WEBVTT - What's Actually Going On With Private Credit 0:00:02.720 --> 0:00:15.840 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:17.960 --> 0:00:20.760 Hello and welcome to another episode of the Audults podcast. 0:00:20.840 --> 0:00:22.200 I'm Tracy Alloway. 0:00:22.079 --> 0:00:23.320 And I'm Joe Wisenthal. 0:00:23.920 --> 0:00:26.599 Joe, I think it's fair to say that if we 0:00:26.640 --> 0:00:30.120 didn't have the situation with Iran, we would be talking 0:00:30.120 --> 0:00:31.400 a lot more about private credit. 0:00:31.680 --> 0:00:35.360 Yeah, yeah, for sure, Jamie Diamond, you talk about the cockroaches. 0:00:35.479 --> 0:00:38.919 We keep getting these headlines over the last several weeks, 0:00:39.000 --> 0:00:43.040 maybe months, various mini you know, not blow ups per se, 0:00:43.200 --> 0:00:46.120 but many something between a hiccup and a blow up. 0:00:46.240 --> 0:00:50.240 In some cases you hear about redemptions being slowed down, 0:00:50.400 --> 0:00:54.160 et cetera. Not great headlines and not great charts often too, 0:00:54.240 --> 0:00:57.200 when you look at the various publicly traded instruments that 0:00:57.240 --> 0:00:58.880 one would associate with private credit. 0:00:59.080 --> 0:01:01.360 Right, So, I love that you said something between a 0:01:01.440 --> 0:01:03.480 hiccup and a blow up, because this is the difficulty 0:01:03.640 --> 0:01:06.200 I have in talking about the private credit space at 0:01:06.200 --> 0:01:09.560 the moment, which is, you either find people who are 0:01:09.720 --> 0:01:12.480 often very close to the private credit industry or in it, 0:01:12.720 --> 0:01:15.120 who will argue that this is just you know, a 0:01:15.200 --> 0:01:19.160 tiny bump in the road, This is maybe a few cockroaches, 0:01:19.319 --> 0:01:22.400 like nothing to worry about, although a single cockroach would 0:01:22.400 --> 0:01:25.520 worry me in my own household. But anyway, or you 0:01:25.600 --> 0:01:28.759 get doomsayers who are like, this is financial crisis two 0:01:28.840 --> 0:01:32.399 point zero, right, and it's very difficult to find nuanced 0:01:32.520 --> 0:01:34.480 commentary in between. 0:01:35.040 --> 0:01:37.920 Yeah, and we were always looking for nuanced commentary. So 0:01:37.959 --> 0:01:39.920 this is a problem for the Odd Launch podcast. 0:01:40.080 --> 0:01:42.360 That's right, Okay, So we're trying to rise to the 0:01:42.400 --> 0:01:46.160 occasion with some nuanced commentary on private credit. And trust me, 0:01:46.280 --> 0:01:49.280 I have watched and seen and read a lot of 0:01:49.320 --> 0:01:52.080 things on this topic. And one thing that stood out 0:01:52.120 --> 0:01:56.200 in particular to me was a particular seminar or lecture 0:01:56.320 --> 0:02:02.080 that came out from a firm called Osterwise recently, and 0:02:02.360 --> 0:02:06.200 we had a couple of old school bond hands talking 0:02:06.640 --> 0:02:09.079 about the rise of private credit and how to think 0:02:09.080 --> 0:02:11.680 about it in the context of the history of the 0:02:11.680 --> 0:02:13.639 bond market. And this is something that I think has 0:02:13.639 --> 0:02:17.560 often missed, is what exactly is private credits role when 0:02:17.560 --> 0:02:19.680 you think about overall corporate credit. 0:02:20.160 --> 0:02:22.800 That's a good way to put it right, because we 0:02:22.840 --> 0:02:25.560 can look at the various funds, et cetera. But within 0:02:25.680 --> 0:02:28.919 the broad history of the evolution of the bond market 0:02:29.160 --> 0:02:32.680 and within the current just sort of landscape of fixed income, 0:02:32.760 --> 0:02:35.360 Like what is private credit? The way I like to 0:02:36.080 --> 0:02:39.000 frame a lot of questions is from the perspective of 0:02:39.040 --> 0:02:43.440 the investor, what problem does the existence of private credits 0:02:43.480 --> 0:02:45.440 solve for their portfolio needs? 0:02:45.520 --> 0:02:45.720 Right? 0:02:45.720 --> 0:02:49.480 Because that is the consistent thing we talked to endowment managers, 0:02:49.480 --> 0:02:53.920 we talked to investors, et cetera. Every instrument in theory, 0:02:54.000 --> 0:02:56.600 like it solves some sort of problem. Maybe you have 0:02:56.680 --> 0:02:58.760 a lot of money, that's a lot for a long time. 0:02:58.800 --> 0:03:01.520 It's like, okay, you're willing to try raid that way 0:03:01.639 --> 0:03:05.440 for some extra premium, etcetera. What problem does private credit solve? 0:03:05.639 --> 0:03:08.119 Well, I was going to say, also from the perspective 0:03:08.120 --> 0:03:10.480 of the issuer and from the issue, right, because the issuer, 0:03:10.560 --> 0:03:12.919 if you're a company looking for financing, you have a 0:03:12.919 --> 0:03:14.960 bunch of different choices, and one of the ones that 0:03:15.000 --> 0:03:18.760 has become very popular in recent years is private credit. 0:03:18.840 --> 0:03:21.440 And in fact, you could I mean, there's a dynamic 0:03:21.440 --> 0:03:24.120 here where both investors are demanding it, but issuers are 0:03:24.160 --> 0:03:27.240 also very very happy to lend into that market for 0:03:27.360 --> 0:03:29.959 various reasons that we are about to get into. Let's 0:03:30.000 --> 0:03:31.760 do it all, right, So we do, in fact, have 0:03:32.000 --> 0:03:34.400 the perfect guests. We're going to be speaking with John Sheen, 0:03:34.520 --> 0:03:38.200 he is a portfolio manager for the Strategic Income Fund 0:03:38.240 --> 0:03:41.240 at austur Weis and Craig Manchuk he is also a 0:03:41.280 --> 0:03:44.640 portfolio manager at the Strategic Income Fund. So thank you 0:03:44.720 --> 0:03:47.560 so much, John and Craig for coming on all. 0:03:47.440 --> 0:03:50.600 Thoughts, thank you for having thanks for having us. 0:03:51.080 --> 0:03:54.320 So maybe just to begin with, how long have you 0:03:54.320 --> 0:03:55.680 guys been in the bond space. 0:03:56.640 --> 0:04:00.720 The firm has had a fixed income strategy for twenty 0:04:01.640 --> 0:04:04.920 coming up on twenty four years. Actually started by our 0:04:05.000 --> 0:04:08.000 one of our other partners, Carl Kaufman. Originally the firm 0:04:08.000 --> 0:04:11.640 here was started as an equity only firm, and as 0:04:11.720 --> 0:04:14.880 the firm's client started to get older, founder John oster 0:04:14.920 --> 0:04:19.520 Weiss wanted to expand into the fixed income space, brought 0:04:19.560 --> 0:04:22.680 Carl in and the fund has been in operation since 0:04:22.920 --> 0:04:24.560 April of two thousand and two. 0:04:25.839 --> 0:04:28.080 What kind of fund is it? When we're talking about 0:04:28.120 --> 0:04:32.120 it is tell us about the general, the mandate and 0:04:32.200 --> 0:04:35.200 the structure of the fund and who is like the 0:04:35.240 --> 0:04:38.839 sort of like the modal client for whom this would 0:04:38.839 --> 0:04:40.479 be a vehicle that they would put their money in. 0:04:41.320 --> 0:04:44.160 Sure, So the fund was set up to be the 0:04:44.160 --> 0:04:47.400 only fixed income fund that our private clients needed. So 0:04:47.800 --> 0:04:50.400 we have an extremely broad mandate. We can go anywhere, 0:04:50.520 --> 0:04:54.160 and so it was a very very early, unconstrained bond fund, 0:04:54.640 --> 0:05:00.480 which has some distinct advantages and some distinct disadvantages are 0:05:00.760 --> 0:05:04.200 we get to go where we see the best opportunities. 0:05:05.000 --> 0:05:08.760 Our mantra is to look for the most attractive parts 0:05:08.800 --> 0:05:11.479 of the market and then we look for the least 0:05:11.560 --> 0:05:15.159 risky ways to play those most attractive parts at any 0:05:15.160 --> 0:05:19.280 given time. And so the as the cycle changes. As 0:05:19.360 --> 0:05:23.640 business cycles are stronger, we would gravitate more towards credit, 0:05:24.120 --> 0:05:27.359 and as it weakens, we could gravitate more towards treasury. 0:05:27.400 --> 0:05:30.600 So the fund has over its life cycle moved back 0:05:30.640 --> 0:05:33.120 and forth, but by and large sense of financial crisis, 0:05:33.120 --> 0:05:38.760 we've been largely in high yield ig and convertible bonds. 0:05:39.040 --> 0:05:43.560 Our client base has predominantly been rias and wealth management 0:05:43.560 --> 0:05:47.520 firms and individuals. Some of those are existing private clients 0:05:47.560 --> 0:05:50.559 of the firm. Right now, so fund is about five 0:05:50.600 --> 0:05:53.520 point eight billion dollars and it is structured as a 0:05:53.600 --> 0:05:54.800 forty act open. 0:05:54.640 --> 0:05:55.479 End mutual fund. 0:05:56.240 --> 0:05:59.120 So once upon a time, if you are looking to 0:05:59.240 --> 0:06:02.520 invest in credit say in two thousand and two, you 0:06:02.560 --> 0:06:05.599 would have had a limited set of options, so you 0:06:05.680 --> 0:06:10.400 basically had investment grade, which are bonds issued by people 0:06:10.400 --> 0:06:13.440 always use the word blue chip companies, which sounds so 0:06:13.560 --> 0:06:16.600 old fashioned to me nowadays, but companies with relatively strong 0:06:16.839 --> 0:06:19.400 balance sheets that are rated by the rating agencies as 0:06:19.480 --> 0:06:23.920 investment grade, or you would have the option of bonds 0:06:23.920 --> 0:06:27.279 in the high yield market aka junk. So companies with 0:06:27.320 --> 0:06:31.880 weaker balance sheets and weaker credit ratings tell us about 0:06:31.880 --> 0:06:35.200 how the sort of I guess menu of credit options 0:06:35.240 --> 0:06:39.280 has expanded post the two thousand and eight financial crisis. 