Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Audults podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 2: Joe, I think it's fair to say that if we
Speaker 2: didn't have the situation with Iran, we would be talking
Speaker 2: a lot more about private credit.
Speaker 3: Yeah, yeah, for sure, Jamie Diamond, you talk about the cockroaches.
Speaker 3: We keep getting these headlines over the last several weeks,
Speaker 3: maybe months, various mini you know, not blow ups per se,
Speaker 3: but many something between a hiccup and a blow up.
Speaker 3: In some cases you hear about redemptions being slowed down,
Speaker 3: et cetera. Not great headlines and not great charts often too,
Speaker 3: when you look at the various publicly traded instruments that
Speaker 3: one would associate with private credit.
Speaker 2: Right, So, I love that you said something between a
Speaker 2: hiccup and a blow up, because this is the difficulty
Speaker 2: I have in talking about the private credit space at
Speaker 2: the moment, which is, you either find people who are
Speaker 2: often very close to the private credit industry or in it,
Speaker 2: who will argue that this is just you know, a
Speaker 2: tiny bump in the road, This is maybe a few cockroaches,
Speaker 2: like nothing to worry about, although a single cockroach would
Speaker 2: worry me in my own household. But anyway, or you
Speaker 2: get doomsayers who are like, this is financial crisis two
Speaker 2: point zero, right, and it's very difficult to find nuanced
Speaker 2: commentary in between.
Speaker 3: Yeah, and we were always looking for nuanced commentary. So
Speaker 3: this is a problem for the Odd Launch podcast.
Speaker 2: That's right, Okay, So we're trying to rise to the
Speaker 2: occasion with some nuanced commentary on private credit. And trust me,
Speaker 2: I have watched and seen and read a lot of
Speaker 2: things on this topic. And one thing that stood out
Speaker 2: in particular to me was a particular seminar or lecture
Speaker 2: that came out from a firm called Osterwise recently, and
Speaker 2: we had a couple of old school bond hands talking
Speaker 2: about the rise of private credit and how to think
Speaker 2: about it in the context of the history of the
Speaker 2: bond market. And this is something that I think has
Speaker 2: often missed, is what exactly is private credits role when
Speaker 2: you think about overall corporate credit.
Speaker 3: That's a good way to put it right, because we
Speaker 3: can look at the various funds, et cetera. But within
Speaker 3: the broad history of the evolution of the bond market
Speaker 3: and within the current just sort of landscape of fixed income,
Speaker 3: Like what is private credit? The way I like to
Speaker 3: frame a lot of questions is from the perspective of
Speaker 3: the investor, what problem does the existence of private credits
Speaker 3: solve for their portfolio needs?
Speaker 4: Right?
Speaker 3: Because that is the consistent thing we talked to endowment managers,
Speaker 3: we talked to investors, et cetera. Every instrument in theory,
Speaker 3: like it solves some sort of problem. Maybe you have
Speaker 3: a lot of money, that's a lot for a long time.
Speaker 3: It's like, okay, you're willing to try raid that way
Speaker 3: for some extra premium, etcetera. What problem does private credit solve?
Speaker 2: Well, I was going to say, also from the perspective
Speaker 2: of the issuer and from the issue, right, because the issuer,
Speaker 2: if you're a company looking for financing, you have a
Speaker 2: bunch of different choices, and one of the ones that
Speaker 2: has become very popular in recent years is private credit.
Speaker 2: And in fact, you could I mean, there's a dynamic
Speaker 2: here where both investors are demanding it, but issuers are
Speaker 2: also very very happy to lend into that market for
Speaker 2: various reasons that we are about to get into. Let's
Speaker 2: do it all, right, So we do, in fact, have
Speaker 2: the perfect guests. We're going to be speaking with John Sheen,
Speaker 2: he is a portfolio manager for the Strategic Income Fund
Speaker 2: at austur Weis and Craig Manchuk he is also a
Speaker 2: portfolio manager at the Strategic Income Fund. So thank you
Speaker 2: so much, John and Craig for coming on all.
Speaker 5: Thoughts, thank you for having thanks for having us.
Speaker 2: So maybe just to begin with, how long have you
Speaker 2: guys been in the bond space.
Speaker 6: The firm has had a fixed income strategy for twenty
Speaker 6: coming up on twenty four years. Actually started by our
Speaker 6: one of our other partners, Carl Kaufman. Originally the firm
Speaker 6: here was started as an equity only firm, and as
Speaker 6: the firm's client started to get older, founder John oster
Speaker 6: Weiss wanted to expand into the fixed income space, brought
Speaker 6: Carl in and the fund has been in operation since
Speaker 6: April of two thousand and two.
Speaker 3: What kind of fund is it? When we're talking about
Speaker 3: it is tell us about the general, the mandate and
Speaker 3: the structure of the fund and who is like the
Speaker 3: sort of like the modal client for whom this would
Speaker 3: be a vehicle that they would put their money in.
Speaker 6: Sure, So the fund was set up to be the
Speaker 6: only fixed income fund that our private clients needed. So
Speaker 6: we have an extremely broad mandate. We can go anywhere,
Speaker 6: and so it was a very very early, unconstrained bond fund,
Speaker 6: which has some distinct advantages and some distinct disadvantages are
Speaker 6: we get to go where we see the best opportunities.
Speaker 6: Our mantra is to look for the most attractive parts
Speaker 6: of the market and then we look for the least
Speaker 6: risky ways to play those most attractive parts at any
Speaker 6: given time. And so the as the cycle changes. As
Speaker 6: business cycles are stronger, we would gravitate more towards credit,
Speaker 6: and as it weakens, we could gravitate more towards treasury.
Speaker 6: So the fund has over its life cycle moved back
Speaker 6: and forth, but by and large sense of financial crisis,
Speaker 6: we've been largely in high yield ig and convertible bonds.
Speaker 6: Our client base has predominantly been rias and wealth management
Speaker 6: firms and individuals. Some of those are existing private clients
Speaker 6: of the firm. Right now, so fund is about five
Speaker 6: point eight billion dollars and it is structured as a
Speaker 6: forty act open.
Speaker 4: End mutual fund.
Speaker 2: So once upon a time, if you are looking to
Speaker 2: invest in credit say in two thousand and two, you
Speaker 2: would have had a limited set of options, so you
Speaker 2: basically had investment grade, which are bonds issued by people
Speaker 2: always use the word blue chip companies, which sounds so
Speaker 2: old fashioned to me nowadays, but companies with relatively strong
Speaker 2: balance sheets that are rated by the rating agencies as
Speaker 2: investment grade, or you would have the option of bonds
Speaker 2: in the high yield market aka junk. So companies with
Speaker 2: weaker balance sheets and weaker credit ratings tell us about
Speaker 2: how the sort of I guess menu of credit options
Speaker 2: has expanded post the two thousand and eight financial crisis.
