns and equities and 0:07:42.200 --> 0:07:45.840 fixed income. I think what the tracks people is that 0:07:46.520 --> 0:07:50.040 the loans that are being issued by those private lenders, 0:07:50.440 --> 0:07:53.480 you know, they have been at extreme low default rates 0:07:53.520 --> 0:07:57.520 for a really long period of time. Now, I always 0:07:57.600 --> 0:07:59.840 talk to the private credit managers with a bit of 0:07:59.880 --> 0:08:03.320 a caution here because coming from a world of total 0:08:03.360 --> 0:08:07.760 return and fixed income training, you take immediately set back well, okay, 0:08:07.880 --> 0:08:09.920 load the faults. Really, I mean so. 0:08:10.640 --> 0:08:15.000 I yesh, it's sort of true of every new asset class, right, like, oh, 0:08:15.040 --> 0:08:17.960 the history is limited, so there aren't many defaults exactly. 0:08:18.040 --> 0:08:20.720 So that's exactly a very good point. That's one reason. 0:08:21.200 --> 0:08:23.560 On the other hand, it's about you know, okay, the 0:08:23.600 --> 0:08:27.000 individual companies that they lend to have had a good 0:08:27.080 --> 0:08:29.520 credit history so far, at least in many of the funds. 0:08:29.520 --> 0:08:31.800 If we looked at that's been the case. Very little 0:08:31.800 --> 0:08:36.520 impairments that have happened. Second, the private lenders are in control, 0:08:36.559 --> 0:08:39.400 so they set the covenance. It's not like a bank 0:08:39.559 --> 0:08:44.760 involved or another intermediary that is controlling the contract. It's 0:08:44.800 --> 0:08:49.920 really Blue Out Blackstone KKR. Those companies. They set the 0:08:50.040 --> 0:08:54.360 terms and they also are very good at enforcing those terms. 0:08:54.480 --> 0:08:58.360 And think it gives clients a confidence that these loans 0:08:58.400 --> 0:09:01.360 are staying current and we're not get any major impairments 0:09:01.360 --> 0:09:05.000 of anything. Now, what I think otherwise is I think 0:09:05.000 --> 0:09:07.800 of attraction to clients is that you know, it is 0:09:08.200 --> 0:09:11.400 an astraclass that is not out on the screen. It 0:09:11.520 --> 0:09:16.840 is privately managed and traded. Private credit funds are nothing 0:09:16.920 --> 0:09:19.839 like a mutual fund of etfor or hedgephone manager they 0:09:19.880 --> 0:09:23.000 are very selective in how they pick their different companies 0:09:23.000 --> 0:09:25.480 to lend to. I think all of those things play 0:09:25.520 --> 0:09:29.400 a role in why investors are interested in this aska class. 0:09:29.640 --> 0:09:32.080 So a lot of this reminds me of the debate 0:09:32.240 --> 0:09:37.360 around cove Light in sort of like the middle twenty tens, 0:09:37.520 --> 0:09:40.640 when there was an explosion in cove Light bonds or 0:09:41.080 --> 0:09:45.520 a dramatic deterioration in the amount of protections that investors 0:09:45.520 --> 0:09:48.320 were demanding in order to lend to companies. And I 0:09:48.320 --> 0:09:50.360 remember that time. There was an argument sort of for 0:09:50.640 --> 0:09:54.280 and against. So you know, some people were arguing, this 0:09:54.320 --> 0:09:57.960 is terrible. This is the result of the search for yield. 0:09:58.040 --> 0:10:01.600 It basically means people will lend to anywhere they can 0:10:01.640 --> 0:10:03.520 get a return, and they're not going to ask for 0:10:03.600 --> 0:10:08.280 any protections because they're just desperate to get any sort 0:10:08.280 --> 0:10:11.920 of yield. But then the offsetting argument was that, well, 0:10:11.960 --> 0:10:16.439 actually it sounds bad. Cove Light sounds bad. The idea 0:10:16.440 --> 0:10:19.600 of investors giving up protections sounds bad. But if something 0:10:19.640 --> 0:10:23.480 were to happen, if there were a recession, then it 0:10:23.520 --> 0:10:25.600 could end up being a good thing because it means 0:10:25.640 --> 0:10:29.760 companies have more flexibility to refinance. They don't have as 0:10:29.760 --> 0:10:32.640 many restrictions around what they can do. So I always 0:10:32.640 --> 0:10:35.720 remember there were sort of pros and cons to the 0:10:35.760 --> 0:10:38.680 cove light argument, and it feels similar in private credit, 0:10:39.920 --> 0:10:40.360 maybe to. 0:10:40.320 --> 0:10:43.400 An extent ration. But I would say the managers that 0:10:43.440 --> 0:10:45.880 we've spoken with, and you know, we talked to over 0:10:45.880 --> 0:10:49.319 one hundred managers in that space, what we've read from 0:10:49.320 --> 0:10:52.200 most of those governance they're not lights. They're actually stricter, 0:10:53.440 --> 0:10:57.559 and I think it is because of the personal relationships 0:10:57.600 --> 0:11:00.360 that these private lenders have of the company that they're 0:11:00.440 --> 0:11:03.240 lending to. And they told us that we've actually got 0:11:03.240 --> 0:11:06.960 an examples they've shown also, you know, uh, a presentation 0:11:07.080 --> 0:11:10.640 of the different companies that are actually we are in 0:11:10.720 --> 0:11:14.199 the fund right who are basically let's say, long term 0:11:14.240 --> 0:11:19.280 standing relationship between say a Blackstone and that company itself. 0:11:19.840 --> 0:11:22.160 So I'm trying to get us that the covenants are 0:11:22.200 --> 0:11:25.920 sort of maybe like customized governance. They certainly don't do 0:11:26.120 --> 0:11:28.640 to us as light. You know, there's a very strict 0:11:28.640 --> 0:11:33.160 control on payments of interest and it's about trying to 0:11:33.280 --> 0:11:36.320 you know, really help the company move ahead. So there's 0:11:36.480 --> 0:11:39.520 much of a i think also a private equity aspect 0:11:39.600 --> 0:11:42.480 to this, and that's typical in private credit anyway, where 0:11:42.520 --> 0:11:45.040 you have a sponsor that it's involved in the structure 0:11:45.080 --> 0:11:48.720 of private credit fund. But having that private equity approach 0:11:49.320 --> 0:11:53.240 gives these companies that sort of, let's say, empower those 0:11:53.240 --> 0:11:55.880 companies to do the right thing with that money and 0:11:56.080 --> 0:11:59.720 invest in the right way. And therefore the governance, although 0:11:59.720 --> 0:12:02.640 they look really strict, are not necessarily going to be 0:12:02.679 --> 0:12:05.760 at some moment like, Okay, you can't pay off those loans, 0:12:06.040 --> 0:12:08.160 We're going to, you know, really put the screws on 0:12:08.480 --> 0:12:10.280 this company if we're going to take the keys right 0:12:10.320 --> 0:12:14.720 at lily and and therefore the company becomes totally impaired 0:12:14.720 --> 0:12:17.960 and dysfunctional. That doesn't seem to be the case so far, 0:12:18.760 --> 0:12:21.679 even though from what I read, those governants there are 0:12:21.760 --> 0:12:25.960 strict compared to say, clos where that governant light showed 0:12:26.040 --> 0:12:27.120 up in the mid to twenty. 0:12:26.920 --> 0:12:45.160 TENHS for now, So what what cause a company to 0:12:45.679 --> 0:12:49.440 decide to go the private route versus you know, either 0:12:49.480 --> 0:12:52.200 issue a bond or take out a loan from a 0:12:52.240 --> 0:12:53.520 bank in the public market. 0:12:54.120 --> 0:12:56.920 So I did announcers on the b credit fund, for example, 0:12:56.920 --> 0:13:01.600 from Blackstone, and all those are in there are non listed. 0:13:02.040 --> 0:13:05.160 All of those companies have what we from our conversations 0:13:05.160 --> 0:13:07.640 with them, have no interest in going public at all. 0:13:08.360 --> 0:13:10.840 And Thirdly, what I did find, and I did say 0:13:10.880 --> 0:13:14.640 that to Blackstone, about ten percent or so of that pool, 0:13:15.120 --> 0:13:17.720 there's very little information I can find on these companies, 0:13:17.960 --> 0:13:20.000 and I go online, I don't see much of any 0:13:20.080 --> 0:13:23.040 kind of information. So some of our really really private, 0:13:23.120 --> 0:13:27.200 private type companies we talk about literally like services companies 0:13:27.200 --> 0:13:30.720 a car wash or some technology services company like that 0:13:30.760 --> 0:13:34.760 you've never heard of before. And so these companies I 0:13:34.800 --> 0:13:37.240 think are no also not in the position to just 0:13:37.280 --> 0:13:40.400 go to the public markets unless there's a bank that 0:13:40.559 --> 0:13:43.560 is really that easy in terms of