0:06:39.480 --> 0:06:41.720 That's basically a long winded way of me saying where 0:06:41.720 --> 0:06:43.400 does private credit come from? 0:06:43.760 --> 0:06:47.640 So private credit had been in existence prior to the 0:06:47.640 --> 0:06:52.840 financial crisis, but really saw expect growth after the financial crisis. 0:06:52.880 --> 0:06:56.919 So if you go back into even the eighties, with 0:06:57.200 --> 0:07:00.640 the growth of the high yield market, prior to that, 0:07:00.839 --> 0:07:05.640 highly levered companies companies that didn't have investment grade balance 0:07:05.640 --> 0:07:09.320 sheets couldn't really borrow much in the public markets, so 0:07:09.600 --> 0:07:13.760 either they financed internally or relied much more heavily on 0:07:13.800 --> 0:07:18.000 the bank market. As the high yield market grew famously 0:07:18.200 --> 0:07:21.640 with the help of milk, and it allowed more companies, 0:07:21.680 --> 0:07:24.480 more highly levered companies to access public markets. 0:07:25.000 --> 0:07:28.120 That evolved into the leverage loan market. 0:07:28.320 --> 0:07:31.080 The leverage loan market once upon a time used to 0:07:31.080 --> 0:07:34.040 be held on the bank balance sheets. They began to 0:07:34.080 --> 0:07:36.800 syndicate those loans and what was really the step function 0:07:36.920 --> 0:07:40.600 there was the evolution of the COLO market where the 0:07:40.640 --> 0:07:44.400 banks could take those loans put them into a securitized 0:07:44.440 --> 0:07:48.520 structure which became colos, which led to the growth there. 0:07:48.960 --> 0:07:53.000 Then after the financial crisis, the bank regulators really did 0:07:53.040 --> 0:07:59.000 not want banks lending to highly levered and or risky entities, 0:07:59.080 --> 0:08:04.960 both corporated and individuals, so you saw pretty strict capital requirements. 0:08:05.280 --> 0:08:08.640 There is an explicit prevention from banks lending to companies 0:08:08.680 --> 0:08:12.440 with greater than six times leverage. That created this need 0:08:13.160 --> 0:08:17.320 for lending outside of the bank market. Those companies didn't 0:08:17.320 --> 0:08:21.640 go away, their borrowing needs didn't end, so that vacuum 0:08:21.760 --> 0:08:22.800 was created. 0:08:22.400 --> 0:08:23.520 By private credit. 0:08:24.000 --> 0:08:27.400 So you saw many of the same entities that were 0:08:27.480 --> 0:08:30.960 lending in the private credit market previously in the private 0:08:31.000 --> 0:08:35.240 equity market, so they also saw a need to finance 0:08:35.400 --> 0:08:38.439 their LBOs that was no longer able to be done 0:08:38.440 --> 0:08:41.040 at the banks. So they started a number of different 0:08:41.080 --> 0:08:45.680 fund structures. The BBC fund structure had been around prior 0:08:45.679 --> 0:08:49.560 to the Financial crisis, but these dedicated private credit funds 0:08:49.960 --> 0:08:52.880 really began to proliferate after the financial crisis. 0:08:53.559 --> 0:08:55.440 Can I just add something to that, just from a 0:08:55.559 --> 0:08:58.920 historical perspective, I also think that we've been talking about 0:08:58.960 --> 0:09:02.720 private credit as it stands today, but it started so 0:09:02.880 --> 0:09:05.160 much earlier, and it started in an area that I 0:09:05.200 --> 0:09:07.880 think most people will tend to forget about, which is 0:09:08.679 --> 0:09:11.640 ge Capital was one of the largest providers of private 0:09:11.720 --> 0:09:15.040 credit under the GE umbrella for many, many, many years. 0:09:15.240 --> 0:09:18.120 They were financing lots of different things though they were 0:09:18.120 --> 0:09:22.720 financing railcars, they were financing aircraft engines, they were financing 0:09:23.040 --> 0:09:27.600 the purchase of MRIs and other healthcare equipment, and they 0:09:27.640 --> 0:09:32.520 were extraordinarily successful and really largely responsible for a big 0:09:32.600 --> 0:09:35.880 chunk of the profits that came in underneath the GE 0:09:36.040 --> 0:09:38.360 umbrella for many years. But what it did is it 0:09:38.400 --> 0:09:43.640 created a large body of really experienced lenders who ultimately 0:09:43.679 --> 0:09:46.360 splintered off and went into different areas and the businesses. 0:09:46.400 --> 0:09:49.840 And one of the businesses that started from them was 0:09:49.960 --> 0:09:52.760 a company called Heller Financial, which had been around for 0:09:52.800 --> 0:09:54.960 a while, but they hired some GE Capital guys to 0:09:55.000 --> 0:09:57.720 come in and they really kind of took the original 0:09:57.720 --> 0:10:01.160 Heller business, which was financing yellow equipment and railcars and things, 0:10:01.679 --> 0:10:05.400 into the middle market LBO space, So they became critical 0:10:05.440 --> 0:10:09.439 providers of financing for that space at a time when 0:10:09.440 --> 0:10:12.800 there really weren't many away from the banks. So a 0:10:12.800 --> 0:10:15.120 lot of this has been around for a long time. 0:10:15.160 --> 0:10:18.440 People just forget about it because there's not as many 0:10:18.440 --> 0:10:20.120 people out there that are as old as we are 0:10:20.520 --> 0:10:22.880 that remember those guys from the eighties and nineties. 0:10:23.240 --> 0:10:25.360 We saw that with a lot of the consolidation of 0:10:25.400 --> 0:10:29.520 the financial institution, so away from GE you know, ciit 0:10:29.800 --> 0:10:32.040 was a big lender in that space. Even in the 0:10:32.080 --> 0:10:36.480 aircraft lending space, an organization ILFC was owned by AIG, 0:10:37.200 --> 0:10:42.200 and the regulators wanted that highly levered, riskier financing out 0:10:42.200 --> 0:10:45.400 of the systematically important financial institutions. 0:10:45.760 --> 0:10:49.040 Well, speaking of people not realizing some of the history here, 0:10:49.120 --> 0:10:52.160 it took me an embarrassingly long amount of time to 0:10:52.240 --> 0:10:55.199 realize that all the stories that I'd written about shadow 0:10:55.240 --> 0:10:57.400 banking in the aftermath of the two thousand and eight 0:10:57.440 --> 0:11:00.160 financial crisis were basically for the credit. 0:11:00.320 --> 0:11:03.920 Yeah, It's interesting to think about, Like I'm familiar to 0:11:03.960 --> 0:11:06.000 some extent. I don't know the full history of like 0:11:06.080 --> 0:11:08.439 GE Capital, but I had certainly heard of it. I 0:11:08.520 --> 0:11:12.000 knew that it became a big profit center for GE itself. 0:11:12.040 --> 0:11:15.120 And it would make sense that a company like GE 0:11:15.520 --> 0:11:19.480 or GM even but GE would have its own lending 0:11:19.600 --> 0:11:22.480 arm and then like do its own financing on the side. 0:11:22.640 --> 0:11:24.720 But I'd never really thought of it as like private 0:11:24.840 --> 0:11:28.080 credit per se. But it's interesting to hear that, Yeah, 0:11:28.160 --> 0:11:30.280 like this was like an origin that a lot of 0:11:30.320 --> 0:11:34.520 the lending form types, etc. That were sort of emerged 0:11:34.559 --> 0:11:38.520 out of these practices in house. Then where did it 0:11:38.559 --> 0:11:40.920 go from there? So you mentioned, okay, like real asset 0:11:41.160 --> 0:11:43.760 invested in maybe it's like aircraft blending or you know, 0:11:43.840 --> 0:11:49.240 aircraft finance, etc. How did it splinter off into all 0:11:49.280 --> 0:11:52.160 of these different fields and areas beyond just the sort 0:11:52.160 --> 0:11:54.440 of like the tangible goods financing. 