Speaker 2: That's basically a long winded way of me saying where
Speaker 2: does private credit come from?
Speaker 7: So private credit had been in existence prior to the
Speaker 7: financial crisis, but really saw expect growth after the financial crisis.
Speaker 7: So if you go back into even the eighties, with
Speaker 7: the growth of the high yield market, prior to that,
Speaker 7: highly levered companies companies that didn't have investment grade balance
Speaker 7: sheets couldn't really borrow much in the public markets, so
Speaker 7: either they financed internally or relied much more heavily on
Speaker 7: the bank market. As the high yield market grew famously
Speaker 7: with the help of milk, and it allowed more companies,
Speaker 7: more highly levered companies to access public markets.
Speaker 5: That evolved into the leverage loan market.
Speaker 7: The leverage loan market once upon a time used to
Speaker 7: be held on the bank balance sheets. They began to
Speaker 7: syndicate those loans and what was really the step function
Speaker 7: there was the evolution of the COLO market where the
Speaker 7: banks could take those loans put them into a securitized
Speaker 7: structure which became colos, which led to the growth there.
Speaker 7: Then after the financial crisis, the bank regulators really did
Speaker 7: not want banks lending to highly levered and or risky entities,
Speaker 7: both corporated and individuals, so you saw pretty strict capital requirements.
Speaker 7: There is an explicit prevention from banks lending to companies
Speaker 7: with greater than six times leverage. That created this need
Speaker 7: for lending outside of the bank market. Those companies didn't
Speaker 7: go away, their borrowing needs didn't end, so that vacuum
Speaker 7: was created.
Speaker 5: By private credit.
Speaker 7: So you saw many of the same entities that were
Speaker 7: lending in the private credit market previously in the private
Speaker 7: equity market, so they also saw a need to finance
Speaker 7: their LBOs that was no longer able to be done
Speaker 7: at the banks. So they started a number of different
Speaker 7: fund structures. The BBC fund structure had been around prior
Speaker 7: to the Financial crisis, but these dedicated private credit funds
Speaker 7: really began to proliferate after the financial crisis.
Speaker 6: Can I just add something to that, just from a
Speaker 6: historical perspective, I also think that we've been talking about
Speaker 6: private credit as it stands today, but it started so
Speaker 6: much earlier, and it started in an area that I
Speaker 6: think most people will tend to forget about, which is
Speaker 6: ge Capital was one of the largest providers of private
Speaker 6: credit under the GE umbrella for many, many, many years.
Speaker 6: They were financing lots of different things though they were
Speaker 6: financing railcars, they were financing aircraft engines, they were financing
Speaker 6: the purchase of MRIs and other healthcare equipment, and they
Speaker 6: were extraordinarily successful and really largely responsible for a big
Speaker 6: chunk of the profits that came in underneath the GE
Speaker 6: umbrella for many years. But what it did is it
Speaker 6: created a large body of really experienced lenders who ultimately
Speaker 6: splintered off and went into different areas and the businesses.
Speaker 6: And one of the businesses that started from them was
Speaker 6: a company called Heller Financial, which had been around for
Speaker 6: a while, but they hired some GE Capital guys to
Speaker 6: come in and they really kind of took the original
Speaker 6: Heller business, which was financing yellow equipment and railcars and things,
Speaker 6: into the middle market LBO space, So they became critical
Speaker 6: providers of financing for that space at a time when
Speaker 6: there really weren't many away from the banks. So a
Speaker 6: lot of this has been around for a long time.
Speaker 6: People just forget about it because there's not as many
Speaker 6: people out there that are as old as we are
Speaker 6: that remember those guys from the eighties and nineties.
Speaker 7: We saw that with a lot of the consolidation of
Speaker 7: the financial institution, so away from GE you know, ciit
Speaker 7: was a big lender in that space. Even in the
Speaker 7: aircraft lending space, an organization ILFC was owned by AIG,
Speaker 7: and the regulators wanted that highly levered, riskier financing out
Speaker 7: of the systematically important financial institutions.
Speaker 2: Well, speaking of people not realizing some of the history here,
Speaker 2: it took me an embarrassingly long amount of time to
Speaker 2: realize that all the stories that I'd written about shadow
Speaker 2: banking in the aftermath of the two thousand and eight
Speaker 2: financial crisis were basically for the credit.
Speaker 3: Yeah, It's interesting to think about, Like I'm familiar to
Speaker 3: some extent. I don't know the full history of like
Speaker 3: GE Capital, but I had certainly heard of it. I
Speaker 3: knew that it became a big profit center for GE itself.
Speaker 3: And it would make sense that a company like GE
Speaker 3: or GM even but GE would have its own lending
Speaker 3: arm and then like do its own financing on the side.
Speaker 3: But I'd never really thought of it as like private
Speaker 3: credit per se. But it's interesting to hear that, Yeah,
Speaker 3: like this was like an origin that a lot of
Speaker 3: the lending form types, etc. That were sort of emerged
Speaker 3: out of these practices in house. Then where did it
Speaker 3: go from there? So you mentioned, okay, like real asset
Speaker 3: invested in maybe it's like aircraft blending or you know,
Speaker 3: aircraft finance, etc. How did it splinter off into all
Speaker 3: of these different fields and areas beyond just the sort
Speaker 3: of like the tangible goods financing.
Speaker 6: So one of the places it went was in an
Speaker 6: area of mezzanine finance. Again, back in the early days
Speaker 6: of the LBO market, the sponsors were always looking for ways,
Speaker 6: how do we fill in the gaps? We can't get
Speaker 6: this deal quite across the finish line with the equity
Speaker 6: we want to put in. Where do we fill in
Speaker 6: the gaps? And there were mezzanine funds, and they were
Speaker 6: hybrids somewhere between credit lenders and private equity investors. So
Speaker 6: they would take the most junior piece, typically a preferred
Speaker 6: or subordinated piece of debt, and get a little bit
Speaker 6: of equity in the form of warrant or something alongside,
Speaker 6: so that they were targeting a slightly higher return profile
Speaker 6: than the typical debt guys were, but they weren't going
Speaker 6: to get the full bang for their bucket that the
Speaker 6: PE guys were getting. And that lasted for a number
Speaker 6: of years, but as the market matured, the sponsors found
Speaker 6: that they no longer really needed the mes guys to
Speaker 6: the same degree. They're still around, but ultimately mes funds
Speaker 6: were niche kind of product that I think over time
Speaker 6: has just kind of been squeezed out between the size
Speaker 6: and scale of the combination of leverage loans and high
Speaker 6: yield bonds and the PE firm's desires to keep as
Speaker 6: much of the equity economics themselves as the asso.
