WEBVTT - Silver Point Sees ‘Game Over’ for Some Private Debt Funds When Cycle Turns 0:00:17.800 --> 0:00:21.320 Hello, and welcome to the Credit Edge, a weekly market podcast. 0:00:21.600 --> 0:00:23.800 My name is Ida Agathia Perez, and I'm a team 0:00:23.880 --> 0:00:25.240 leader at Bloomberg. 0:00:25.040 --> 0:00:28.320 And I'm David Haven's, a senior credit analyst a Bloomberg Intelligence. 0:00:28.840 --> 0:00:32.159 This week, we're delighted to welcome Michael Gatto, a partner 0:00:32.200 --> 0:00:35.640 and head of private side businesses at Silverpoint Capital. Michael, 0:00:35.680 --> 0:00:36.159 how are you? 0:00:36.320 --> 0:00:38.360 I'm great, Thanks for having me excellent. 0:00:38.400 --> 0:00:41.560 We're delighted to have you here, as if being head 0:00:41.600 --> 0:00:44.280 of privates at Silverpoint weren't enough. Michael is also an 0:00:44.320 --> 0:00:47.760 adjunct professor at Columbia Business School in Fordham's Gibelli School 0:00:47.760 --> 0:00:50.920 of Business, where he teaches credit analysis and distressed special 0:00:50.960 --> 0:00:53.560 Situation investing. Now let me toss it back. 0:00:53.479 --> 0:00:57.960 To your Silverpoint has its origins in distress debt, founded 0:00:58.000 --> 0:01:03.120 by Edmulay and Boboshi, who came from GOLDMANSAC Special Situations Group. 0:01:04.480 --> 0:01:08.479 You work with them at Goldman then joined them shortly after, 0:01:08.560 --> 0:01:11.200 so you you're not a founding partner, but as close 0:01:11.240 --> 0:01:15.160 as it gets. Pretty much of silver Point in recent years, 0:01:15.160 --> 0:01:18.880 though it has expanded. I guess expanded is more accurate 0:01:19.000 --> 0:01:24.000 than pivoted to private credit because of the stress strategy 0:01:24.040 --> 0:01:27.480 is still a relevant one. But I wanted to ask 0:01:27.520 --> 0:01:30.040 you you're under the private credit strategy, tell me more 0:01:30.040 --> 0:01:34.360 about this expansion. What is the cell point or what's 0:01:34.400 --> 0:01:37.600 the edge that your private credit strategy has, and how 0:01:38.520 --> 0:01:40.840 have you convinced How difficult was it the conversation with 0:01:40.959 --> 0:01:45.080 borrowers that yes, you have a loan to own strategy, 0:01:45.280 --> 0:01:46.920 but you do more things on that. 0:01:47.400 --> 0:01:50.120 Yeah, it's a great question, and I think it's a 0:01:50.120 --> 0:01:53.040 little misunderstood in the maocket. And you know, as the 0:01:53.080 --> 0:01:56.680 three of us was discussing earlier at silver Point, we 0:01:56.760 --> 0:02:01.120 never really talked about ourselves a lot to the press 0:02:01.240 --> 0:02:06.240 or other than our investors and our barwers. But we 0:02:06.360 --> 0:02:11.160 started we were Amulet and Barboa Change said they started 0:02:11.240 --> 0:02:16.040 all of the credit functions investing at Goldman Sachs and 0:02:16.440 --> 0:02:19.720 they left two thousand and two and started silver Point, 0:02:20.360 --> 0:02:24.240 and in that we are a credit fund. The press 0:02:24.800 --> 0:02:29.000 has called us a distress debt fund, But in two 0:02:29.040 --> 0:02:33.440 thousand and three we were doing private credit along with 0:02:34.000 --> 0:02:38.800 investing in the secondary markets. So how we view ourselves 0:02:38.800 --> 0:02:43.000 are we are investors in credit and that could be 0:02:43.200 --> 0:02:48.079 performing credit, that could be originating new loans in private 0:02:48.160 --> 0:02:53.800 credit and buying in the secondary market of credits that 0:02:53.880 --> 0:02:57.040 are having problems. So what I want to make a 0:02:57.080 --> 0:03:01.120 clear We've been in that private credit business since two 0:03:01.160 --> 0:03:04.920 thousand and three, and in fact, coming into the Great 0:03:04.960 --> 0:03:10.800 Financial Crisis, we had five billion dollars of our originated lots. 0:03:10.919 --> 0:03:14.200 We had gone through the life into the financial crisis 0:03:14.240 --> 0:03:17.840 about nine billion, and we had five billion that we 0:03:18.040 --> 0:03:22.480 worked through successfully and in fact got very good returns 0:03:22.600 --> 0:03:26.239 on our that they came in and out of the crisis. 