0:11:55.280 --> 0:11:58.079 So one of the places it went was in an 0:11:58.080 --> 0:12:01.560 area of mezzanine finance. Again, back in the early days 0:12:01.600 --> 0:12:06.120 of the LBO market, the sponsors were always looking for ways, 0:12:06.160 --> 0:12:08.640 how do we fill in the gaps? We can't get 0:12:08.640 --> 0:12:11.200 this deal quite across the finish line with the equity 0:12:11.240 --> 0:12:12.680 we want to put in. Where do we fill in 0:12:12.679 --> 0:12:16.880 the gaps? And there were mezzanine funds, and they were 0:12:17.920 --> 0:12:22.760 hybrids somewhere between credit lenders and private equity investors. So 0:12:22.800 --> 0:12:25.480 they would take the most junior piece, typically a preferred 0:12:25.600 --> 0:12:29.120 or subordinated piece of debt, and get a little bit 0:12:29.160 --> 0:12:32.679 of equity in the form of warrant or something alongside, 0:12:32.720 --> 0:12:36.360 so that they were targeting a slightly higher return profile 0:12:36.400 --> 0:12:39.040 than the typical debt guys were, but they weren't going 0:12:39.080 --> 0:12:41.920 to get the full bang for their bucket that the 0:12:41.920 --> 0:12:44.440 PE guys were getting. And that lasted for a number 0:12:44.440 --> 0:12:49.760 of years, but as the market matured, the sponsors found 0:12:49.800 --> 0:12:53.320 that they no longer really needed the mes guys to 0:12:53.360 --> 0:12:56.520 the same degree. They're still around, but ultimately mes funds 0:12:56.559 --> 0:12:59.640 were niche kind of product that I think over time 0:12:59.679 --> 0:13:03.520 has just kind of been squeezed out between the size 0:13:03.520 --> 0:13:06.679 and scale of the combination of leverage loans and high 0:13:06.760 --> 0:13:11.480 yield bonds and the PE firm's desires to keep as 0:13:11.559 --> 0:13:15.439 much of the equity economics themselves as the asso. 0:13:31.320 --> 0:13:33.640 So today we're at a point where the private credit 0:13:33.679 --> 0:13:36.200 market there are all these different estimates for exactly how 0:13:36.240 --> 0:13:38.319 big it is, and you're going to get some variation 0:13:38.440 --> 0:13:41.000 because it is private, like the clue is in the name. 0:13:41.200 --> 0:13:45.640 But by most estimates, it's bigger than the junk rated market, 0:13:45.679 --> 0:13:49.200 which is kind of crazy if you think about, like 0:13:49.480 --> 0:13:52.480 how large the junk raded market has loomed in the 0:13:52.520 --> 0:13:56.640 market's collective consciousness for so long. How did we get 0:13:56.679 --> 0:14:00.240 to that particular point? How did we get to a 0:14:00.240 --> 0:14:03.000 point where this like relatively new market, Although I take 0:14:03.040 --> 0:14:07.200 the point that it has intellectual routes before even the 0:14:07.200 --> 0:14:09.680 financial crisis, but why did it grow so quickly after 0:14:09.720 --> 0:14:10.480 two thousand and eight. 0:14:11.360 --> 0:14:15.880 I think there's two macro influences that had a large 0:14:15.920 --> 0:14:18.440 play in that. First, if you look back after the 0:14:18.559 --> 0:14:22.160 dot com meltdown in the equity market, we had three 0:14:22.200 --> 0:14:24.680 straight years of negative returns in the S ANDP. It 0:14:24.720 --> 0:14:27.080 was the first time that happened since the Great Depression. 0:14:27.680 --> 0:14:31.400 The cumulative returns of high yield for that twenty year 0:14:31.440 --> 0:14:36.320 period nineteen ninety ninety twenty nineteen beat equities, So among 0:14:36.360 --> 0:14:39.160 investors there was a desire for something away from the 0:14:39.200 --> 0:14:43.600 equity market. Their experience in equities was unsatisfactory, so they're 0:14:43.640 --> 0:14:45.200 looking for other alternatives. 0:14:45.640 --> 0:14:47.960 And then in the later part of that time period 0:14:48.400 --> 0:14:49.000 we went. 0:14:48.880 --> 0:14:53.080 Through the zero interest rate environment where you know, the 0:14:53.120 --> 0:14:56.840 Fed Treasury, etcetera. Drove interest rates to zero in response 0:14:56.880 --> 0:15:00.720 to COVID. So there was a massive desire for yield 0:15:01.160 --> 0:15:03.800 and better performing assets than they had in the early 0:15:03.840 --> 0:15:06.400 parts of the two thousands in the equity market. So 0:15:06.960 --> 0:15:11.240 that really led to the proliferation of the amount of 0:15:11.800 --> 0:15:15.480 dollars flowing into the product. And then on the supply 0:15:15.560 --> 0:15:19.320 sid we touched on it earlier, these highly levered borrowers 0:15:19.640 --> 0:15:22.760 were basically shut out of the banking lending market, so 0:15:22.800 --> 0:15:26.240 they needed to find alternatives to fund their businesses and 0:15:26.280 --> 0:15:29.760 to refinance their debt. So those two kind of came 0:15:29.800 --> 0:15:32.600 together at the same time and really fueled the growth 0:15:32.600 --> 0:15:33.680 of the product. 0:15:33.880 --> 0:15:37.200 And I think institutionally you had in the LBO world, 0:15:37.600 --> 0:15:41.280 sponsors were looking to have a real partner that they 0:15:41.280 --> 0:15:45.280 could go to repeatedly for all different types of transactions, 0:15:45.320 --> 0:15:48.640 go back to them again and again and develop a 0:15:48.680 --> 0:15:53.760 real relationship, and where their lender could be very expedient 0:15:53.880 --> 0:15:57.000 as well, and I think expediency mattered and provide them 0:15:57.040 --> 0:16:00.880 with sort of that guaranteed financing which the banks were 0:16:00.880 --> 0:16:04.120 providing up until they were squeezed out from a regulatory 0:16:04.160 --> 0:16:07.840 standpoint on the most highly leveraged transactions. So I think 0:16:07.880 --> 0:16:10.360 that's what it really kind of comes down to, is 0:16:10.440 --> 0:16:13.280 the ability to provide more leverage than the banks were 0:16:13.320 --> 0:16:16.880 allowed to without running a foul of the regulators. 0:16:17.200 --> 0:16:20.200 So one thing that comes up regularly on the podcast 0:16:20.640 --> 0:16:25.120 is the sort of natural synergy between private credit and 0:16:25.400 --> 0:16:29.080 insurance and insurance companies. They have all these assets, and 0:16:29.080 --> 0:16:32.240 they have this advantage that they know exactly when those 0:16:32.280 --> 0:16:34.280 assets will be withdrawn. It will probably be in like 0:16:34.320 --> 0:16:36.480 forty years from now. They do not have to worry 0:16:36.760 --> 0:16:40.320 at all about you know, a quick run whatever, and 0:16:40.400 --> 0:16:45.200 so they can harvest they can harvest that illiquidity illiquidity 0:16:45.200 --> 0:16:46.960 premium but that they could be they could put their 0:16:47.000 --> 0:16:49.800 money into assets that do not trade very much. And 0:16:49.800 --> 0:16:53.520 that's very intuitive to me. Talk to us, though, you're 0:16:53.800 --> 0:16:57.880 operating an unconstrained fund that is a publicly traded forty 0:16:57.920 --> 0:17:00.800 act mutual fund, Talk to us out what it means. 0:17:00.840 --> 0:17:04.000 You know, you say you look for opportunity. Why are 0:17:04.240 --> 0:17:07.480 there private credit assets that aren't all locked up in 0:17:07.560 --> 0:17:11.560 these long term vehicles why does it sometimes make sense 0:17:11.920 --> 0:17:15.240 for private credit assets to be in a vehicle that 0:17:15.440 --> 0:17:19.000 is just sort of more opportunistic and has a daily quote. 0:17:19.000 --> 0:17:23.040 Potentially, we currently actually right now, don't have any private 0:17:23.080 --> 0:17:25.720 credit we were involved with. We were involved in it 0:17:25.760 --> 0:17:29.280 in the past, but I think most of those opportunities 0:17:29.359 --> 0:17:34.840 have gone to the dedicated private credit funds because there's 0:17:35.200 --> 0:17:37.480 one of the structural differences of the way they're set 0:17:37.560 --> 0:17:41.000 up versus the way we're set up, h is we 0:17:41.040 --> 0:17:45.520 source our ideas mostly from investment banks. Now, some of 0:17:45.520 --> 0:17:48.600 those investment banks used to come to us with transactions 0:17:48.840 --> 0:17:51.560 that weren't going to fly in the public market, so 0:17:51.600 --> 0:17:53.960 they would look and say, this is a small deal. 0:17:54.400 --> 0:17:56.240 We're not going to be able to find buyers from 0:17:56.240 --> 0:18:00.720 this among our investors who are primarily benchmark high yield investors, 0:18:00.760 --> 0:18:03.200 because it would be outside the index and it would 0:18:03.200 --> 0:18:06.280 be illiquid, and there's been a lot of talk about 0:18:06.720 --> 0:18:10.520 in problems with investing in ill liquid securities. One of 0:18:10.560 --> 0:18:13.480 the real benefits of our strategy is we always have 0:18:13.640 --> 0:18:17.240 lots of liquidity. We have historically have managed our portfolio 0:18:17.359 --> 0:18:21.359 and a short duration with a short duration focus. 0:18:21.040 --> 0:18:23.560 That creates cash and we keep a lot of front 0:18:23.680 --> 0:18:24.760 end ballast. 0:18:24.880 --> 0:18:28.080 So as our portfolio is always creating cash, we could 0:18:28.119 --> 0:18:31.919 invest in some pockets of less liquid strategies, but we 0:18:32.040 --> 0:18:34.560 haven't done that. But the private credit guys are set 0:18:34.640 --> 0:18:36.439 up differently. They need a team of bankers to go 0:18:36.480 --> 0:18:38.440 out and source all their deals. They have to knock 0:18:38.480 --> 0:18:41.880 on companies' doors. It's a very different way in their 0:18:42.160 --> 0:18:45.240 function of having to source their transactions to try to 0:18:45.280 --> 0:18:48.840 fill up the asset side of their portfolios. So because 0:18:48.880 --> 0:18:52.840 of that, over time, I think there's a huge structural 0:18:52.840 --> 0:18:54.680 difference between the way they approach. 0:18:54.400 --> 0:18:55.640 It and the way we approach it. 0:18:56.080 --> 0:18:58.959 But going just going back briefly to the insurance company side, 0:18:59.119 --> 0:19:02.280 insurance companies have long been investors in private assets, and 0:19:02.320 --> 0:19:06.560 they used to have large teams of private debt investors, 0:19:06.880 --> 0:19:09.680 and ultimately, over time what they've done is they've shrunken 0:19:09.760 --> 0:19:13.080 those teams and just said, here, you guys source the 0:19:13.119 --> 0:19:15.840 transactions for us, and then we'll give you guys the 0:19:15.880 --> 0:19:18.439 money and you can go do it yourselves, sort of 0:19:18.440 --> 0:19:21.640 on an outsourced basis. So naturally it is a very 0:19:21.640 --> 0:19:24.720 good fit for them because they do have long duration 0:19:24.880 --> 0:19:28.440 assets and there's generally not a rush for those assets. 