Speaker 2: So today we're at a point where the private credit
Speaker 2: market there are all these different estimates for exactly how
Speaker 2: big it is, and you're going to get some variation
Speaker 2: because it is private, like the clue is in the name.
Speaker 2: But by most estimates, it's bigger than the junk rated market,
Speaker 2: which is kind of crazy if you think about, like
Speaker 2: how large the junk raded market has loomed in the
Speaker 2: market's collective consciousness for so long. How did we get
Speaker 2: to that particular point? How did we get to a
Speaker 2: point where this like relatively new market, Although I take
Speaker 2: the point that it has intellectual routes before even the
Speaker 2: financial crisis, but why did it grow so quickly after
Speaker 2: two thousand and eight.
Speaker 7: I think there's two macro influences that had a large
Speaker 7: play in that. First, if you look back after the
Speaker 7: dot com meltdown in the equity market, we had three
Speaker 7: straight years of negative returns in the S ANDP. It
Speaker 7: was the first time that happened since the Great Depression.
Speaker 7: The cumulative returns of high yield for that twenty year
Speaker 7: period nineteen ninety ninety twenty nineteen beat equities, So among
Speaker 7: investors there was a desire for something away from the
Speaker 7: equity market. Their experience in equities was unsatisfactory, so they're
Speaker 7: looking for other alternatives.
Speaker 5: And then in the later part of that time period
Speaker 5: we went.
Speaker 7: Through the zero interest rate environment where you know, the
Speaker 7: Fed Treasury, etcetera. Drove interest rates to zero in response
Speaker 7: to COVID. So there was a massive desire for yield
Speaker 7: and better performing assets than they had in the early
Speaker 7: parts of the two thousands in the equity market. So
Speaker 7: that really led to the proliferation of the amount of
Speaker 7: dollars flowing into the product. And then on the supply
Speaker 7: sid we touched on it earlier, these highly levered borrowers
Speaker 7: were basically shut out of the banking lending market, so
Speaker 7: they needed to find alternatives to fund their businesses and
Speaker 7: to refinance their debt. So those two kind of came
Speaker 7: together at the same time and really fueled the growth
Speaker 7: of the product.
Speaker 6: And I think institutionally you had in the LBO world,
Speaker 6: sponsors were looking to have a real partner that they
Speaker 6: could go to repeatedly for all different types of transactions,
Speaker 6: go back to them again and again and develop a
Speaker 6: real relationship, and where their lender could be very expedient
Speaker 6: as well, and I think expediency mattered and provide them
Speaker 6: with sort of that guaranteed financing which the banks were
Speaker 6: providing up until they were squeezed out from a regulatory
Speaker 6: standpoint on the most highly leveraged transactions. So I think
Speaker 6: that's what it really kind of comes down to, is
Speaker 6: the ability to provide more leverage than the banks were
Speaker 6: allowed to without running a foul of the regulators.
Speaker 3: So one thing that comes up regularly on the podcast
Speaker 3: is the sort of natural synergy between private credit and
Speaker 3: insurance and insurance companies. They have all these assets, and
Speaker 3: they have this advantage that they know exactly when those
Speaker 3: assets will be withdrawn. It will probably be in like
Speaker 3: forty years from now. They do not have to worry
Speaker 3: at all about you know, a quick run whatever, and
Speaker 3: so they can harvest they can harvest that illiquidity illiquidity
Speaker 3: premium but that they could be they could put their
Speaker 3: money into assets that do not trade very much. And
Speaker 3: that's very intuitive to me. Talk to us, though, you're
Speaker 3: operating an unconstrained fund that is a publicly traded forty
Speaker 3: act mutual fund, Talk to us out what it means.
Speaker 3: You know, you say you look for opportunity. Why are
Speaker 3: there private credit assets that aren't all locked up in
Speaker 3: these long term vehicles why does it sometimes make sense
Speaker 3: for private credit assets to be in a vehicle that
Speaker 3: is just sort of more opportunistic and has a daily quote.
Speaker 6: Potentially, we currently actually right now, don't have any private
Speaker 6: credit we were involved with. We were involved in it
Speaker 6: in the past, but I think most of those opportunities
Speaker 6: have gone to the dedicated private credit funds because there's
Speaker 6: one of the structural differences of the way they're set
Speaker 6: up versus the way we're set up, h is we
Speaker 6: source our ideas mostly from investment banks. Now, some of
Speaker 6: those investment banks used to come to us with transactions
Speaker 6: that weren't going to fly in the public market, so
Speaker 6: they would look and say, this is a small deal.
Speaker 6: We're not going to be able to find buyers from
Speaker 6: this among our investors who are primarily benchmark high yield investors,
Speaker 6: because it would be outside the index and it would
Speaker 6: be illiquid, and there's been a lot of talk about
Speaker 6: in problems with investing in ill liquid securities. One of
Speaker 6: the real benefits of our strategy is we always have
Speaker 6: lots of liquidity. We have historically have managed our portfolio
Speaker 6: and a short duration with a short duration focus.
Speaker 4: That creates cash and we keep a lot of front
Speaker 4: end ballast.
Speaker 6: So as our portfolio is always creating cash, we could
Speaker 6: invest in some pockets of less liquid strategies, but we
Speaker 6: haven't done that. But the private credit guys are set
Speaker 6: up differently. They need a team of bankers to go
Speaker 6: out and source all their deals. They have to knock
Speaker 6: on companies' doors. It's a very different way in their
Speaker 6: function of having to source their transactions to try to
Speaker 6: fill up the asset side of their portfolios. So because
Speaker 6: of that, over time, I think there's a huge structural
Speaker 6: difference between the way they approach.
Speaker 4: It and the way we approach it.
Speaker 6: But going just going back briefly to the insurance company side,
Speaker 6: insurance companies have long been investors in private assets, and
Speaker 6: they used to have large teams of private debt investors,
Speaker 6: and ultimately, over time what they've done is they've shrunken
Speaker 6: those teams and just said, here, you guys source the
Speaker 6: transactions for us, and then we'll give you guys the
Speaker 6: money and you can go do it yourselves, sort of
Speaker 6: on an outsourced basis. So naturally it is a very
Speaker 6: good fit for them because they do have long duration
Speaker 6: assets and there's generally not a rush for those assets.