his lending standards, 0:13:43.600 --> 0:13:46.839 that is willing to give these companies money or allow 0:13:46.880 --> 0:13:49.720 them to come to market. On the other hand, I mean, 0:13:49.960 --> 0:13:53.040 some of these companies may be in a position where 0:13:53.559 --> 0:13:55.640 they get better and better revenues, they get more traction, 0:13:55.760 --> 0:13:58.320 get more attention to their business model, and at some 0:13:58.360 --> 0:14:00.320 point some big investor compans like, hey, look, you know, 0:14:00.559 --> 0:14:03.640 we can help you go public and raise equity. We've 0:14:03.679 --> 0:14:06.199 not found those examples in these pools so far. 0:14:06.600 --> 0:14:09.679 How much of the rise of this acid class, in 0:14:09.720 --> 0:14:13.400 your view, is simply about scale and capacity within the banks, 0:14:13.480 --> 0:14:16.280 or maybe lack thereof, because if the story is right, 0:14:16.600 --> 0:14:20.480 the companies are not listed, they're not particularly well known, so, 0:14:20.600 --> 0:14:22.840 like you know, you're sort of starting from scratch on 0:14:22.960 --> 0:14:27.800 due diligence or familiarity. Perhaps the covenants are bespoke. In 0:14:27.840 --> 0:14:31.000 many cases, as you've described, they're tailored, so that obviously 0:14:31.040 --> 0:14:35.080 takes legwork on the part of whoever is making lending decisions. 0:14:35.480 --> 0:14:37.480 So is this like a story of like essentially going 0:14:37.520 --> 0:14:41.080 to post Dodd Frank world where like banks are constrained, 0:14:41.200 --> 0:14:45.240 et cetera, that essentially it just makes more sense for 0:14:45.760 --> 0:14:47.880 in many cases for a third parties who have the 0:14:47.920 --> 0:14:51.920 capacity and scale to specialize and find in creating that relationship. 0:14:52.360 --> 0:14:55.880 That's spot on, Joe. I think the outer part of 0:14:55.920 --> 0:14:59.520 that story is that as banks have skilled back ye 0:15:00.000 --> 0:15:04.200 dedicated market, that created a void, and I think that 0:15:04.320 --> 0:15:07.960 was part of the story too, of these companies automatically 0:15:07.960 --> 0:15:11.520 getting towards a private lender as supposed to going to 0:15:11.640 --> 0:15:14.120 it let's say mid size or smaller bank trying to 0:15:14.160 --> 0:15:16.880 get a loan or business loan. But as I mentioned, 0:15:16.880 --> 0:15:21.600 the personal aspect that found really fascinating of how personal 0:15:21.640 --> 0:15:25.440 relationships they've had. Now, any private banker has this right 0:15:25.520 --> 0:15:27.240 if you go to I don't think of any of 0:15:27.280 --> 0:15:31.000 the major banks there's a personal relationship. But I think 0:15:31.080 --> 0:15:35.880 in this case it's very driven by personal long term relationships. 0:15:36.280 --> 0:15:40.680 So that void of the banks, not you know, lendings 0:15:40.680 --> 0:15:44.320 as much in that syndicated loan channel, is one reason 0:15:44.320 --> 0:15:46.480 why there is a lot of demand for private lending. 0:15:46.920 --> 0:15:48.960 On the other hand, it's really the personal relationships. I 0:15:49.000 --> 0:15:49.760 think that's driving it. 0:15:50.160 --> 0:15:53.760 Tracy, it still strikes me as perverse that the banks 0:15:53.800 --> 0:15:57.080 that failed in twenty twenty three were like the banks 0:15:57.080 --> 0:16:00.320 where they actually took like private relationships seriously. Like it 0:16:00.360 --> 0:16:01.760 sort of bothered me. It's like, oh, this is like 0:16:01.760 --> 0:16:04.040 what I think like bankers should be, like really getting 0:16:04.080 --> 0:16:07.680 to know the clients, bespoke offerings that isn't just like 0:16:07.720 --> 0:16:08.760 some generic website. 