0:03:26.600 --> 0:03:32.160 But you're right, you have a perception of your distressed 0:03:32.160 --> 0:03:35.840 that fund, so people will say on occasion, why would 0:03:35.840 --> 0:03:38.640 I borrow from you? And if it's okay, I'd like 0:03:38.720 --> 0:03:44.920 to break it up into two components. One is right now, 0:03:45.440 --> 0:03:49.160 our fund has thirty eight billion of a vestible capital. 0:03:49.680 --> 0:03:55.000 North of half of it is for performing credits four 0:03:55.040 --> 0:04:01.240 billion dollars colos, sixteen billion dollars private credit. That's twenty 0:04:01.640 --> 0:04:09.240 and the remainder is our special opportunities. When we're going 0:04:09.360 --> 0:04:13.920 to the market in the private credit, we're trying to 0:04:14.040 --> 0:04:18.520 fill a gap that's greatly appreciated. And as you know, David, 0:04:18.560 --> 0:04:22.320 you follow private credit, a lot of lenders have a 0:04:22.720 --> 0:04:27.919 very distinct box they lend it to. They want to 0:04:28.000 --> 0:04:31.719 lend to a new LBO. They have a loan to 0:04:31.880 --> 0:04:35.640 value they want, and they have industries that they like 0:04:35.920 --> 0:04:39.960 and industries they don't like, and the minute something fits 0:04:40.000 --> 0:04:44.080 in that box, they're gonna win. They're gonna go after it. 0:04:44.160 --> 0:04:46.800 And they basically are saying, hey, tell me where I 0:04:46.920 --> 0:04:51.400 need to be to win. And that's an overbank market. 0:04:51.440 --> 0:04:56.800 Today won't be through cycles, but today it is. We 0:04:56.880 --> 0:05:01.760 have a different conversation. One we're going to try to 0:05:01.800 --> 0:05:06.680 target thirty forty percent of our loans will be two nonsponsors, 0:05:07.120 --> 0:05:12.760 which is very underbanked because it's harder. You have to 0:05:12.800 --> 0:05:17.720 be comfortable doing full due diligence. You can't rely on, Hey, 0:05:18.080 --> 0:05:21.520 an equity sponsor's buying this company for a billion, they 0:05:21.560 --> 0:05:24.560 want a five hundred billion dollar loan. I could go 0:05:24.600 --> 0:05:29.119 to cent committee with a straight face, fifty percent loan 0:05:29.160 --> 0:05:32.280 to value plus they're going to give me go all 0:05:32.360 --> 0:05:36.120 their work, and then I could cut in paste that summarizon. 0:05:36.839 --> 0:05:40.599 We we will do our own credit work, and we're 0:05:40.640 --> 0:05:45.000 comfortable doing full level private and wey like due diligence 0:05:45.320 --> 0:05:48.360 for a loan, and that allows you to attack that 0:05:49.760 --> 0:05:54.480 our non sponsor space. Then that's not to say we're ignoring. 0:05:54.600 --> 0:05:58.040 If that's thirty forty percent, well if I do the 0:05:58.080 --> 0:06:01.320 math one hundred minus forty, that'd be sixty percent will 0:06:01.360 --> 0:06:07.000 be sponsors. But we break sponsor's need for financing into 0:06:07.160 --> 0:06:12.280 three buckets. Bug. The number one is that core LBO 0:06:12.640 --> 0:06:17.840 it's fairly vanilla, and that we will look at all 0:06:17.920 --> 0:06:20.200 of those we want to see it, but we're only 0:06:20.240 --> 0:06:22.800 going to do very few. Now you say, well, why 0:06:22.839 --> 0:06:25.880 would you even look at it if it's overbanked, Because 0:06:26.080 --> 0:06:31.320 when the cycle turns, we want the relationships and we 0:06:31.480 --> 0:06:34.240 want to be in that. And I'll give you an example. 0:06:34.400 --> 0:06:36.240 A lot of people say, well, there aren't a lot 0:06:36.240 --> 0:06:40.000 of cycles. You had nineteen ninety eight, two thousand and two, 0:06:40.040 --> 0:06:43.159 two thousand and eight and COVID, but you've got a 0:06:43.200 --> 0:06:47.880 lot of mini cycles. So we were maybe doing ten 0:06:47.880 --> 0:06:52.040 to fifteen percent in LBOs and then two thousand and 0:06:52.240 --> 0:06:55.880 three hat men and the market shut down short period 0:06:55.920 --> 0:07:00.520 of time. But you had our real fear of inflation. 