Speaker 2: Could you say a little bit more about how competitive
Speaker 2: it's been in the past to source private credit deals.
Speaker 2: If you're on the investor side, we hear these stories
Speaker 2: about you know, basically private companies can kind of dictate
Speaker 2: the terms of the deals because there's so much overwhelming
Speaker 2: investor demand, and you get this vision of people like
Speaker 2: literally pounding down the door to get in on a
Speaker 2: particular loan. Is that was that accurate in the past. No.
Speaker 7: I think even the managers of private credit would tell you,
Speaker 7: and honesty maybe not on the record, that they're surprised
Speaker 7: how quickly this has grown. So if you look at
Speaker 7: some of these funds that have grown ten x over
Speaker 7: the last five ten years, I don't think that they
Speaker 7: have grown their sourcing abilities by.
Speaker 5: Five to ten x.
Speaker 7: So if you can trast it to say private equity,
Speaker 7: the way a private equity fund works is they find
Speaker 7: the investment opportunity and then they go call the funds.
Speaker 5: From their LPs.
Speaker 7: Private credit, most of these funds work where they've taken
Speaker 7: the money first and then they go out and find
Speaker 7: the investments. So they are under much more crushure to
Speaker 7: find investments, which creates this competitive environment that you alluded
Speaker 7: to some of the issues that we talked to that
Speaker 7: may have been in the public markets in the past,
Speaker 7: tell us that when they go to the private credit market,
Speaker 7: it's just a competition for who will jump the highest
Speaker 7: for the piece of meat. And what that translates to
Speaker 7: in the credit world is either lower interest rate, weaker covenance,
Speaker 7: or a combination of the both. And that's really what
Speaker 7: you've seen with private credit in this hyper competitive environment
Speaker 7: that we're in.
Speaker 4: Now.
Speaker 6: Another thing that John mentioned which is actually really important here,
Speaker 6: so the structural side, this is what liability side of
Speaker 6: the balance sheet for private credit guys is kind.
Speaker 4: Of critically important here.
Speaker 6: So if you're out there and you're raising an institutional fund,
Speaker 6: those institutional funds are generally DRAWDOUN funds, so they're allowed
Speaker 6: to go out market and say, okay, we've raised commitments
Speaker 6: for five or ten billion dollars. We're going to go
Speaker 6: out now and source our investments, which is the assets side.
Speaker 6: The LP commitments are the liability side. So they will
Speaker 6: take on those liabilities as they find the assets and
Speaker 6: they end up being matched. And this is in a
Speaker 6: structure that's typically got a term and it's locked up
Speaker 6: money that they will not be providing liquidity for those
Speaker 6: institutional investors. The problem, and this is where we've run
Speaker 6: into the big problems, and this is what is really
Speaker 6: circulating in around them, is more recently, when we've gone
Speaker 6: and taken this out into these private BBC structures to
Speaker 6: market them to the retail or private wealth world. In
Speaker 6: order to raise the money, they've needed to offer some
Speaker 6: concessions on the liquidity right, because it makes it easier
Speaker 6: to raise money if you're going to allow people or
Speaker 6: going to tell them that you're going to allow them
Speaker 6: to redeem at least somewhat periodically. That has allowed them
Speaker 6: to raise money really fast. It's a little bit piggy
Speaker 6: because they've just said, Okay, we can raise a lot
Speaker 6: of money. Let's just raise the money when we can.
Speaker 6: The difference is when those dollars come in, they come
Speaker 6: into the fund on a subscription basis and need to
Speaker 6: be invested quickly, and that's what's really created a lot
Speaker 6: of the problems and what's really led to the degradation
Speaker 6: of credit underwriting because if you don't invest those dollars quickly,
Speaker 6: it creates the lag on performance in the fund. A
Speaker 6: minute that dollar comes in, it's part of your nav
Speaker 6: Therefore it needs to be invested rapidly in an income
Speaker 6: earning investment. So that's what's happened, and you really saw
Speaker 6: a huge proliferation of this. I mean the most obvious
Speaker 6: and visible of these you could see on there would
Speaker 6: be the cliff Water Corporate Lending Fund, which is CCLFX
Speaker 6: on your Bloomberg. If you look that up, you can
Speaker 6: look at the asset growth in that, and it really
Speaker 6: has taken off in the last five years. In twenty
Speaker 6: twenty two, we would speak to our wealth management advisors
Speaker 6: who are investors in our fund and ask them about
Speaker 6: what's working for them, because in twenty twenty two rates
Speaker 6: are going up. Investment grade bond funds are trading off
Speaker 6: sharply because people didn't understand the duration risk that they
Speaker 6: were carrying. High yield funds were weaker, but nowhere near
Speaker 6: as bad as IG and I'd.
Speaker 4: Say, what's working. They said, oh, gosh, private credit's been
Speaker 4: working great.
Speaker 6: I would say, well, that's wonderful, but that's because they're
Speaker 6: not taking their marks, and so they became very very
Speaker 6: comfortable because they didn't have to turn around talk to
Speaker 6: their existing investors and say here you lost a lot
Speaker 6: of money in this fund. It looks like you've just
Speaker 6: earned your yield and your NAV has been very, very stable.
Speaker 6: So as a result, their clients were happy. They were happy,
Speaker 6: and what happened money poured in. So as that money
Speaker 6: poured in, it led to I think more bad actors
Speaker 6: is too strong work, but really more bad underwriting, weaker underwriting,
Speaker 6: more aggressive underwriting, because they needed to get that money
Speaker 6: put to work so they would provide more leverage at
Speaker 6: weaker terms.
Speaker 3: Just can you clarify? Sorry, I think you explained it,
Speaker 3: but why is it that with the traditional private asset
Speaker 3: not private private asset model that they only call on
Speaker 3: the capital once it's needed, Because what you explained is okay,
Speaker 3: once you take into the capital, if it's not being invested,
Speaker 3: it's a drag on NAV. Very intuitive. Just explain why
Speaker 3: is that? Why is the other parts of the private
Speaker 3: capital world able to do the thing. You only call
Speaker 3: up the LPs when you have a deal, whereas that's
Speaker 3: not the case with private credit where you're taken the
Speaker 3: money upfront.
Speaker 6: I just think it's what people are used to and
Speaker 6: they've gotten used to on that model over the years.