0:19:29.320 --> 0:19:32.200 Could you say a little bit more about how competitive 0:19:32.480 --> 0:19:35.560 it's been in the past to source private credit deals. 0:19:35.640 --> 0:19:38.160 If you're on the investor side, we hear these stories 0:19:38.200 --> 0:19:41.600 about you know, basically private companies can kind of dictate 0:19:41.640 --> 0:19:44.880 the terms of the deals because there's so much overwhelming 0:19:45.080 --> 0:19:48.119 investor demand, and you get this vision of people like 0:19:48.200 --> 0:19:51.040 literally pounding down the door to get in on a 0:19:51.080 --> 0:19:56.040 particular loan. Is that was that accurate in the past. No. 0:19:56.440 --> 0:20:00.000 I think even the managers of private credit would tell you, 0:20:00.119 --> 0:20:03.600 and honesty maybe not on the record, that they're surprised 0:20:03.600 --> 0:20:05.720 how quickly this has grown. So if you look at 0:20:05.720 --> 0:20:08.480 some of these funds that have grown ten x over 0:20:08.520 --> 0:20:11.359 the last five ten years, I don't think that they 0:20:11.560 --> 0:20:14.800 have grown their sourcing abilities by. 0:20:14.680 --> 0:20:15.520 Five to ten x. 0:20:16.000 --> 0:20:19.360 So if you can trast it to say private equity, 0:20:19.800 --> 0:20:22.440 the way a private equity fund works is they find 0:20:22.440 --> 0:20:25.520 the investment opportunity and then they go call the funds. 0:20:25.200 --> 0:20:26.280 From their LPs. 0:20:26.800 --> 0:20:29.879 Private credit, most of these funds work where they've taken 0:20:29.920 --> 0:20:31.720 the money first and then they go out and find 0:20:31.720 --> 0:20:35.320 the investments. So they are under much more crushure to 0:20:35.359 --> 0:20:39.640 find investments, which creates this competitive environment that you alluded 0:20:39.680 --> 0:20:42.440 to some of the issues that we talked to that 0:20:42.560 --> 0:20:44.399 may have been in the public markets in the past, 0:20:44.920 --> 0:20:47.240 tell us that when they go to the private credit market, 0:20:47.600 --> 0:20:50.440 it's just a competition for who will jump the highest 0:20:50.440 --> 0:20:53.040 for the piece of meat. And what that translates to 0:20:53.359 --> 0:20:58.000 in the credit world is either lower interest rate, weaker covenance, 0:20:58.280 --> 0:21:01.040 or a combination of the both. And that's really what 0:21:01.080 --> 0:21:05.280 you've seen with private credit in this hyper competitive environment 0:21:05.320 --> 0:21:05.679 that we're in. 0:21:05.720 --> 0:21:05.800 Now. 0:21:06.240 --> 0:21:09.000 Another thing that John mentioned which is actually really important here, 0:21:09.840 --> 0:21:14.920 so the structural side, this is what liability side of 0:21:14.960 --> 0:21:17.840 the balance sheet for private credit guys is kind. 0:21:17.680 --> 0:21:18.960 Of critically important here. 0:21:19.040 --> 0:21:22.480 So if you're out there and you're raising an institutional fund, 0:21:22.560 --> 0:21:26.639 those institutional funds are generally DRAWDOUN funds, so they're allowed 0:21:26.640 --> 0:21:29.320 to go out market and say, okay, we've raised commitments 0:21:29.400 --> 0:21:32.359 for five or ten billion dollars. We're going to go 0:21:32.400 --> 0:21:35.640 out now and source our investments, which is the assets side. 0:21:35.800 --> 0:21:39.800 The LP commitments are the liability side. So they will 0:21:39.840 --> 0:21:43.239 take on those liabilities as they find the assets and 0:21:43.280 --> 0:21:45.240 they end up being matched. And this is in a 0:21:45.280 --> 0:21:48.879 structure that's typically got a term and it's locked up 0:21:48.920 --> 0:21:51.880 money that they will not be providing liquidity for those 0:21:51.920 --> 0:21:55.840 institutional investors. The problem, and this is where we've run 0:21:55.880 --> 0:21:58.480 into the big problems, and this is what is really 0:21:58.640 --> 0:22:03.680 circulating in around them, is more recently, when we've gone 0:22:03.680 --> 0:22:07.399 and taken this out into these private BBC structures to 0:22:07.480 --> 0:22:12.040 market them to the retail or private wealth world. In 0:22:12.119 --> 0:22:16.159 order to raise the money, they've needed to offer some 0:22:16.400 --> 0:22:19.800 concessions on the liquidity right, because it makes it easier 0:22:19.840 --> 0:22:22.320 to raise money if you're going to allow people or 0:22:22.440 --> 0:22:24.400 going to tell them that you're going to allow them 0:22:24.960 --> 0:22:30.080 to redeem at least somewhat periodically. That has allowed them 0:22:30.080 --> 0:22:32.920 to raise money really fast. It's a little bit piggy 0:22:33.320 --> 0:22:35.320 because they've just said, Okay, we can raise a lot 0:22:35.359 --> 0:22:37.200 of money. Let's just raise the money when we can. 0:22:37.720 --> 0:22:40.800 The difference is when those dollars come in, they come 0:22:40.840 --> 0:22:44.000 into the fund on a subscription basis and need to 0:22:44.040 --> 0:22:47.520 be invested quickly, and that's what's really created a lot 0:22:47.520 --> 0:22:49.840 of the problems and what's really led to the degradation 0:22:50.440 --> 0:22:54.640 of credit underwriting because if you don't invest those dollars quickly, 0:22:55.000 --> 0:22:57.720 it creates the lag on performance in the fund. A 0:22:57.800 --> 0:23:00.480 minute that dollar comes in, it's part of your nav 0:23:01.119 --> 0:23:03.840 Therefore it needs to be invested rapidly in an income 0:23:03.880 --> 0:23:08.000 earning investment. So that's what's happened, and you really saw 0:23:08.040 --> 0:23:11.800 a huge proliferation of this. I mean the most obvious 0:23:11.840 --> 0:23:14.240 and visible of these you could see on there would 0:23:14.240 --> 0:23:17.800 be the cliff Water Corporate Lending Fund, which is CCLFX 0:23:17.800 --> 0:23:20.200 on your Bloomberg. If you look that up, you can 0:23:20.200 --> 0:23:22.640 look at the asset growth in that, and it really 0:23:22.880 --> 0:23:25.800 has taken off in the last five years. In twenty 0:23:25.840 --> 0:23:29.840 twenty two, we would speak to our wealth management advisors 0:23:29.840 --> 0:23:32.760 who are investors in our fund and ask them about 0:23:32.800 --> 0:23:35.160 what's working for them, because in twenty twenty two rates 0:23:35.160 --> 0:23:38.560 are going up. Investment grade bond funds are trading off 0:23:38.560 --> 0:23:41.600 sharply because people didn't understand the duration risk that they 0:23:41.600 --> 0:23:44.920 were carrying. High yield funds were weaker, but nowhere near 0:23:44.960 --> 0:23:47.120 as bad as IG and I'd. 0:23:46.960 --> 0:23:49.479 Say, what's working. They said, oh, gosh, private credit's been 0:23:49.480 --> 0:23:50.080 working great. 0:23:50.840 --> 0:23:53.560 I would say, well, that's wonderful, but that's because they're 0:23:53.600 --> 0:23:57.280 not taking their marks, and so they became very very 0:23:57.320 --> 0:24:00.159 comfortable because they didn't have to turn around talk to 0:24:00.240 --> 0:24:03.600 their existing investors and say here you lost a lot 0:24:03.640 --> 0:24:05.960 of money in this fund. It looks like you've just 0:24:06.080 --> 0:24:09.360 earned your yield and your NAV has been very, very stable. 0:24:09.440 --> 0:24:12.680 So as a result, their clients were happy. They were happy, 0:24:12.880 --> 0:24:16.280 and what happened money poured in. So as that money 0:24:16.320 --> 0:24:20.600 poured in, it led to I think more bad actors 0:24:20.680 --> 0:24:25.240 is too strong work, but really more bad underwriting, weaker underwriting, 0:24:25.320 --> 0:24:28.240 more aggressive underwriting, because they needed to get that money 0:24:28.280 --> 0:24:31.280 put to work so they would provide more leverage at 0:24:31.359 --> 0:24:32.840 weaker terms. 0:24:33.320 --> 0:24:35.639 Just can you clarify? Sorry, I think you explained it, 0:24:35.680 --> 0:24:38.920 but why is it that with the traditional private asset 0:24:39.080 --> 0:24:43.160 not private private asset model that they only call on 0:24:43.240 --> 0:24:46.879 the capital once it's needed, Because what you explained is okay, 0:24:46.880 --> 0:24:49.480 once you take into the capital, if it's not being invested, 0:24:49.520 --> 0:24:53.840 it's a drag on NAV. Very intuitive. Just explain why 0:24:53.960 --> 0:24:57.200 is that? Why is the other parts of the private 0:24:57.280 --> 0:25:00.640 capital world able to do the thing. You only call 0:25:00.720 --> 0:25:03.560 up the LPs when you have a deal, whereas that's 0:25:03.600 --> 0:25:05.879 not the case with private credit where you're taken the 0:25:05.960 --> 0:25:06.800 money upfront. 0:25:07.600 --> 0:25:10.159 I just think it's what people are used to and 0:25:10.160 --> 0:25:12.640 they've gotten used to on that model over the years. 