0:07:01.360 --> 0:07:04.599 You had interest rates going off for the first time 0:07:04.640 --> 0:07:08.600 in a long time. You had banks with hung deals, 0:07:08.760 --> 0:07:11.320 Twitter was stole hung, and you had all of a sudden, 0:07:11.440 --> 0:07:15.520 Silicon Valley bank blows up. So you had this short 0:07:15.560 --> 0:07:20.320 period of time where the market shut and we went 0:07:20.360 --> 0:07:24.600 in and aggressively filled that cap. The golden moment, Yeah, 0:07:24.640 --> 0:07:27.840 it's the golden moment, but you gotta have the capital, 0:07:28.480 --> 0:07:33.400 the confidence, and the relationship. So that's one part of 0:07:33.440 --> 0:07:38.160 how we're attacking the sponsor market. The second component is 0:07:38.960 --> 0:07:45.040 what we call specialty LBOs, and that's where the sponsor 0:07:45.680 --> 0:07:49.760 does not want to go to the broadly syndicated low 0:07:49.880 --> 0:07:53.160 market or go to ten and fifteen lenders and play 0:07:53.280 --> 0:07:56.720 one off the other. It could be a take private. 0:07:56.760 --> 0:08:00.920 I'll give you just an example. Company has four billion 0:08:01.880 --> 0:08:06.960 market cap goes down to a billion because it was 0:08:07.160 --> 0:08:12.880 growing at high rates, their core business matured and the 0:08:13.240 --> 0:08:19.360 throwing a lot of cash into potential growth businesses, none 0:08:19.360 --> 0:08:23.480 of which are working. A sponsor comes in sees where 0:08:23.520 --> 0:08:27.679 the prices knows, the industry knows, the management team knows, 0:08:27.840 --> 0:08:31.800 the board and says, you shouldn't be a public, you 0:08:31.840 --> 0:08:37.280 should be private. Wi'll pay a thirty percent premium and 0:08:37.320 --> 0:08:42.200 cuts the deal. They got to go announce it, get 0:08:42.400 --> 0:08:49.360 shareholder votes to close. They are not looking to fight 0:08:49.559 --> 0:08:54.760 about every basis point. What they're fearful of. What if 0:08:54.800 --> 0:08:58.720 this leaks before the shareholder meeting. What if the stock 0:08:58.840 --> 0:09:04.439 price goes above our thirty percent premium. What if some 0:09:04.559 --> 0:09:08.480 investment banks start calling the board and saying, I have 0:09:08.480 --> 0:09:11.320 a buyer who could do better. They might be fishing, 0:09:11.640 --> 0:09:14.800 but the board gets nervous, Oh, maybe I need They 0:09:14.880 --> 0:09:17.960 want to go to one lender who they trust. 0:09:18.080 --> 0:09:20.080 They want to have the assurance of getting the deal. 0:09:19.880 --> 0:09:25.760 Done, deal done quietly. It's both exactly David is and 0:09:26.200 --> 0:09:30.480 someone who the confident could step up and write a 0:09:30.600 --> 0:09:34.439 check for three four hundred million. And if they're paying 0:09:34.440 --> 0:09:38.320 a little more upfront, a little more call, a little 0:09:38.360 --> 0:09:44.480 more coupon stronger docs. It's small in the overall thing 0:09:45.320 --> 0:09:51.480 of private equity funds auctions. They know they paid more 0:09:51.760 --> 0:09:55.640 than everyone else a proprietary deal that they might have 0:09:55.760 --> 0:10:01.080 spent a year, two years developing the relationship. Everything falls 0:10:01.120 --> 0:10:05.280 in line. They want to come to someone like us, 0:10:05.800 --> 0:10:10.040 So we have core LBOs. We're going to attack that 0:10:10.760 --> 0:10:16.439 in market dislocations, MIDI and major specialty finance. That's what 0:10:16.600 --> 0:10:20.840 we're marketing and things that don't fit everyone's box. 0:10:21.360 --> 0:10:24.120 Is that specialty finance component that the sort of the 0:10:24.520 --> 0:10:27.920 private element that you just described is that pretty much 0:10:27.920 --> 0:10:28.440 a niche. 0:10:28.559 --> 0:10:31.640 Are there only a few places in that for sure? Okay, 0:10:31.920 --> 0:10:34.920 it's a big niche. Yeah, you have to have you 0:10:34.960 --> 0:10:38.200 have to have the capital, you have to have the relationships. 