Speaker 6: As an institution. Hey, I'll commit to your fund, tell
Speaker 6: me when you need the money, and we'll send it in.
Speaker 6: And I think that's the way they do it now,
Speaker 6: exactly how they do Yeah. I don't know if that's
Speaker 6: a dollar for dollar thing or if they'll do it
Speaker 6: in just installments over time, but it does help to provide.
Speaker 6: It gives them the ability to have less drag by
Speaker 6: having you go out and raise a five billion dollar
Speaker 6: fund day one.
Speaker 4: That money's going to sit there if you.
Speaker 3: No, no, I mean it makes it. I guess what
Speaker 3: I'm trying to establish is why couldn't private credit work
Speaker 3: the same way where it's like, Okay, I go out
Speaker 3: and raise five billion dollars worth of commitment, and then
Speaker 3: as I get a lending opportunity, and when then I
Speaker 3: call up my LPs and say, okay, you needed to
Speaker 3: phone you up that fifty million to us that you've
Speaker 3: committed and whatever. Why couldn't have worked that way?
Speaker 5: It could? I think it's the nature of the investment.
Speaker 7: So the traditional structure that Craig described as private equity, right,
Speaker 7: So if you think about an equity investment, you go out,
Speaker 7: you buy a company, you take over management, retool operations,
Speaker 7: you merge, you do whatever you do in private equity
Speaker 7: to increase value, and then in three five years you
Speaker 7: want to turn around and realize that investment where a
Speaker 7: lending business is more of a kind of balance sheet
Speaker 7: perpetual business where you're finding new loans all the time
Speaker 7: and you have loans maturing, redeploying the money. So the
Speaker 7: evergreen structure of an integral fund.
Speaker 3: Makes more makes sense.
Speaker 7: Yeah, so you typically have bigger bite sizes in private equity.
Speaker 7: You know, it's more heavily concentrated portfolio with a finite timeframe.
Speaker 5: Where it's credit, it's like a if you take a.
Speaker 7: Bank balance right, this was finding that used to be
Speaker 7: funded by deposits.
Speaker 5: In perpose, it is balance here by a time.
Speaker 6: I think the fact you have a much smaller number
Speaker 6: of investments many many small. I mean a typical private
Speaker 6: equity fund can have five to twenty five investments depending
Speaker 6: on its size, whereas the typical private credit fund is
Speaker 6: going to have hundreds, if not thousands, of So imagine
Speaker 6: having to make to call fifty dollars four times, four
Speaker 6: times a week from your investor each of your one
Speaker 6: hundreds of thousands of it.
Speaker 4: It would be really cumbersome.
Speaker 7: And I think that also goes to the logic around
Speaker 7: the gates. That's been a pretty controversial topic. But think
Speaker 7: about a five year loan, right, You probably have twenty
Speaker 7: percent of your loans come and do every year.
Speaker 5: That's five percent a quarter.
Speaker 7: So the gates were put in there to address the
Speaker 7: fact that we have maturities every quarter that could be
Speaker 7: there to meet redemptions, where some of the five percent
Speaker 7: logic came from.
Speaker 2: Actually, we should talk about the gates because one of
Speaker 2: the sort of defenses that you sometimes hear about private
Speaker 2: credit is this idea that, well, even if you get
Speaker 2: a spike in defaults and all these companies start failing,
Speaker 2: it's not necessarily a huge problem for private credit because
Speaker 2: we've set up these limitations on redemption so you can't
Speaker 2: get this rapid run for the exit because the amount
Speaker 2: of money that can be taken out of each fund
Speaker 2: is capped at you know, five percent or something like that.
Speaker 2: My inclination when I hear stuff like that is to think, like, Okay,
Speaker 2: well you've capped the amount of money that can exit
Speaker 2: the fund, but that doesn't mean that you've stopped people
Speaker 2: from wanting to exit the fund, it's just a slower
Speaker 2: run than it would be otherwise, So you're sort of
Speaker 2: building up that pressure. But then again the response to
Speaker 2: that is, well, you know, you're giving investors time to
Speaker 2: see their marks build back up or whatever, but like,
Speaker 2: does that selling pressure go away at all? How helpful
Speaker 2: are the gates when it comes to managing stress in
Speaker 2: private credit?
Speaker 6: I think they're critical actually in the retail channel, because
Speaker 6: you're protecting both sets of investors. It's not the asset
Speaker 6: side of the equation. It's not the loans that they're
Speaker 6: making that or the problem. It's the other side. So
Speaker 6: if you go back and just think about what happened
Speaker 6: at First Republic Bank, they were owning treasuries and they
Speaker 6: had forty billion dollars of redemption requests for their demand
Speaker 6: deposits go out the door in a few days and.
Speaker 4: The business was sunk.
Speaker 6: So if you didn't have the gates up and you
Speaker 6: had to run on the private credit funds because people
Speaker 6: were unhappy, they got nervous, they got scared, you sink
Speaker 6: funds very very easily that way. But what's important about it,
Speaker 6: and this is where we're going to get into a
Speaker 6: potentially thorny period as we move down the road is
Speaker 6: these funds will either need to do one of two things.
Speaker 6: They'll either need to sell assets to meet their redemptions,
Speaker 6: or they'll have to finance the redemption requests, provided that
Speaker 6: the inflows that they've been seeing slow down.
Speaker 4: Now.
Speaker 6: I think, because of all the noise out there that
Speaker 6: we see in the media, people's confidence in the private
Speaker 6: credit space, certainly the retail investor's confidence, the wealth manager's
Speaker 6: confidence has been shaken. So it wouldn't surprise me at
Speaker 6: all if we see those flows slow down. If that happens,
Speaker 6: then the net outflows will be potentially greater and they'll build.
Speaker 6: That means that these private credit managers will have to
Speaker 6: finance those or they'll have to sell assets. And the
Speaker 6: assets they sell are the ones that are probably the
Speaker 6: easiest to sell, which generally are the highest quality. So
Speaker 6: the concern here and really where when people are worried
Speaker 6: about the contagion. The concern is you are left with
Speaker 6: a fund that has raised more debt to meet some redemptions,
Speaker 6: then been forced to redeem to sell more positions, and
Speaker 6: some of those are your better positions. So now you've
Speaker 6: got a more levered fund with horror overall investment quality.