0:25:12.640 --> 0:25:15.880 As an institution. Hey, I'll commit to your fund, tell 0:25:15.880 --> 0:25:17.600 me when you need the money, and we'll send it in. 0:25:17.640 --> 0:25:19.200 And I think that's the way they do it now, 0:25:20.000 --> 0:25:22.480 exactly how they do Yeah. I don't know if that's 0:25:22.480 --> 0:25:24.640 a dollar for dollar thing or if they'll do it 0:25:24.680 --> 0:25:28.760 in just installments over time, but it does help to provide. 0:25:29.040 --> 0:25:32.600 It gives them the ability to have less drag by 0:25:32.640 --> 0:25:34.800 having you go out and raise a five billion dollar 0:25:34.920 --> 0:25:35.640 fund day one. 0:25:36.000 --> 0:25:38.119 That money's going to sit there if you. 0:25:37.720 --> 0:25:39.240 No, no, I mean it makes it. I guess what 0:25:39.280 --> 0:25:44.040 I'm trying to establish is why couldn't private credit work 0:25:44.119 --> 0:25:46.400 the same way where it's like, Okay, I go out 0:25:46.400 --> 0:25:49.080 and raise five billion dollars worth of commitment, and then 0:25:49.280 --> 0:25:53.840 as I get a lending opportunity, and when then I 0:25:53.920 --> 0:25:56.199 call up my LPs and say, okay, you needed to 0:25:56.320 --> 0:25:58.240 phone you up that fifty million to us that you've 0:25:58.280 --> 0:26:00.840 committed and whatever. Why couldn't have worked that way? 0:26:01.760 --> 0:26:05.240 It could? I think it's the nature of the investment. 0:26:05.440 --> 0:26:10.360 So the traditional structure that Craig described as private equity, right, 0:26:10.400 --> 0:26:13.480 So if you think about an equity investment, you go out, 0:26:13.560 --> 0:26:18.160 you buy a company, you take over management, retool operations, 0:26:18.280 --> 0:26:20.600 you merge, you do whatever you do in private equity 0:26:20.640 --> 0:26:23.840 to increase value, and then in three five years you 0:26:23.840 --> 0:26:27.359 want to turn around and realize that investment where a 0:26:27.480 --> 0:26:31.240 lending business is more of a kind of balance sheet 0:26:31.280 --> 0:26:34.800 perpetual business where you're finding new loans all the time 0:26:34.840 --> 0:26:38.560 and you have loans maturing, redeploying the money. So the 0:26:38.600 --> 0:26:41.560 evergreen structure of an integral fund. 0:26:41.280 --> 0:26:42.560 Makes more makes sense. 0:26:43.480 --> 0:26:47.840 Yeah, so you typically have bigger bite sizes in private equity. 0:26:47.960 --> 0:26:51.800 You know, it's more heavily concentrated portfolio with a finite timeframe. 0:26:52.400 --> 0:26:55.240 Where it's credit, it's like a if you take a. 0:26:55.160 --> 0:26:57.760 Bank balance right, this was finding that used to be 0:26:57.760 --> 0:26:58.960 funded by deposits. 0:26:59.480 --> 0:27:01.960 In perpose, it is balance here by a time. 0:27:02.160 --> 0:27:05.040 I think the fact you have a much smaller number 0:27:05.160 --> 0:27:08.080 of investments many many small. I mean a typical private 0:27:08.080 --> 0:27:11.560 equity fund can have five to twenty five investments depending 0:27:11.560 --> 0:27:15.439 on its size, whereas the typical private credit fund is 0:27:15.480 --> 0:27:19.280 going to have hundreds, if not thousands, of So imagine 0:27:19.320 --> 0:27:24.160 having to make to call fifty dollars four times, four 0:27:24.200 --> 0:27:26.760 times a week from your investor each of your one 0:27:26.800 --> 0:27:27.760 hundreds of thousands of it. 0:27:28.080 --> 0:27:29.159 It would be really cumbersome. 0:27:29.520 --> 0:27:32.919 And I think that also goes to the logic around 0:27:33.359 --> 0:27:37.600 the gates. That's been a pretty controversial topic. But think 0:27:37.640 --> 0:27:40.280 about a five year loan, right, You probably have twenty 0:27:40.280 --> 0:27:42.000 percent of your loans come and do every year. 0:27:42.280 --> 0:27:43.480 That's five percent a quarter. 0:27:43.880 --> 0:27:46.800 So the gates were put in there to address the 0:27:46.840 --> 0:27:51.679 fact that we have maturities every quarter that could be 0:27:51.720 --> 0:27:54.679 there to meet redemptions, where some of the five percent 0:27:54.840 --> 0:28:11.439 logic came from. 0:28:11.480 --> 0:28:14.480 Actually, we should talk about the gates because one of 0:28:14.520 --> 0:28:17.879 the sort of defenses that you sometimes hear about private 0:28:17.880 --> 0:28:20.920 credit is this idea that, well, even if you get 0:28:20.960 --> 0:28:24.720 a spike in defaults and all these companies start failing, 0:28:25.040 --> 0:28:28.760 it's not necessarily a huge problem for private credit because 0:28:28.840 --> 0:28:32.680 we've set up these limitations on redemption so you can't 0:28:32.760 --> 0:28:36.399 get this rapid run for the exit because the amount 0:28:36.440 --> 0:28:38.360 of money that can be taken out of each fund 0:28:38.680 --> 0:28:42.480 is capped at you know, five percent or something like that. 0:28:43.720 --> 0:28:46.520 My inclination when I hear stuff like that is to think, like, Okay, 0:28:46.560 --> 0:28:49.640 well you've capped the amount of money that can exit 0:28:49.680 --> 0:28:51.920 the fund, but that doesn't mean that you've stopped people 0:28:52.000 --> 0:28:55.680 from wanting to exit the fund, it's just a slower 0:28:55.800 --> 0:28:58.160 run than it would be otherwise, So you're sort of 0:28:58.200 --> 0:29:01.480 building up that pressure. But then again the response to 0:29:01.520 --> 0:29:05.000 that is, well, you know, you're giving investors time to 0:29:05.040 --> 0:29:07.800 see their marks build back up or whatever, but like, 0:29:08.640 --> 0:29:12.280 does that selling pressure go away at all? How helpful 0:29:12.400 --> 0:29:14.960 are the gates when it comes to managing stress in 0:29:15.000 --> 0:29:15.680 private credit? 0:29:15.960 --> 0:29:21.360 I think they're critical actually in the retail channel, because 0:29:22.280 --> 0:29:26.800 you're protecting both sets of investors. It's not the asset 0:29:26.960 --> 0:29:29.280 side of the equation. It's not the loans that they're 0:29:29.280 --> 0:29:31.720 making that or the problem. It's the other side. So 0:29:31.960 --> 0:29:34.760 if you go back and just think about what happened 0:29:34.800 --> 0:29:38.240 at First Republic Bank, they were owning treasuries and they 0:29:38.280 --> 0:29:41.960 had forty billion dollars of redemption requests for their demand 0:29:41.960 --> 0:29:44.200 deposits go out the door in a few days and. 0:29:44.520 --> 0:29:45.520 The business was sunk. 0:29:45.520 --> 0:29:47.520 So if you didn't have the gates up and you 0:29:47.600 --> 0:29:51.360 had to run on the private credit funds because people 0:29:51.360 --> 0:29:54.800 were unhappy, they got nervous, they got scared, you sink 0:29:54.840 --> 0:29:58.840 funds very very easily that way. But what's important about it, 0:29:58.880 --> 0:30:00.920 and this is where we're going to get into a 0:30:01.600 --> 0:30:04.520 potentially thorny period as we move down the road is 0:30:05.240 --> 0:30:07.960 these funds will either need to do one of two things. 0:30:08.080 --> 0:30:11.640 They'll either need to sell assets to meet their redemptions, 0:30:12.080 --> 0:30:17.720 or they'll have to finance the redemption requests, provided that 0:30:18.160 --> 0:30:21.200 the inflows that they've been seeing slow down. 0:30:21.280 --> 0:30:21.520 Now. 0:30:22.120 --> 0:30:25.080 I think, because of all the noise out there that 0:30:25.120 --> 0:30:29.360 we see in the media, people's confidence in the private 0:30:29.400 --> 0:30:33.360 credit space, certainly the retail investor's confidence, the wealth manager's 0:30:33.400 --> 0:30:36.920 confidence has been shaken. So it wouldn't surprise me at 0:30:36.960 --> 0:30:41.920 all if we see those flows slow down. If that happens, 0:30:42.280 --> 0:30:47.280 then the net outflows will be potentially greater and they'll build. 0:30:48.120 --> 0:30:51.040 That means that these private credit managers will have to 0:30:51.240 --> 0:30:53.640 finance those or they'll have to sell assets. And the 0:30:53.720 --> 0:30:56.760 assets they sell are the ones that are probably the 0:30:56.800 --> 0:31:00.880 easiest to sell, which generally are the highest quality. So 0:31:01.120 --> 0:31:04.320 the concern here and really where when people are worried 0:31:04.320 --> 0:31:07.680 about the contagion. The concern is you are left with 0:31:08.920 --> 0:31:13.880 a fund that has raised more debt to meet some redemptions, 0:31:14.360 --> 0:31:18.440 then been forced to redeem to sell more positions, and 0:31:18.480 --> 0:31:20.640 some of those are your better positions. So now you've 0:31:20.640 --> 0:31:26.280 got a more levered fund with horror overall investment quality. 