0:10:38.360 --> 0:10:40.520 And when you go through it and you have to 0:10:40.640 --> 0:10:44.439 drop everything and get it done quietly in a short 0:10:44.520 --> 0:10:48.760 period of time, there are ready that many players that 0:10:48.880 --> 0:10:52.520 could do that. That the sponsors are confident and when 0:10:52.559 --> 0:10:56.839 I look at our core relationships they repeat. And then 0:10:57.000 --> 0:11:02.200 finally there's a lot of deals in the sponsor world 0:11:02.520 --> 0:11:08.599 that are not for new LBO add on acquisition refinancing. 0:11:09.040 --> 0:11:15.960 The incumbent lender always has a massive advantage if everything 0:11:16.160 --> 0:11:19.880 was going well, if there were a lot of hiccups 0:11:20.440 --> 0:11:23.720 and all of a sudden it's three or four years later, 0:11:24.720 --> 0:11:30.520 and the original incumbent lenders were reliant on the sponsor's 0:11:30.679 --> 0:11:34.480 loan to value from three years ago. It's sort of 0:11:34.520 --> 0:11:39.080 irrelevant now because things did not go as plan and 0:11:39.160 --> 0:11:43.199 we market ourselves, come to us, we'll re underwrite it. 0:11:44.040 --> 0:11:48.880 And while we're known to do much more due diligence 0:11:48.960 --> 0:11:53.760 than most and structure more than most, we fit this 0:11:54.040 --> 0:12:00.040 need so we're embraced by the sponsor community in it. 0:12:00.240 --> 0:12:03.440 So you obviously have tremendous perspective on the market. I 0:12:03.440 --> 0:12:05.920 mean you fledged from Goldman in two thousand and two 0:12:05.960 --> 0:12:08.360 and got going in two thousand and three. Really at 0:12:08.400 --> 0:12:12.240 silver Point, Techrek was winding down. Enron just happened. Financial 0:12:12.240 --> 0:12:15.520 crisis was a few years away. Europe languished right after that. 0:12:15.920 --> 0:12:20.200 COVID nineteen happened. Private credit is sort of described or 0:12:20.240 --> 0:12:21.880 thought of as a new thing. It's not really a 0:12:21.920 --> 0:12:24.400 new thing. I went through a chemical bank training program 0:12:24.880 --> 0:12:28.160 back in nineteen eighty seven to do leverage loans to 0:12:28.160 --> 0:12:31.400 middle market companies. But how have you seen this market evolve? 0:12:31.440 --> 0:12:33.960 You've been here since the very beginning of what sort 0:12:33.960 --> 0:12:37.480 of is referred to as private credit. So two decades 0:12:37.640 --> 0:12:40.120 in two decades plus in how has it changed. 0:12:40.480 --> 0:12:47.760 Oh, it's changed tremendously in the amount of capital. So 0:12:47.960 --> 0:12:51.360 I agree. I was in I taught those training programs, 0:12:51.720 --> 0:12:54.160 and we had, like I said, at Goldman Sachs, we 0:12:54.280 --> 0:12:58.000 did private credit. I think what's changed the most is 0:12:58.160 --> 0:13:04.680 how many players have come in since the Great Financial Crisis. 0:13:05.320 --> 0:13:08.920 It was viewed the Great Financial Crisis opened this window 0:13:09.600 --> 0:13:14.640 as banks had to worry about their own liquidity solvencies. 0:13:15.120 --> 0:13:21.880 Regulators clos were not getting the same type of leverage 0:13:21.960 --> 0:13:26.000 they needed to make their business model worked, and people 0:13:26.240 --> 0:13:30.520 jumped in, which is great, And I actually think, you 0:13:30.559 --> 0:13:34.520 know all this the private credit is somehow bad for 0:13:34.600 --> 0:13:39.000 the economy. I don't get that in that it's phenomenal there. 0:13:39.120 --> 0:13:44.320 When you think of economic crisises, they're driven and magnified 0:13:44.840 --> 0:13:50.040 by a lack of capital to refinance loans to fund growth. 