0:16:08.800 --> 0:16:10.880 There's a difference between getting to know the clients and 0:16:10.920 --> 0:16:12.280 doing whatever they want you to do. 0:16:12.400 --> 0:16:14.640 I guess that's it, but it still feels like man like, 0:16:15.040 --> 0:16:16.960 I think that's what bankers should be doing, but I 0:16:16.960 --> 0:16:19.040 guess apparently not, that's not what the market said. 0:16:19.200 --> 0:16:21.840 Well, I mean, just going back to the regulation, I 0:16:21.840 --> 0:16:25.560 mean a lot of this was by design. I remember 0:16:25.600 --> 0:16:28.320 when the leverage lending guidelines came out again in the 0:16:28.360 --> 0:16:30.760 mid twenty tens. That was back when the market was 0:16:30.800 --> 0:16:34.040 going absolutely haywire, and the regulators came out and said, 0:16:34.040 --> 0:16:36.520 hold on, you guys have to like take a breath 0:16:36.520 --> 0:16:38.760 here and stop doing so many things that are risky, 0:16:39.400 --> 0:16:42.960 basically forcing that activity into what we used to refer 0:16:43.040 --> 0:16:45.200 to as the shadow banking system. I don't see that 0:16:45.280 --> 0:16:46.880 term as much as I used to, but that is 0:16:46.960 --> 0:16:50.240 exactly what private credit is, of course. But just on 0:16:50.280 --> 0:16:53.280 this note, I remember there was a really interesting chart. 0:16:53.360 --> 0:16:55.000 I think I put it in one of the All 0:16:55.040 --> 0:16:58.800 Thoughts newsletters maybe a couple months back, but it showed 0:16:59.040 --> 0:17:04.520 commercial and industrial bank lending in the US versus USGDP, 0:17:05.400 --> 0:17:09.119 and for most of the history of that time series, 0:17:09.160 --> 0:17:12.520 they pretty much moved together. So if there are more 0:17:12.760 --> 0:17:17.479 commercial and industrial loans, then GDP tends to be growing. 0:17:17.880 --> 0:17:20.800 But over the past couple of years they've kind of decoupled, 0:17:21.480 --> 0:17:24.040 and in my mind, it really raises the question of, like, 0:17:24.320 --> 0:17:27.600 what is driving GDP growth. If it isn't bank lending, 0:17:27.640 --> 0:17:29.720 you know, maybe it's government funding. We've seen a lot 0:17:29.720 --> 0:17:33.479 of infrastructure spending and things like that, but maybe it 0:17:33.560 --> 0:17:37.560 is also the more than one trillion dollars of private 0:17:37.600 --> 0:17:39.320 credit that now exists. 0:17:39.880 --> 0:17:42.240 I think that's right, because you know the fact that 0:17:42.280 --> 0:17:46.679 it is one point three trillion dollars going to lily 0:17:46.720 --> 0:17:49.480 companies that making twenty five to fifty one hundred million 0:17:49.560 --> 0:17:53.200 dollars of gross revenues a year. That's part of the 0:17:53.240 --> 0:17:57.679 really the small mid size backbone of America that's driving 0:17:57.720 --> 0:18:01.480 GDP and again doing reach own these companies. From the 0:18:01.480 --> 0:18:05.120 information that I've found on it is, you can really 0:18:05.160 --> 0:18:07.639 tell like their business models have expanded very rapidly of 0:18:07.760 --> 0:18:11.760 last several years. In part I think is the infusion 0:18:11.800 --> 0:18:15.560 of private credit and the availability of private credit. Again 0:18:15.680 --> 0:18:18.160 to that question of Joe like that if the availability 0:18:18.240 --> 0:18:21.520 is from private lenders not from banks, it does eventually 0:18:21.560 --> 0:18:24.800 do show up in GDP, maybe not because of the 0:18:24.880 --> 0:18:28.000 commercial and industrial loan contractions you're see in there, but 0:18:28.520 --> 0:18:31.880 through the other channel of private credit extension. I think 0:18:31.920 --> 0:18:36.359 also that the impact in itself of leveraging gearing in 0:18:36.400 --> 0:18:40.840 the financial markets is actually none by from private credit. 0:18:40.880 --> 0:18:44.679 There has been one colo now issues of Blackstone's bi 0:18:44.800 --> 0:18:47.760 credit fund that was very very recently. It was about 0:18:47.760 --> 0:18:50.720 a five hundred million dollar deal. They took the most 0:18:51.520 --> 0:18:53.280 I think that the best loans that they had in 0:18:53.280 --> 0:18:56.480 their fund and bundled them together and sold them to 0:18:56.520 --> 0:19:00.640 investors at a very i think, very tight spread compared 0:19:00.680 --> 0:19:04.000 to where high yielders and anything else, so very conservative. 