0:31:26.960 --> 0:31:30.400 Where does that stop and at what point does that 0:31:30.560 --> 0:31:35.400 potentially blow up? Because candidly, the private credit guys may 0:31:35.480 --> 0:31:39.000 sell the early sales there were from we heard from 0:31:39.120 --> 0:31:42.160 a blue owl into an insurance company. Okay, that's great, 0:31:42.520 --> 0:31:47.160 but I will argue that we're just seeing the beginnings 0:31:47.320 --> 0:31:51.880 of the pools of assets being created that are going 0:31:51.920 --> 0:31:55.440 to take on some of the stressed or distress loans 0:31:55.440 --> 0:31:58.440 in that space, and those loans are not going to 0:31:58.480 --> 0:32:01.360 be as easy to move. You'll find somebody like an 0:32:01.400 --> 0:32:04.000 oak Tree who typically does this. At points of stress 0:32:04.080 --> 0:32:07.240 or distress. They'll go to their lkpi's and say, hey, 0:32:07.280 --> 0:32:09.240 we have a great opportunity. We want to raise ten 0:32:09.280 --> 0:32:12.000 billion dollars, and because over the years they've been really 0:32:12.040 --> 0:32:14.840 really savvy about that, they're able to raise that money. 0:32:14.880 --> 0:32:15.560 So they'll create a. 0:32:15.560 --> 0:32:19.480 Special Opportunities Fund to go out and buy these particular 0:32:19.600 --> 0:32:23.080 private credit loans that are stressed or distressed. You need 0:32:23.360 --> 0:32:26.600 the expertise to go in and work out those loans 0:32:26.680 --> 0:32:29.640 and potentially either take and run the company from an 0:32:29.680 --> 0:32:32.400 equity standpoint, or kick the can down the road and 0:32:32.440 --> 0:32:35.880 hopefully restructure and revise those loans. So I think that's 0:32:35.920 --> 0:32:38.480 where it really starts to get thorny. If we get 0:32:38.520 --> 0:32:43.920 into a protracted redemption cycle, the financing runs out and 0:32:43.960 --> 0:32:46.480 they have to start selling things, it starts to really 0:32:46.520 --> 0:32:48.239 cut into the bone. 0:32:48.320 --> 0:32:51.920 We do have a precedent for how the gates of 0:32:52.280 --> 0:32:56.280 interval funds have behaved over time. So if you go 0:32:56.360 --> 0:33:00.680 back to the commercial real estate market, after Value Bank 0:33:00.800 --> 0:33:03.800 and First Republic Bank, everyone was trying to pull their 0:33:03.840 --> 0:33:08.160 money out of large real estate interval funds. There's one 0:33:08.200 --> 0:33:12.520 famously that hit the gates and prevented redemptions. That fund 0:33:12.560 --> 0:33:15.200 now has kind of gotten to the other side. It 0:33:15.280 --> 0:33:17.960 actually had a better return than its credit fund last year. 0:33:18.480 --> 0:33:23.080 And people tend not to panic for longer than three 0:33:23.160 --> 0:33:27.000 six months, right human nature crisis is a day, a week, 0:33:27.200 --> 0:33:30.000 a month. But if it just stays there long enough, 0:33:30.360 --> 0:33:32.680 people tend to get. 0:33:32.440 --> 0:33:36.280 Cooler heads and it works itself out. But as Craik said, 0:33:36.880 --> 0:33:39.960 that'll help on the liability management side of these fund structures, 0:33:40.000 --> 0:33:41.680 it's not going to help on the asset side. 0:33:41.760 --> 0:33:45.680 So if the default rates start hitting some of these 0:33:45.760 --> 0:33:49.200 levels that people fear and or predict, it's not going 0:33:49.240 --> 0:33:50.960 to save you on the asset side of the equation. 0:33:51.240 --> 0:33:52.800 And then maybe. 0:33:52.560 --> 0:33:55.959 To open up another topic, there's two parts of a default, right, 0:33:56.000 --> 0:33:58.880 there's when the company actually took player's default, and then 0:33:58.920 --> 0:34:03.400 what the credit recover in bankruptcy. I think there's big 0:34:03.440 --> 0:34:07.240 fears around some of these recovery values that will be seeing. 0:34:07.760 --> 0:34:11.000 Some of these are very highly levered companies with very 0:34:11.000 --> 0:34:14.359 few hard assets. So that's going to be the next 0:34:14.400 --> 0:34:16.200 test when we start getting it to work out of 0:34:16.239 --> 0:34:18.960 some of these loans, what do the creditors really have 0:34:19.080 --> 0:34:19.919 to protect them. 0:34:20.600 --> 0:34:22.760 I'm glad you said this because this is a perfect 0:34:22.760 --> 0:34:25.640 seg into the question I was going to go to next, 0:34:25.640 --> 0:34:28.800 which is, Okay, we trace the history of private credit 0:34:28.880 --> 0:34:32.760 to physical things, the type of things that a ge 0:34:32.920 --> 0:34:35.560 would sell, maybe like a wind turbine or you know, 0:34:35.560 --> 0:34:38.480 get natural gas turbine, whatever it is, et cetera. And 0:34:38.520 --> 0:34:40.480 we were talking about the big mega trends of the 0:34:40.520 --> 0:34:43.920 twenty tens, and one of them was the regulatory push 0:34:43.960 --> 0:34:47.080 of loans off banks. Another one reserve, but another one 0:34:47.600 --> 0:34:51.880 was the emergence of these predictable payment streams called software 0:34:51.920 --> 0:34:54.759 as a service subscriptions. This is the area in which 0:34:54.760 --> 0:34:58.239 you could really have zeros, a natural gas turbine is 0:34:58.239 --> 0:35:01.719 going to be worth something at the end. A obsolete 0:35:01.800 --> 0:35:04.239 software company is not going to be worth anything if 0:35:04.280 --> 0:35:07.279 the business has been destroyed thanks to AI. But what 0:35:07.400 --> 0:35:12.080 was the moment in which the credit guy suddenly realized that, essentially, 0:35:12.200 --> 0:35:14.200 here's this business that we used to never think of 0:35:14.280 --> 0:35:15.880 high tech. It used to be when when I was 0:35:15.920 --> 0:35:18.960 a kid, Tech and debt didn't go together. What was 0:35:19.000 --> 0:35:22.040 the moment that the credit guys sort of realized that 0:35:22.080 --> 0:35:26.239 these are financiable assets, so to speak, that could come 0:35:26.280 --> 0:35:27.760 into the debt world. 0:35:28.800 --> 0:35:31.480 Joe, you hit the nail on the head here, because 0:35:31.680 --> 0:35:35.000 this is the spot where really the high yield market 0:35:35.280 --> 0:35:38.920 and the private credit market started to diverge the most. 0:35:39.520 --> 0:35:43.279 There have been issuers in the tech space and in 0:35:43.280 --> 0:35:47.439 the software space into high yield, but it's definitely been 0:35:47.640 --> 0:35:50.640 a more recent phenomenon. If you go back ten years, 0:35:50.680 --> 0:35:53.000 there were not a lot of software issuers in the 0:35:53.040 --> 0:35:56.160 high yield space, largely because of that, because people couldn't 0:35:56.160 --> 0:35:58.640 get their arms around the typical okay, I need to 0:35:58.680 --> 0:36:00.879 have two times asset coverage or two and a half 0:36:00.960 --> 0:36:03.879 times asset coverage. We just never saw that. So those 0:36:03.880 --> 0:36:08.440 companies financed themselves either in the equity market where they 0:36:08.440 --> 0:36:11.200 financed themselves in the convertible bond market. So we used 0:36:11.239 --> 0:36:13.160 to see a lot of that in the convertible bond 0:36:13.160 --> 0:36:16.400 market because these are growth companies, and so the convert 0:36:16.400 --> 0:36:19.560 market would say, Okay, I'll accept a low coupon because 0:36:19.640 --> 0:36:22.319 I'm going to have equity participation on the upside, and 0:36:22.360 --> 0:36:25.640 so my upside isn't capped at whatever my coupon is. 0:36:25.960 --> 0:36:28.440 And I think that that's actually really been the area 0:36:28.480 --> 0:36:29.920 where it's diverged the most. 0:36:30.440 --> 0:36:32.919 How exactly did we get here? 0:36:33.160 --> 0:36:36.880 I think it was a willingness of these sponsors to 0:36:36.920 --> 0:36:39.640 come in and say, all right, I'm going to pay 0:36:39.840 --> 0:36:45.040 sixteen or seventeen times enterprise value to EBITDA for this business, 0:36:45.360 --> 0:36:48.479 and I'm going to put in an unusually large check. 0:36:48.600 --> 0:36:51.279 Let's say forty percent of that I will put in 0:36:51.280 --> 0:36:55.719 in equity instead of the typical twenty percent. So historically 0:36:56.120 --> 0:36:58.799 people have in the LBO space, they were coming to 0:36:58.840 --> 0:37:01.560 the highal market saying we put twenty percent down, finance 0:37:01.600 --> 0:37:03.840 the other eighty percent. If they go to the private 0:37:03.880 --> 0:37:06.239 credit guys and say, well we'll put forty percent down 0:37:06.440 --> 0:37:08.919 if you'll lend to us on the balance, we love 0:37:08.920 --> 0:37:12.239 this business at sixteen times, And I think they potentially 0:37:12.320 --> 0:37:15.440 just persuaded a lot of these lenders to get a 0:37:15.440 --> 0:37:17.640 little bit too far out over their skis in terms 0:37:17.680 --> 0:37:20.120 of the amount of leverage that they were willing to extend. 0:37:20.760 --> 0:37:24.239 And as a private credit lender, if it's just you, 0:37:24.360 --> 0:37:26.560 or if it's just you and one other, you can 0:37:26.600 --> 0:37:29.359 be a lot more creative in terms of structure. And 0:37:29.400 --> 0:37:33.480 I think they also took on this willingness to say, Okay, well, 0:37:33.640 --> 0:37:36.440 you can't afford to pay me this interest, so how 0:37:36.440 --> 0:37:37.040 about if. 0:37:36.880 --> 0:37:37.440 We pick it. 0:37:37.520 --> 0:37:41.320 Because if we pick it, my investment will grow and 0:37:41.360 --> 0:37:44.320 it'll give me sort of a quasi equity like feel 0:37:44.440 --> 0:37:47.920 because it's getting bigger. So that's kind of intriguing to 0:37:48.000 --> 0:37:50.640 me too. So I think there was a little bit 0:37:50.680 --> 0:37:55.240 of lender over zealousness. I think there was a competitive pressure. 