0:13:50.360 --> 0:13:56.360 Private credit will fill has filled that vacancy. The real 0:13:56.559 --> 0:14:03.480 question that people ask is it has gotten overheated, especially 0:14:04.000 --> 0:14:08.440 in that core LB oh, and is it a bubble 0:14:08.480 --> 0:14:11.680 that's gonna blow up? And the answer is, you know, 0:14:11.720 --> 0:14:14.840 it's the warring buffet quote that everyone loves. When the 0:14:14.880 --> 0:14:19.880 tide goes out, we're gonna see who's when we get 0:14:19.920 --> 0:14:25.080 into the next cycle. There will be people who do fine. 0:14:25.560 --> 0:14:29.400 There will be people who don't do well, and they 0:14:29.440 --> 0:14:33.760 will work down their portfolio and go out of business, 0:14:34.440 --> 0:14:36.960 and there will be a third category that not only 0:14:37.040 --> 0:14:42.920 does fine, but has the dry powder and the expertise 0:14:43.800 --> 0:14:48.960 to lean into that. What I love, what silver Point 0:14:49.120 --> 0:14:54.480 loves is when the market is driven by fear of 0:14:54.760 --> 0:15:00.680 missing out risk on to just constantly be saying, when 0:15:00.720 --> 0:15:05.160 it changes, how is our portfolio going to do? Do 0:15:05.240 --> 0:15:09.960 we know every potential problem and have a plan of attack, 0:15:10.440 --> 0:15:14.280 and do we have the dry powder and the expertise 0:15:14.840 --> 0:15:18.280 that when we go from fear of missing out to 0:15:18.680 --> 0:15:22.720 fear that's where you want to be. And if you 0:15:22.760 --> 0:15:28.400 have capital, don't you're not playing triage and you have 0:15:28.480 --> 0:15:33.080 the confidence to step up when most people are not. 0:15:34.160 --> 0:15:36.920 That's how you really win, and that's how you build 0:15:37.320 --> 0:15:42.320 the long term relationships. When the market's heated, it's odd 0:15:42.400 --> 0:15:46.080 everyone will do that deal. This monster in a core 0:15:46.280 --> 0:15:50.000 LBO is not saying thank you, thank you, thank you. 0:15:50.480 --> 0:15:53.440 They're saying you say thank you, thank you, thank you 0:15:53.520 --> 0:15:57.000 to me because I have twenty term sheets. It's when 0:15:57.040 --> 0:16:02.160 you're attacking the markets, in the segments that aren't as competitive, 0:16:03.120 --> 0:16:06.840 or when everything shuts down, then you build the long 0:16:06.960 --> 0:16:08.600 term relationships. 0:16:08.760 --> 0:16:13.640 Right, speaking of dry powder, that combined with added pressure 0:16:13.760 --> 0:16:17.440 to deploy, I'm not speaking about silver point sell, but 0:16:17.600 --> 0:16:21.280 about like funding private credit in general that seems to 0:16:21.280 --> 0:16:25.280 add to the risk to the bottom to just sign 0:16:25.680 --> 0:16:28.440 any type of deal to some extent in terms that 0:16:28.480 --> 0:16:32.480 are very favorable for favorable for borrowers, but not necessarily 0:16:32.640 --> 0:16:36.560 the best terms for creditors with the best protections for creditors. 0:16:36.600 --> 0:16:40.360 Are you seeing any opportunities from this type of loans 0:16:40.400 --> 0:16:43.760 that for private credit loans that you know, offer very 0:16:44.080 --> 0:16:46.280 few protections for creditors. And now I don't know if 0:16:46.280 --> 0:16:51.040 you're seeing opportunities in perhaps private credit secondaries or other 0:16:51.160 --> 0:16:53.880 sorts of like ways in for re. 0:16:54.000 --> 0:16:56.840 No, I mean, I think that there's a lot and 0:16:56.880 --> 0:16:59.640 you guys have written a lot, you guys meaning bloomberk 0:17:00.040 --> 0:17:04.320 and trading of private credit, you know, And we're gonna 0:17:04.320 --> 0:17:07.560 have a discussion around that because that's sort of interesting 0:17:07.600 --> 0:17:10.280 because the whole idea and the whole part of the 0:17:10.320 --> 0:17:14.160 benefit of private credit is I'm dealing with self appoint 0:17:14.440 --> 0:17:17.400 you're my lendo. When we need to amend the doc, 0:17:17.480 --> 0:17:21.040 I'm calling you. I know who universe is it? I 0:17:21.080 --> 0:17:23.720 don't know who's the person I need to talk to. 0:17:24.280 --> 0:17:27.680 But no, we're not seeing a lot of opportunities in 0:17:27.840 --> 0:17:32.359 buying private credit, whether over time that trades or not. 0:17:33.160 --> 0:17:37.040 What I would say is the race to the bontom 0:17:37.160 --> 0:17:41.320 phenomenal is there. You got to avoid it. And it 0:17:41.400 --> 0:17:44.280 goes back to We're not gonna know the winners and 0:17:44.320 --> 0:17:48.960 the losers until things get bad. What you know? And 0:17:50.000 --> 0:17:54.440 or investors will ask me, well, what questions should I ask? Well, One, 0:17:54.960 --> 0:17:58.119 I look at it and say, what scares me the 0:17:58.160 --> 0:18:03.240 most is a couple of things. One, small companies ten million, 0:18:03.400 --> 0:18:09.280 fifty million EBDA doesn't have significant market share when there's 0:18:09.359 --> 0:18:16.200 a problem. You might not have the senior secure downside protection. 