Speaker 6: Where does that stop and at what point does that
Speaker 6: potentially blow up? Because candidly, the private credit guys may
Speaker 6: sell the early sales there were from we heard from
Speaker 6: a blue owl into an insurance company. Okay, that's great,
Speaker 6: but I will argue that we're just seeing the beginnings
Speaker 6: of the pools of assets being created that are going
Speaker 6: to take on some of the stressed or distress loans
Speaker 6: in that space, and those loans are not going to
Speaker 6: be as easy to move. You'll find somebody like an
Speaker 6: oak Tree who typically does this. At points of stress
Speaker 6: or distress. They'll go to their lkpi's and say, hey,
Speaker 6: we have a great opportunity. We want to raise ten
Speaker 6: billion dollars, and because over the years they've been really
Speaker 6: really savvy about that, they're able to raise that money.
Speaker 4: So they'll create a.
Speaker 6: Special Opportunities Fund to go out and buy these particular
Speaker 6: private credit loans that are stressed or distressed. You need
Speaker 6: the expertise to go in and work out those loans
Speaker 6: and potentially either take and run the company from an
Speaker 6: equity standpoint, or kick the can down the road and
Speaker 6: hopefully restructure and revise those loans. So I think that's
Speaker 6: where it really starts to get thorny. If we get
Speaker 6: into a protracted redemption cycle, the financing runs out and
Speaker 6: they have to start selling things, it starts to really
Speaker 6: cut into the bone.
Speaker 7: We do have a precedent for how the gates of
Speaker 7: interval funds have behaved over time. So if you go
Speaker 7: back to the commercial real estate market, after Value Bank
Speaker 7: and First Republic Bank, everyone was trying to pull their
Speaker 7: money out of large real estate interval funds. There's one
Speaker 7: famously that hit the gates and prevented redemptions. That fund
Speaker 7: now has kind of gotten to the other side. It
Speaker 7: actually had a better return than its credit fund last year.
Speaker 7: And people tend not to panic for longer than three
Speaker 7: six months, right human nature crisis is a day, a week,
Speaker 7: a month. But if it just stays there long enough,
Speaker 7: people tend to get.
Speaker 5: Cooler heads and it works itself out. But as Craik said,
Speaker 5: that'll help on the liability management side of these fund structures,
Speaker 5: it's not going to help on the asset side.
Speaker 7: So if the default rates start hitting some of these
Speaker 7: levels that people fear and or predict, it's not going
Speaker 7: to save you on the asset side of the equation.
Speaker 5: And then maybe.
Speaker 7: To open up another topic, there's two parts of a default, right,
Speaker 7: there's when the company actually took player's default, and then
Speaker 7: what the credit recover in bankruptcy. I think there's big
Speaker 7: fears around some of these recovery values that will be seeing.
Speaker 7: Some of these are very highly levered companies with very
Speaker 7: few hard assets. So that's going to be the next
Speaker 7: test when we start getting it to work out of
Speaker 7: some of these loans, what do the creditors really have
Speaker 7: to protect them.
Speaker 3: I'm glad you said this because this is a perfect
Speaker 3: seg into the question I was going to go to next,
Speaker 3: which is, Okay, we trace the history of private credit
Speaker 3: to physical things, the type of things that a ge
Speaker 3: would sell, maybe like a wind turbine or you know,
Speaker 3: get natural gas turbine, whatever it is, et cetera. And
Speaker 3: we were talking about the big mega trends of the
Speaker 3: twenty tens, and one of them was the regulatory push
Speaker 3: of loans off banks. Another one reserve, but another one
Speaker 3: was the emergence of these predictable payment streams called software
Speaker 3: as a service subscriptions. This is the area in which
Speaker 3: you could really have zeros, a natural gas turbine is
Speaker 3: going to be worth something at the end. A obsolete
Speaker 3: software company is not going to be worth anything if
Speaker 3: the business has been destroyed thanks to AI. But what
Speaker 3: was the moment in which the credit guy suddenly realized that, essentially,
Speaker 3: here's this business that we used to never think of
Speaker 3: high tech. It used to be when when I was
Speaker 3: a kid, Tech and debt didn't go together. What was
Speaker 3: the moment that the credit guys sort of realized that
Speaker 3: these are financiable assets, so to speak, that could come
Speaker 3: into the debt world.
Speaker 6: Joe, you hit the nail on the head here, because
Speaker 6: this is the spot where really the high yield market
Speaker 6: and the private credit market started to diverge the most.
Speaker 6: There have been issuers in the tech space and in
Speaker 6: the software space into high yield, but it's definitely been
Speaker 6: a more recent phenomenon. If you go back ten years,
Speaker 6: there were not a lot of software issuers in the
Speaker 6: high yield space, largely because of that, because people couldn't
Speaker 6: get their arms around the typical okay, I need to
Speaker 6: have two times asset coverage or two and a half
Speaker 6: times asset coverage. We just never saw that. So those
Speaker 6: companies financed themselves either in the equity market where they
Speaker 6: financed themselves in the convertible bond market. So we used
Speaker 6: to see a lot of that in the convertible bond
Speaker 6: market because these are growth companies, and so the convert
Speaker 6: market would say, Okay, I'll accept a low coupon because
Speaker 6: I'm going to have equity participation on the upside, and
Speaker 6: so my upside isn't capped at whatever my coupon is.
Speaker 6: And I think that that's actually really been the area
Speaker 6: where it's diverged the most.
Speaker 4: How exactly did we get here?
Speaker 6: I think it was a willingness of these sponsors to
Speaker 6: come in and say, all right, I'm going to pay
Speaker 6: sixteen or seventeen times enterprise value to EBITDA for this business,
Speaker 6: and I'm going to put in an unusually large check.
Speaker 6: Let's say forty percent of that I will put in
Speaker 6: in equity instead of the typical twenty percent. So historically
Speaker 6: people have in the LBO space, they were coming to
Speaker 6: the highal market saying we put twenty percent down, finance
Speaker 6: the other eighty percent. If they go to the private
Speaker 6: credit guys and say, well we'll put forty percent down
Speaker 6: if you'll lend to us on the balance, we love
Speaker 6: this business at sixteen times, And I think they potentially
Speaker 6: just persuaded a lot of these lenders to get a
Speaker 6: little bit too far out over their skis in terms
Speaker 6: of the amount of leverage that they were willing to extend.
Speaker 6: And as a private credit lender, if it's just you,
Speaker 6: or if it's just you and one other, you can
Speaker 6: be a lot more creative in terms of structure. And
Speaker 6: I think they also took on this willingness to say, Okay, well,
Speaker 6: you can't afford to pay me this interest, so how
Speaker 6: about if.
Speaker 4: We pick it.