0:37:55.640 --> 0:37:59.000 I think that they fell preyed to some of the 0:37:59.040 --> 0:38:03.840 sponsors willingness to overpay for some of these interestings. 0:38:04.880 --> 0:38:09.120 So when I hear secured credit that might not have 0:38:09.200 --> 0:38:12.520 that much security behind it, as we just discussed with 0:38:12.560 --> 0:38:15.040 the example of the software companies, and then when I 0:38:15.120 --> 0:38:18.080 hear increasing amounts of leverage on the issuer side, but 0:38:18.160 --> 0:38:20.560 also on the fund side, because you have private credit 0:38:20.560 --> 0:38:24.920 funds that use leverage to increase their returns. And then 0:38:24.960 --> 0:38:29.120 when I hear illiquidity mismatches between a publicly traded BDC 0:38:29.320 --> 0:38:33.839 and the underlying assets, all of those sound very familiar 0:38:33.960 --> 0:38:38.240 from financial crisis history and have certain, you know, negative 0:38:38.280 --> 0:38:42.359 connotations around them. How worried should we be about the 0:38:42.400 --> 0:38:45.560 future of private credit at this point and the idea 0:38:45.640 --> 0:38:48.160 that is it going to be a systemic issue for 0:38:48.280 --> 0:38:49.280 the financial system. 0:38:49.920 --> 0:38:53.680 I think the liability structure that we've discussed numerous times 0:38:53.800 --> 0:38:56.759 is dramatically different than what we saw in the financial crisis. 0:38:56.880 --> 0:39:01.359 So most financial institutions that we fail because of their 0:39:01.400 --> 0:39:06.760 liability structure. They're built to realize losses over extended periods 0:39:06.800 --> 0:39:09.920 of time, which I think many of these credit funds 0:39:10.000 --> 0:39:13.000 will be able to do. But I do think that 0:39:13.400 --> 0:39:16.480 we are going to enter into a period where we're 0:39:16.480 --> 0:39:21.040 going to see significant dispersion among credit fund managers or 0:39:21.080 --> 0:39:26.840 private credit managers. We've been lulled into uniformity of returns 0:39:26.920 --> 0:39:29.239 right if you look in the public markets, it's been 0:39:29.280 --> 0:39:34.040 a huge trend towards indexation, so most people own spy 0:39:34.160 --> 0:39:36.440 or QQQ or whatever form you want to pick. So 0:39:36.520 --> 0:39:39.560 equity returns all look very similar. And that's what happened 0:39:39.800 --> 0:39:42.880 in the early days of private credit, where everything was 0:39:42.920 --> 0:39:46.000 marked a par you had an eight, nine, ten percent coupon. 0:39:46.120 --> 0:39:49.160 It looked great, so you couldn't really see some of 0:39:49.160 --> 0:39:52.320 the cracks below the surface. As Craig alluded to earlier, 0:39:52.360 --> 0:39:54.720 there have been managers who've been doing this for twenty 0:39:54.719 --> 0:39:58.440 five thirty years and they are very new recent entrance 0:39:58.480 --> 0:40:01.840 into it, who've seen st andro growth in their assets 0:40:01.840 --> 0:40:04.440 that they had to invest. So I think that's probably 0:40:04.480 --> 0:40:07.440 the first leg that we'll see, is that you're going 0:40:07.480 --> 0:40:10.720 to start to see real dispersion of returns from manager 0:40:10.840 --> 0:40:14.839 or manager. But you know, they have a good head 0:40:14.880 --> 0:40:18.800 start where they have coupons and they have returns built 0:40:18.840 --> 0:40:21.440 in that they can absorb higher default rates than they 0:40:21.440 --> 0:40:24.160 are now. It's just the question of how high do 0:40:24.239 --> 0:40:26.920 those default rates get relative to the coupons that they're earning. 0:40:27.239 --> 0:40:29.640 And we've heard some numbers from some of the cell 0:40:29.760 --> 0:40:34.479 side Wall Street analysts that suggests that we could see 0:40:34.520 --> 0:40:38.040 fifteen percent of faults in private credit seems a little high, 0:40:38.120 --> 0:40:40.600 but it doesn't it's not so far out of the 0:40:40.640 --> 0:40:44.919 realm of possibility, because we've just seen the practice of 0:40:45.600 --> 0:40:49.960 extending more leverage to companies that probably shouldn't have that 0:40:50.080 --> 0:40:52.480 much leverage. On many many years ago, a good friend 0:40:52.480 --> 0:40:55.439 of mine who was doing this for a long long time, 0:40:55.560 --> 0:40:58.920 told me, company gets to six times levered, it's very, 0:40:59.000 --> 0:41:01.120 very difficult to get out from under that. 0:41:01.400 --> 0:41:03.600 And this is back in the early two thousands. We 0:41:03.600 --> 0:41:04.520 were in a normal rate. 0:41:04.440 --> 0:41:07.480 Environment that went by the wayside when we went through 0:41:07.520 --> 0:41:10.760 this period of extraordinarily low rates for many many years 0:41:10.760 --> 0:41:14.640 post financial crisis. Now that we're back where we are today, 0:41:15.120 --> 0:41:18.400 we're back into that environment where six seven times leverage, 0:41:18.400 --> 0:41:21.080 all of a sudden, at the current borrowing rates becomes 0:41:21.080 --> 0:41:24.760 a real strain on most companies balance sheets. So again, 0:41:24.760 --> 0:41:27.520 if you think about the legacy businesses, some of these 0:41:27.760 --> 0:41:31.160 software companies that were in these portfolios, they might be 0:41:31.960 --> 0:41:35.800 twenty twenty or twenty twenty one vintage LBOs that haven't 0:41:35.840 --> 0:41:40.000 monetized yet. They were borrowing versus a eight and historically 0:41:40.040 --> 0:41:43.200 low treasury rate. Once we raise rates in twenty twenty two, 0:41:43.600 --> 0:41:46.399 all of a sudden, the resets on these loans because 0:41:46.400 --> 0:41:49.080 they are floating rate have gone up, so it's chewing 0:41:49.120 --> 0:41:52.600 into the equity value these businesses, and it's putting an 0:41:52.600 --> 0:41:56.359 increasing amount of strain on the companies to have to 0:41:56.440 --> 0:42:00.399 cover their interest expenses. So I think that all these 0:42:00.440 --> 0:42:05.360 things filter into more and more pressure on these companies, 0:42:05.400 --> 0:42:07.480 which could lead us to a spot where we do 0:42:07.560 --> 0:42:10.480 get to fifteen percent dems. I'm not saying that the 0:42:10.560 --> 0:42:13.759 probability is very very high, but if it happened, I 0:42:13.760 --> 0:42:14.840 wouldn't be shocked. 0:42:15.480 --> 0:42:17.960 And can I just ask you said earlier that you 0:42:18.000 --> 0:42:21.880 don't have any private credit exposure in your fund at 0:42:21.880 --> 0:42:25.880 the moment. Is that right or that's correct? Okay? What 0:42:26.160 --> 0:42:28.520 made you take that decision because you said you'd been 0:42:28.560 --> 0:42:31.120 involved a little bit earlier. And then secondly, what would 0:42:31.160 --> 0:42:33.799 you need to see in the market to potentially get 0:42:33.840 --> 0:42:34.120 back in. 0:42:35.120 --> 0:42:37.279 I think the reason that we don't is because we 0:42:37.280 --> 0:42:40.359 were financed out over time and it was never a 0:42:40.600 --> 0:42:43.239 core part of what we did. It was a more 0:42:43.280 --> 0:42:47.120 ancillary part of our business. There were a few individual 0:42:47.160 --> 0:42:51.080 opportunities that came along with companies that needed money for 0:42:51.080 --> 0:42:53.400 a particular reason, or it was a business that people 0:42:53.800 --> 0:42:56.360 I don't think widely understood, or it was the size 0:42:56.360 --> 0:42:59.480 of the re borrowing requirement. One of the companies took 0:42:59.520 --> 0:43:01.479 the money that we lent them and kept the money 0:43:01.520 --> 0:43:03.520 on their balance sheet the whole time. They just had 0:43:03.600 --> 0:43:06.799 it as a safety net. It was less than one 0:43:06.840 --> 0:43:09.279 and a half times levered for the entire time. They 0:43:09.320 --> 0:43:11.880 no longer needed it. They paid us off and moved 0:43:11.920 --> 0:43:14.280 on and went to the next thing. So other times 0:43:14.360 --> 0:43:18.040 we were financed out by the leverage loan market or 0:43:18.080 --> 0:43:19.759 the private credit market, where they were going to be 0:43:19.840 --> 0:43:22.799 much more aggressive on the terms than the ones that 0:43:22.840 --> 0:43:26.480 we were willing to provide. And that's typically we're a 0:43:26.520 --> 0:43:28.920 bunch of old guys, and we have our ways of 0:43:28.960 --> 0:43:33.280 doing things that have been developed over thirty or forty years. 0:43:33.680 --> 0:43:38.799 We're not likely to change approach to providing credit just 0:43:38.840 --> 0:43:41.759 because the market now all of a sudden wants to 0:43:41.760 --> 0:43:45.800 get more aggressive and look past some of the obvious things, 0:43:45.840 --> 0:43:49.480 particularly as it comes to structure and covenant protections and 0:43:49.800 --> 0:43:52.480 amounts of leverage. We'd look at the business and say, Okay, 0:43:52.840 --> 0:43:55.360 this business is worth seven times I'm not going to 0:43:55.360 --> 0:43:57.920 give them six and a half times leverage. Do something 0:43:58.320 --> 0:43:59.240 just doesn't make sense. 