0:18:16.840 --> 0:18:20.879 You might be taking equity risk getting debt like returns. 0:18:21.280 --> 0:18:27.920 So small business is scamming two documents. I'm like almost 0:18:27.960 --> 0:18:33.639 shocked at how loans sometimes and this is also the 0:18:33.680 --> 0:18:38.480 worldly syndicated loan market. The focus on the loan to 0:18:38.600 --> 0:18:44.399 value day one the company, But then there's the docs. 0:18:44.400 --> 0:18:48.080 Are the docks right? But if I'm landing five hundred 0:18:48.119 --> 0:18:51.719 million dollars to a company that's worth a billion today, 0:18:51.880 --> 0:18:55.320 But the docs say there's a carve out and they 0:18:55.400 --> 0:18:59.440 could move two hundred and fifty million dollars of value 0:19:00.119 --> 0:19:04.199 out of the companies that you're lending to to an 0:19:04.320 --> 0:19:08.119 unrestricted sub that I cannot put a covenant on. I 0:19:08.160 --> 0:19:12.440 can't go after the value. It's misleading to say I'm 0:19:12.480 --> 0:19:16.680 fifty percent loans of value taking five hundred over the billion, 0:19:17.320 --> 0:19:22.000 I would take five hundred divided by seven fifty because 0:19:22.040 --> 0:19:27.000 the sponsor, of course, they should move assets out when 0:19:27.040 --> 0:19:31.080 there's a problem. And unlike being a venture capitalist and 0:19:31.400 --> 0:19:38.320 equity value growth equity, where you worry about good things 0:19:38.359 --> 0:19:42.359 and bad things happening, as a lender, all you care 0:19:42.480 --> 0:19:44.440 about is bad things. 0:19:44.640 --> 0:19:48.080 Yeah, your best outcome is getting repaid what you lent. 0:19:48.560 --> 0:19:52.439 Par plus my coupons. Yeah, that's the game of our men. 0:19:53.000 --> 0:19:56.840 And therefore I have to say, what could go wrong, 0:19:57.200 --> 0:20:03.040 what's the probability of it going how much can value 0:20:03.240 --> 0:20:08.720 deteriorate if that happens, and what does the document allow 0:20:09.359 --> 0:20:12.800 that company to do. You know, I have a lot 0:20:12.840 --> 0:20:17.280 of friends in VC and growth equity, and they'll say, Michael, 0:20:17.359 --> 0:20:21.960 your job so easy, senior secured, And I'm like, no, No, 0:20:22.160 --> 0:20:26.320 your job is so easy because you could do ten deals, 0:20:26.720 --> 0:20:31.040 get a zero on three or four of them, mediocre 0:20:31.160 --> 0:20:35.200 returns on three or four. As long as you have 0:20:36.880 --> 0:20:40.160 of the deals being the next uber the next day, 0:20:40.280 --> 0:20:44.800 are your hero. We can't lose money. We have to 0:20:44.880 --> 0:20:48.840 be paranoid about everything that could go wrong and say, 0:20:48.960 --> 0:20:52.280 if it goes wrong, do I think I'm gonna lose money. 0:20:52.920 --> 0:20:55.040 We will, and that's a tough way to live a life. 0:20:56.040 --> 0:21:00.000 We will go into more detail about liability management exercise. 0:20:59.680 --> 0:21:04.760 Letter liability management as in you love to participate, Oh no, 0:21:04.760 --> 0:21:07.240 I love talking, I love well, I will talk about 0:21:07.280 --> 0:21:09.200 I love talking about it. It's interesting. 0:21:09.520 --> 0:21:13.399 Okay, But before that, do you think investors are adequately 0:21:13.440 --> 0:21:16.040 compensated for the risk of fill liquidity? 0:21:16.119 --> 0:21:19.320 Yes and no. You know, it's gonna be the simple answer. 0:21:19.960 --> 0:21:23.800 Certain segments of the market, I think you're getting fairly 0:21:24.000 --> 0:21:28.960 to overcompensated for it. Again, these parts of the segments 0:21:29.480 --> 0:21:35.520 where they're just less efficient, less capital. Yes, I think 0:21:35.560 --> 0:21:40.399 in certain of the deals you're getting no ill liquidity premium. 