Speaker 6: Because if we pick it, my investment will grow and
Speaker 6: it'll give me sort of a quasi equity like feel
Speaker 6: because it's getting bigger. So that's kind of intriguing to
Speaker 6: me too. So I think there was a little bit
Speaker 6: of lender over zealousness. I think there was a competitive pressure.
Speaker 6: I think that they fell preyed to some of the
Speaker 6: sponsors willingness to overpay for some of these interestings.
Speaker 2: So when I hear secured credit that might not have
Speaker 2: that much security behind it, as we just discussed with
Speaker 2: the example of the software companies, and then when I
Speaker 2: hear increasing amounts of leverage on the issuer side, but
Speaker 2: also on the fund side, because you have private credit
Speaker 2: funds that use leverage to increase their returns. And then
Speaker 2: when I hear illiquidity mismatches between a publicly traded BDC
Speaker 2: and the underlying assets, all of those sound very familiar
Speaker 2: from financial crisis history and have certain, you know, negative
Speaker 2: connotations around them. How worried should we be about the
Speaker 2: future of private credit at this point and the idea
Speaker 2: that is it going to be a systemic issue for
Speaker 2: the financial system.
Speaker 7: I think the liability structure that we've discussed numerous times
Speaker 7: is dramatically different than what we saw in the financial crisis.
Speaker 7: So most financial institutions that we fail because of their
Speaker 7: liability structure. They're built to realize losses over extended periods
Speaker 7: of time, which I think many of these credit funds
Speaker 7: will be able to do. But I do think that
Speaker 7: we are going to enter into a period where we're
Speaker 7: going to see significant dispersion among credit fund managers or
Speaker 7: private credit managers. We've been lulled into uniformity of returns
Speaker 7: right if you look in the public markets, it's been
Speaker 7: a huge trend towards indexation, so most people own spy
Speaker 7: or QQQ or whatever form you want to pick. So
Speaker 7: equity returns all look very similar. And that's what happened
Speaker 7: in the early days of private credit, where everything was
Speaker 7: marked a par you had an eight, nine, ten percent coupon.
Speaker 7: It looked great, so you couldn't really see some of
Speaker 7: the cracks below the surface. As Craig alluded to earlier,
Speaker 7: there have been managers who've been doing this for twenty
Speaker 7: five thirty years and they are very new recent entrance
Speaker 7: into it, who've seen st andro growth in their assets
Speaker 7: that they had to invest. So I think that's probably
Speaker 7: the first leg that we'll see, is that you're going
Speaker 7: to start to see real dispersion of returns from manager
Speaker 7: or manager. But you know, they have a good head
Speaker 7: start where they have coupons and they have returns built
Speaker 7: in that they can absorb higher default rates than they
Speaker 7: are now. It's just the question of how high do
Speaker 7: those default rates get relative to the coupons that they're earning.
Speaker 6: And we've heard some numbers from some of the cell
Speaker 6: side Wall Street analysts that suggests that we could see
Speaker 6: fifteen percent of faults in private credit seems a little high,
Speaker 6: but it doesn't it's not so far out of the
Speaker 6: realm of possibility, because we've just seen the practice of
Speaker 6: extending more leverage to companies that probably shouldn't have that
Speaker 6: much leverage. On many many years ago, a good friend
Speaker 6: of mine who was doing this for a long long time,
Speaker 6: told me, company gets to six times levered, it's very,
Speaker 6: very difficult to get out from under that.
Speaker 4: And this is back in the early two thousands. We
Speaker 4: were in a normal rate.
Speaker 6: Environment that went by the wayside when we went through
Speaker 6: this period of extraordinarily low rates for many many years
Speaker 6: post financial crisis. Now that we're back where we are today,
Speaker 6: we're back into that environment where six seven times leverage,
Speaker 6: all of a sudden, at the current borrowing rates becomes
Speaker 6: a real strain on most companies balance sheets. So again,
Speaker 6: if you think about the legacy businesses, some of these
Speaker 6: software companies that were in these portfolios, they might be
Speaker 6: twenty twenty or twenty twenty one vintage LBOs that haven't
Speaker 6: monetized yet. They were borrowing versus a eight and historically
Speaker 6: low treasury rate. Once we raise rates in twenty twenty two,
Speaker 6: all of a sudden, the resets on these loans because
Speaker 6: they are floating rate have gone up, so it's chewing
Speaker 6: into the equity value these businesses, and it's putting an
Speaker 6: increasing amount of strain on the companies to have to
Speaker 6: cover their interest expenses. So I think that all these
Speaker 6: things filter into more and more pressure on these companies,
Speaker 6: which could lead us to a spot where we do
Speaker 6: get to fifteen percent dems. I'm not saying that the
Speaker 6: probability is very very high, but if it happened, I
Speaker 6: wouldn't be shocked.
Speaker 2: And can I just ask you said earlier that you
Speaker 2: don't have any private credit exposure in your fund at
Speaker 2: the moment. Is that right or that's correct? Okay? What
Speaker 2: made you take that decision because you said you'd been
Speaker 2: involved a little bit earlier. And then secondly, what would
Speaker 2: you need to see in the market to potentially get
Speaker 2: back in.
Speaker 6: I think the reason that we don't is because we
Speaker 6: were financed out over time and it was never a
Speaker 6: core part of what we did. It was a more
Speaker 6: ancillary part of our business. There were a few individual
Speaker 6: opportunities that came along with companies that needed money for
Speaker 6: a particular reason, or it was a business that people
Speaker 6: I don't think widely understood, or it was the size
Speaker 6: of the re borrowing requirement. One of the companies took
Speaker 6: the money that we lent them and kept the money
Speaker 6: on their balance sheet the whole time. They just had
Speaker 6: it as a safety net. It was less than one
Speaker 6: and a half times levered for the entire time. They
Speaker 6: no longer needed it. They paid us off and moved
Speaker 6: on and went to the next thing. So other times
Speaker 6: we were financed out by the leverage loan market or
Speaker 6: the private credit market, where they were going to be
Speaker 6: much more aggressive on the terms than the ones that
Speaker 6: we were willing to provide. And that's typically we're a
Speaker 6: bunch of old guys, and we have our ways of
Speaker 6: doing things that have been developed over thirty or forty years.
Speaker 6: We're not likely to change approach to providing credit just
Speaker 6: because the market now all of a sudden wants to
Speaker 6: get more aggressive and look past some of the obvious things,
Speaker 6: particularly as it comes to structure and covenant protections and
Speaker 6: amounts of leverage. We'd look at the business and say, Okay,
Speaker 6: this business is worth seven times I'm not going to
Speaker 6: give them six and a half times leverage. Do something
Speaker 6: just doesn't make sense.