0:44:00.400 --> 0:44:02.600 And if you go back to the point you make 0:44:02.680 --> 0:44:07.239 to begin the podcast, how private credit in the proliferation 0:44:07.640 --> 0:44:11.520 of the loan market has impacted the high yielded investment 0:44:11.520 --> 0:44:13.680 grade market. You know, what was once a two tiered 0:44:13.680 --> 0:44:17.520 market of investment grade non investment grade has really become 0:44:17.520 --> 0:44:21.240 a four tier market investment grade, high yield, leverage, loans, 0:44:21.280 --> 0:44:25.359 private credit in that order of credit quality. Most of 0:44:25.880 --> 0:44:29.560 the credits that do not meet our underwriting standards have 0:44:29.680 --> 0:44:32.839 fallen into leverage loan and private credit. So the high 0:44:32.880 --> 0:44:36.880 yield market is substantially higher quality now than it was before. 0:44:37.200 --> 0:44:40.560 The double B portion of the market is approaching sixty 0:44:40.560 --> 0:44:43.480 percent that used to be about thirty five percent, and 0:44:43.520 --> 0:44:47.480 the riskiest segment, the triple cs, is now about nine 0:44:47.520 --> 0:44:50.360 percent that used to be over twenty percent. So just 0:44:50.440 --> 0:44:54.080 by our underwriting process, we kick out a lot of 0:44:54.120 --> 0:44:56.200 the highly leveraged companies, kick out a lot of the 0:44:56.239 --> 0:44:57.600 companies that do not. 0:44:57.600 --> 0:44:59.520 Have the interest coverage that we're looking for. 0:45:00.040 --> 0:45:02.880 And so there's a function of our under adding process, 0:45:02.920 --> 0:45:06.120 but also where the more risky companies are financing themselves 0:45:06.160 --> 0:45:07.040 these days. 0:45:07.320 --> 0:45:09.520 All right, well, I think we could talk about this 0:45:09.560 --> 0:45:11.719 even more. We're going to have to leave it there, 0:45:12.040 --> 0:45:13.920 John and Craig, Thank you so much for coming on 0:45:13.920 --> 0:45:15.040 our thoughts. Really appreciate it. 0:45:15.400 --> 0:45:16.640 Thanks so much. Nice being with you. 0:45:16.800 --> 0:45:17.319 That was great. 0:45:17.320 --> 0:45:18.320 Thank you so much. 0:45:30.920 --> 0:45:33.880 So, Joe, I found that conversation super helpful just to 0:45:33.920 --> 0:45:37.160 sort of again contextualize private credit in the history of 0:45:37.200 --> 0:45:39.440 the bomb market. I do think, setting aside whether or 0:45:39.520 --> 0:45:42.480 not this is like a systemic issue, and I do 0:45:43.120 --> 0:45:47.480 think we're probably not even close to two thousand and 0:45:47.520 --> 0:45:51.400 eight style crisis right like it just can't be, but 0:45:51.440 --> 0:45:53.680 there are probably some hidden issues within there that are 0:45:53.880 --> 0:45:56.880 going to start to appear. But setting all of that aside, 0:45:57.120 --> 0:46:01.319 I think one of the challenges of credit having these 0:46:02.080 --> 0:46:04.719 continued crises, or at least being in the headlines all 0:46:04.760 --> 0:46:08.320 the time, is it is going to have a macroeconomic impact. 0:46:08.560 --> 0:46:10.759 Sure if you think of it as this market that 0:46:11.160 --> 0:46:13.560 is now bigger than the junk bond market, Like the 0:46:13.640 --> 0:46:16.040 junk bond market is an important source of financing for 0:46:16.120 --> 0:46:20.360 companies all around America, and so is private credit. So 0:46:20.400 --> 0:46:23.480 if you start to see that particular asset class slow down, 0:46:23.680 --> 0:46:26.600 like at a minimum, that's basically a credit crunch for 0:46:26.600 --> 0:46:27.920 a bunch of companies totally. 0:46:27.960 --> 0:46:30.400 And you can see like how there's like this path dependency. 0:46:30.480 --> 0:46:33.160 And again that doesn't mean it has to be like systemic, 0:46:33.200 --> 0:46:35.439 but you can see how there's this path dependency. Where 0:46:35.480 --> 0:46:38.440 as you mentioned, you get the headlines about with the draws, 0:46:38.640 --> 0:46:42.720 there are more withdraws. These sponsors have to sell good assets, 0:46:42.760 --> 0:46:45.560 they might have to take on credit borrowing of their 0:46:45.600 --> 0:46:49.480 own in order to meet those redemptions and so forth. 0:46:49.640 --> 0:46:52.040 You could see how that really spirals. I just really 0:46:52.160 --> 0:46:56.799 like their situation situation, how well they situated the whole conversation, situationship, 0:46:56.880 --> 0:46:59.440 their situationship, the way they could situate in the history 0:46:59.440 --> 0:47:01.879 of credit. Yeah, and there like look like if we're 0:47:01.920 --> 0:47:07.240 talking about ge credit financing, jet engine deals, et cetera, 0:47:07.560 --> 0:47:11.319 that's private credit. Yeah, it's expanded beyond that, but it's 0:47:11.360 --> 0:47:15.759 basically all sort of versions, you know, various flavors of 0:47:15.880 --> 0:47:19.560 a kind of financing that is quite old and non 0:47:19.600 --> 0:47:20.319 exotic at all. 0:47:20.520 --> 0:47:23.120 Absolutely, But I do think the sequencing also matters when 0:47:23.120 --> 0:47:25.560 it comes to raising money because, as they pointed out, 0:47:25.600 --> 0:47:27.720 this idea that like you're going to start a fund 0:47:27.960 --> 0:47:30.400 and you immediately have to start like going out and 0:47:30.440 --> 0:47:33.120 sourcing stuff to buy with that money, and it puts 0:47:33.200 --> 0:47:35.560 pressure on you to get like what you can get. 0:47:35.760 --> 0:47:39.880 That was very interesting, the difference between fund structure of 0:47:39.920 --> 0:47:43.480 a private equity fund versus a private credit fund, which 0:47:43.520 --> 0:47:46.480 I had never really thought of. Right, So VC in 0:47:46.600 --> 0:47:49.640 PE you're like hunting around for deals and so forth 0:47:49.640 --> 0:47:51.239 that you're like, all right, we got a deal. Then 0:47:51.280 --> 0:47:53.520 you call up all the LPs will give you commitments 0:47:53.520 --> 0:47:56.319 and say, while you're sad cash that you promised to 0:47:56.719 --> 0:48:00.719 now where is in the financing realm? You know, you 0:48:00.800 --> 0:48:02.839 just always have the cash on hand. It's always coming 0:48:02.840 --> 0:48:05.280 in and out and then coming in and out. Part 0:48:05.400 --> 0:48:09.320 also help clarify something for me, which is that, unlike 0:48:10.000 --> 0:48:13.520 with say a VC investment or a PE investment, where 0:48:13.560 --> 0:48:16.239 you put the money in and it's sort of indeterminate 0:48:16.280 --> 0:48:17.640 when you get the money back, right, you don't know 0:48:17.680 --> 0:48:19.520 when the company's gonna IPO, you don't know it's going 0:48:19.600 --> 0:48:22.839 to sell, et cetera. With lending, you do have that 0:48:22.960 --> 0:48:25.320 schedule from day one of when the money is supposed 0:48:25.360 --> 0:48:28.800 to come back in. And therefore the idea of gates 0:48:28.840 --> 0:48:31.520 and redemption schedules in the first place makes more sense 0:48:31.880 --> 0:48:35.960 because when you have this sort of pre understood timing 0:48:36.000 --> 0:48:38.840 of when the money comes back in. You can understand 0:48:38.840 --> 0:48:41.480 why you have a mechanism in place right to schedule 0:48:41.600 --> 0:48:43.960 and regulate when the money is allowed to go back 0:48:43.960 --> 0:48:44.840 out to the LPs. 0:48:45.000 --> 0:48:46.680 Right, but you still need to get back to some 0:48:46.800 --> 0:48:50.960 form of normalcy. Yeah, yeah, yeah, but like it's obviously 0:48:51.000 --> 0:48:51.880 incredibly helpful. 0:48:51.960 --> 0:48:54.600 Well, this gets to a thing you know, I've wondered about, 0:48:54.600 --> 0:48:56.920 which is like, well, okay, as part of the issue 0:48:56.960 --> 0:49:00.520 here with some of the more retail oriented private credit, 0:49:00.600 --> 0:49:04.600 which is education or lack of sophistication, where you have 0:49:04.880 --> 0:49:08.319 entities putting money into private credit that hadn't really appreciated 0:49:08.400 --> 0:49:11.320 that this is an element of it, which maybe. 0:49:11.000 --> 0:49:13.840 But on the other dating itself, but on the. 0:49:13.840 --> 0:49:17.920 Other hand, like the industry wouldn't be as big as 0:49:17.960 --> 0:49:21.040 it is today were you not going out to these 0:49:21.080 --> 0:49:25.040 less sophisticated investors. So yeah, two sides of the same. Colindre, 0:49:25.400 --> 0:49:26.080 all right, shall we. 0:49:26.040 --> 0:49:26.400 Leave it there. 0:49:26.480 --> 0:49:27.239 Let's leave it there. 0:49:27.360 --> 0:49:30.040 This has been another episode of the Authoughts podcast. I'm 0:49:30.080 --> 0:49:32.800 Tracy Alloway. You can follow me at Tracy Alloway. 0:49:32.520 --> 0:49:35.240 And I'm Jill Wisenthal. You can follow me at The Stalwart. 0:49:35.440 --> 0:49:38.680 Follow our producers Carmen Rodriguez at Carmen Ermann, dash O 0:49:38.719 --> 0:49:42.600 Bennett at Dashbock, kel Brooks at kel Brooks, Kevin Lozano 0:49:42.719 --> 0:49:45.800 at Kevin Lloyd Lozano and for more odd Laws content 0:49:45.880 --> 0:49:48.120 go to Bloomberg dot com slash odd Logs. 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