0:21:40.840 --> 0:21:43.679 But then again, you have some investors that are fine. 0:21:44.160 --> 0:21:47.840 You know, it's also who are the investors of the fund. 0:21:48.440 --> 0:21:51.760 If the investors of the fund have a very very 0:21:52.040 --> 0:21:57.040 long term their capital, very long term, they don't want 0:21:57.200 --> 0:22:01.359 market vowel of things going up and down just based 0:22:01.440 --> 0:22:08.040 on something the president says. They actually value not having 0:22:08.200 --> 0:22:12.639 all that liquidity. So it depends on a lot of things. 0:22:13.080 --> 0:22:16.640 I think right now the core LBO market is what 0:22:17.119 --> 0:22:21.480 I would call a beta trade. It's not there's no 0:22:21.680 --> 0:22:25.919 excess return in it, and you're probably being adequate for 0:22:26.119 --> 0:22:29.400 those who do it. Well, I think you're getting adequately 0:22:29.560 --> 0:22:34.640 compensated for the risk and the liquidity. And my only 0:22:34.720 --> 0:22:40.240 point before not everyone has the same illiquidity premium. So 0:22:40.280 --> 0:22:44.560 the people who go into these assets aren't aren't going 0:22:44.600 --> 0:22:48.360 to be someone who knew needs day to day liquidity 0:22:48.440 --> 0:22:52.719 and therefore they don't need the same liquidity premium as others. 0:22:53.200 --> 0:22:54.080 Does that make sense? 0:22:54.680 --> 0:22:57.719 Yeah, So just sort of sticking with this liquidity issue 0:22:58.200 --> 0:23:01.159 and pivoting a little bit. Private credit has been a 0:23:01.160 --> 0:23:05.080 hot sector for a while. Is it suitable for retail 0:23:05.119 --> 0:23:08.679 investors via ETFs with a private credit component? Don't we 0:23:08.920 --> 0:23:11.879 have the risk of fundamentally illiquid assets being backed by 0:23:11.960 --> 0:23:14.120 daily liquidity funding sort of? 0:23:15.080 --> 0:23:21.640 Well, it's unambiguously a legitimate concern, right, So if you're 0:23:21.840 --> 0:23:26.959 raising money to the retail market, you need to explain 0:23:27.920 --> 0:23:32.040 what is the liquidity of this. Now you could have 0:23:33.800 --> 0:23:39.640 liquidity backstabs, so allowing you could draw on to pay 0:23:39.720 --> 0:23:43.440 out x percent of the investors, so you know there 0:23:43.560 --> 0:23:48.840 is some liquidity. We're just early on in thinking about 0:23:49.080 --> 0:23:53.760 whether we should or shouldn't raise money from the retail investors. 0:23:53.760 --> 0:23:57.919 So there's a big learning curve of a fund saying 0:23:58.080 --> 0:23:59.879 is that appropriate or not? 0:24:00.440 --> 0:24:02.360 It seems to be a little bit of baby steps too, 0:24:02.400 --> 0:24:06.760 because the private credit component is relatively low in these 0:24:06.760 --> 0:24:07.440 funds so far. 0:24:08.359 --> 0:24:11.720 Yeah, I agree with that. So to answer your question, 0:24:12.359 --> 0:24:16.840 it's going to be I think, yes, it is appropriate 0:24:17.240 --> 0:24:23.440 if it structured correctly and it's disclosed that marketed correctly. 0:24:24.080 --> 0:24:26.080 But I'm not an expert on it. 0:24:26.960 --> 0:24:28.840 In the book, one of the things and you were 0:24:29.040 --> 0:24:32.159 discussing now, you mentioned the and you emphasized a lot 0:24:32.160 --> 0:24:34.280 of importance of due diligence, and you were talking about 0:24:34.320 --> 0:24:36.960 it just now. And in the book you mentioned the 0:24:37.000 --> 0:24:39.960 anecdote of Mark Dreyer, the lawyer that was sentenced to 0:24:40.000 --> 0:24:43.560 I think twenty years of prison for fraud. Yes, that 0:24:43.840 --> 0:24:47.359 was you know, I was trying to sell loans that 0:24:47.400 --> 0:24:50.720 were actually non existent. It was a fraud basically, and 0:24:52.200 --> 0:24:55.080 was getting annoyed by the level of due diligence questions 0:24:55.119 --> 0:24:57.800 that Silverpoint was asking. Was meant to have dinner with 0:24:57.840 --> 0:25:00.960 you guys, but was actually the rest in Canada the 0:25:01.320 --> 0:25:05.160 day before? I think is due diligence even more important 0:25:05.160 --> 0:25:09.920 in private credit, equally importantness in public markets? Is there 0:25:09.960 --> 0:25:13.760 something additional that investors would need to take into account. 