0:19:04.480 --> 0:19:06.720 But as not much more of that is happening yet. 0:19:06.760 --> 0:19:09.280 So if you think of impact from private credit on 0:19:09.320 --> 0:19:12.400 the economy, we go through leverage and securitization as an example, 0:19:12.480 --> 0:19:15.600 so that maybe the next stage in the future, as 0:19:15.640 --> 0:19:18.560 Blackstone sort of tipped the waters there and figured out, hey, 0:19:18.640 --> 0:19:22.119 there is investor demand instead of direct into our fund, 0:19:22.280 --> 0:19:26.080 we can securitize. If that were to pick up that securitization, 0:19:26.160 --> 0:19:28.640 I would think you're going to get an even more 0:19:28.680 --> 0:19:32.600 compounded effect from this, and then maybe the fears about 0:19:32.640 --> 0:19:35.959 the risk of private credit will become more justified. Right 0:19:36.000 --> 0:19:40.520 because I'm maybe jumping ahead of another question, but you 0:19:40.560 --> 0:19:42.800 know the risk if you think of macro impact on 0:19:42.840 --> 0:19:45.600 the economy and you think of risk, I would think 0:19:45.800 --> 0:19:48.080 the real risk of private credit is that the leverage, 0:19:48.280 --> 0:19:50.960 yeah that's in these funds, which tends to be about 0:19:51.000 --> 0:19:54.240 one and a half two times is sort of most 0:19:54.280 --> 0:19:57.120 of the funds that have that sort of leverage that 0:19:57.119 --> 0:20:01.040 that gets compounded by securitization the loans in the funds, 0:20:01.359 --> 0:20:04.040 and we haven't gotten to that stage yet. So the 0:20:04.119 --> 0:20:07.359 actual leverage itself, I think relatively low. If you compare 0:20:07.400 --> 0:20:10.760 it to the public markets take investment grade leverage is 0:20:10.760 --> 0:20:14.800 still three four times. Yeah, earnings is supposed to one 0:20:14.880 --> 0:20:15.479 or two times. 0:20:15.720 --> 0:20:18.119 I've brought this up in a few different conversations, but 0:20:18.200 --> 0:20:20.639 always blows my mind. So I keep asking the same question. 0:20:20.720 --> 0:20:24.520 But people like the fact that it's not on a screen. 0:20:25.320 --> 0:20:28.960 You mentioned that, And so there's this attraction to prices 0:20:29.000 --> 0:20:31.200 that I guess you don't have to look at every day. 0:20:31.240 --> 0:20:34.200 And if the market's read one day and the stock 0:20:34.280 --> 0:20:37.440 market's down two percent, but you look at your privacy easy. 0:20:37.240 --> 0:20:39.000 To be diversified if you're not traded. 0:20:39.080 --> 0:20:42.520 Yeah, there's like, oh, hey, my credit exposure was totally fat, 0:20:42.560 --> 0:20:45.280 even though like implicitly like that's a lie. I mean, 0:20:45.320 --> 0:20:47.320 we all know, but like, here's what I don't get 0:20:47.320 --> 0:20:50.320 about that. So A, like, is that real like that 0:20:50.440 --> 0:20:54.680 premium that people pay for the appearance of non diversification, 0:20:55.040 --> 0:20:57.440 And b it seems to me that the people who 0:20:57.440 --> 0:21:00.080 should really like pay up for the privilege of not 0:21:00.119 --> 0:21:03.359 having to look at their quotes. Are like individual retail 0:21:03.400 --> 0:21:05.920 investors who are like prone to panic and selling it 0:21:06.000 --> 0:21:07.880 the worst time and buying at the top, et cetera. 0:21:08.280 --> 0:21:12.240 But for the sophisticated investor, which I imagine most people 0:21:12.240 --> 0:21:14.440 who are like allocating to private credit, you know, they're 0:21:14.440 --> 0:21:16.639 not mom and pop. They're you know, they're people with 0:21:16.960 --> 0:21:20.520 moving serious money and sophisticated, like they're pros at this. 0:21:20.600 --> 0:21:23.879 Shouldn't they like be able to bear to look at 0:21:23.880 --> 0:21:25.879 their portfolio on a day to day basis? Why do 0:21:25.920 --> 0:21:27.080 they need to not have the screen? 0:21:27.920 --> 0:21:30.880 Yeah? I know, And that actually has happened because if 0:21:30.880 --> 0:21:32.680 it takes step back, yeah and go to the four 0:21:32.800 --> 0:21:35.840 quote of twenty twenty two, they are suddenly this news 0:21:35.880 --> 0:21:40.320 out that institutional investors in Asia were taking their money 0:21:40.359 --> 0:21:42.760 out of Beat Credit, and that was the first news 0:21:43.480 --> 0:21:47.879 of sort of this redemption starting, and that did spill 0:21:47.920 --> 0:21:50.000 over to the US and cause a little bit of 0:21:50.000 --> 0:21:53.320