Speaker 7: And if you go back to the point you make
Speaker 7: to begin the podcast, how private credit in the proliferation
Speaker 7: of the loan market has impacted the high yielded investment
Speaker 7: grade market. You know, what was once a two tiered
Speaker 7: market of investment grade non investment grade has really become
Speaker 7: a four tier market investment grade, high yield, leverage, loans,
Speaker 7: private credit in that order of credit quality. Most of
Speaker 7: the credits that do not meet our underwriting standards have
Speaker 7: fallen into leverage loan and private credit. So the high
Speaker 7: yield market is substantially higher quality now than it was before.
Speaker 7: The double B portion of the market is approaching sixty
Speaker 7: percent that used to be about thirty five percent, and
Speaker 7: the riskiest segment, the triple cs, is now about nine
Speaker 7: percent that used to be over twenty percent. So just
Speaker 7: by our underwriting process, we kick out a lot of
Speaker 7: the highly leveraged companies, kick out a lot of the
Speaker 7: companies that do not.
Speaker 5: Have the interest coverage that we're looking for.
Speaker 7: And so there's a function of our under adding process,
Speaker 7: but also where the more risky companies are financing themselves
Speaker 7: these days.
Speaker 2: All right, well, I think we could talk about this
Speaker 2: even more. We're going to have to leave it there,
Speaker 2: John and Craig, Thank you so much for coming on
Speaker 2: our thoughts. Really appreciate it.
Speaker 4: Thanks so much. Nice being with you.
Speaker 2: That was great.
Speaker 3: Thank you so much.
Speaker 2: So, Joe, I found that conversation super helpful just to
Speaker 2: sort of again contextualize private credit in the history of
Speaker 2: the bomb market. I do think, setting aside whether or
Speaker 2: not this is like a systemic issue, and I do
Speaker 2: think we're probably not even close to two thousand and
Speaker 2: eight style crisis right like it just can't be, but
Speaker 2: there are probably some hidden issues within there that are
Speaker 2: going to start to appear. But setting all of that aside,
Speaker 2: I think one of the challenges of credit having these
Speaker 2: continued crises, or at least being in the headlines all
Speaker 2: the time, is it is going to have a macroeconomic impact.
Speaker 2: Sure if you think of it as this market that
Speaker 2: is now bigger than the junk bond market, Like the
Speaker 2: junk bond market is an important source of financing for
Speaker 2: companies all around America, and so is private credit. So
Speaker 2: if you start to see that particular asset class slow down,
Speaker 2: like at a minimum, that's basically a credit crunch for
Speaker 2: a bunch of companies totally.
Speaker 3: And you can see like how there's like this path dependency.
Speaker 3: And again that doesn't mean it has to be like systemic,
Speaker 3: but you can see how there's this path dependency. Where
Speaker 3: as you mentioned, you get the headlines about with the draws,
Speaker 3: there are more withdraws. These sponsors have to sell good assets,
Speaker 3: they might have to take on credit borrowing of their
Speaker 3: own in order to meet those redemptions and so forth.
Speaker 3: You could see how that really spirals. I just really
Speaker 3: like their situation situation, how well they situated the whole conversation, situationship,
Speaker 3: their situationship, the way they could situate in the history
Speaker 3: of credit. Yeah, and there like look like if we're
Speaker 3: talking about ge credit financing, jet engine deals, et cetera,
Speaker 3: that's private credit. Yeah, it's expanded beyond that, but it's
Speaker 3: basically all sort of versions, you know, various flavors of
Speaker 3: a kind of financing that is quite old and non
Speaker 3: exotic at all.
Speaker 2: Absolutely, But I do think the sequencing also matters when
Speaker 2: it comes to raising money because, as they pointed out,
Speaker 2: this idea that like you're going to start a fund
Speaker 2: and you immediately have to start like going out and
Speaker 2: sourcing stuff to buy with that money, and it puts
Speaker 2: pressure on you to get like what you can get.
Speaker 3: That was very interesting, the difference between fund structure of
Speaker 3: a private equity fund versus a private credit fund, which
Speaker 3: I had never really thought of. Right, So VC in
Speaker 3: PE you're like hunting around for deals and so forth
Speaker 3: that you're like, all right, we got a deal. Then
Speaker 3: you call up all the LPs will give you commitments
Speaker 3: and say, while you're sad cash that you promised to
Speaker 3: now where is in the financing realm? You know, you
Speaker 3: just always have the cash on hand. It's always coming
Speaker 3: in and out and then coming in and out. Part
Speaker 3: also help clarify something for me, which is that, unlike
Speaker 3: with say a VC investment or a PE investment, where
Speaker 3: you put the money in and it's sort of indeterminate
Speaker 3: when you get the money back, right, you don't know
Speaker 3: when the company's gonna IPO, you don't know it's going
Speaker 3: to sell, et cetera. With lending, you do have that
Speaker 3: schedule from day one of when the money is supposed
Speaker 3: to come back in. And therefore the idea of gates
Speaker 3: and redemption schedules in the first place makes more sense
Speaker 3: because when you have this sort of pre understood timing
Speaker 3: of when the money comes back in. You can understand
Speaker 3: why you have a mechanism in place right to schedule
Speaker 3: and regulate when the money is allowed to go back
Speaker 3: out to the LPs.
Speaker 2: Right, but you still need to get back to some
Speaker 2: form of normalcy. Yeah, yeah, yeah, but like it's obviously
Speaker 2: incredibly helpful.
Speaker 3: Well, this gets to a thing you know, I've wondered about,
Speaker 3: which is like, well, okay, as part of the issue
Speaker 3: here with some of the more retail oriented private credit,
Speaker 3: which is education or lack of sophistication, where you have
Speaker 3: entities putting money into private credit that hadn't really appreciated
Speaker 3: that this is an element of it, which maybe.
Speaker 2: But on the other dating itself, but on the.
Speaker 3: Other hand, like the industry wouldn't be as big as
Speaker 3: it is today were you not going out to these
Speaker 3: less sophisticated investors. So yeah, two sides of the same. Colindre,
Speaker 3: all right, shall we.
Speaker 2: Leave it there.
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Authoughts podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Jill Wisenthal. You can follow me at The Stalwart.
Speaker 3: Follow our producers Carmen Rodriguez at Carmen Ermann, dash O
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