0:25:14.080 --> 0:25:17.680 Our firm believes due diligence is the core of who 0:25:17.720 --> 0:25:21.600 we are. In fact, we have certain core principles, and 0:25:21.680 --> 0:25:25.639 one is we dig deeper we enjoy due diligence. You know, 0:25:25.720 --> 0:25:31.080 we think it's really important. Now. The less liquid your 0:25:31.280 --> 0:25:37.440 investment is, the more due diligence you need, because if 0:25:37.480 --> 0:25:42.080 you make a mistake, you can't get out. So if 0:25:42.080 --> 0:25:46.800 it's a public investment, you might have done eighty percent 0:25:46.840 --> 0:25:49.480 of your work and say, I am going to start 0:25:49.560 --> 0:25:55.400 to buy because I think I have a unique investment thesis. 0:25:55.840 --> 0:25:58.479 I think I'm ahead of the curve, and even though 0:25:58.840 --> 0:26:02.480 I still have work to do, the price is trading 0:26:02.560 --> 0:26:08.520 at today compensates me for buying without all of my 0:26:08.640 --> 0:26:12.080 due diligence done, because if I wait until I'm done 0:26:12.119 --> 0:26:15.679 and the price moves up ten twenty points, well I 0:26:15.720 --> 0:26:20.639 didn't do my job. So when there's liquidity, you could 0:26:20.800 --> 0:26:25.280 start to buy and then change your mind and get out, 0:26:25.280 --> 0:26:29.199 and you might take a loss. If you're doing on 0:26:29.280 --> 0:26:33.840 the other extreme, your private equity fund, you have to 0:26:33.880 --> 0:26:38.280 finish your due diligence before you invest. So I would 0:26:38.280 --> 0:26:42.280 say if you're lending to private deals, you're going to 0:26:42.400 --> 0:26:47.120 have to do more due diligence because you can't decide 0:26:47.119 --> 0:26:50.560 to make a mistake and move out, or if you're 0:26:50.600 --> 0:26:58.080 doing nonsponsor loans, that even magnifies that because you can't 0:26:58.119 --> 0:27:02.600 piggyback on the work sponsor has done. So I think 0:27:02.720 --> 0:27:07.800 due diligence is really really critical, and it will go 0:27:07.920 --> 0:27:11.960 back to one of the themes when the cycle changes. 0:27:13.000 --> 0:27:16.959 Those who were deep in due diligence have confidence in 0:27:17.000 --> 0:27:22.359 their investment, will not only do better on how their 0:27:22.440 --> 0:27:28.080 existing investments performed, but I also think they'll do better 0:27:28.359 --> 0:27:33.320 in building the relationships with their barers because if you 0:27:33.440 --> 0:27:37.159 did all your work and then there's a downturn in 0:27:37.200 --> 0:27:42.520 the economy, but you have ultimate confidence in the value 0:27:42.600 --> 0:27:47.960 cushion to your loone that this is very temporary, that 0:27:48.080 --> 0:27:52.239 this company is going to have some problems and then 0:27:52.400 --> 0:27:56.320 come out of this recession as good, if not better, 0:27:56.359 --> 0:28:01.040 because some of their competitors might disappear, you are going 0:28:01.119 --> 0:28:06.320 to be more accommodating to that ball. Versus if you 0:28:06.359 --> 0:28:09.879 didn't do a lot of due diligence, you were not deep, 0:28:10.600 --> 0:28:14.320 and then you're worried, which one of your credits are 0:28:15.240 --> 0:28:19.840 high likelihood of impairment versus one you should be leading 0:28:19.920 --> 0:28:21.400 in and support it well. 0:28:21.440 --> 0:28:23.200 Due diligence has to be the name of the game, 0:28:23.320 --> 0:28:27.160 right I believe so, sort of leveraged lending, which sort 0:28:27.200 --> 0:28:29.639 of brings up a question about the way again, the 0:28:29.640 --> 0:28:32.600 way that the market has evolved over time. When you 0:28:33.320 --> 0:28:36.119 were early on getting involved in private credit, it was 0:28:36.920 --> 0:28:39.760 it wasn't terror incognita, but it was not far off 0:28:40.360 --> 0:28:43.120