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Speaker 1: Hello, Welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome Jim Fellows, co

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Speaker 1: president and CIO of First Eagle Alternative Credit.

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Speaker 2: How are you, Jim, Good, Happy New Year.

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Speaker 1: Happy new year to you. Thanks so much for joining

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Speaker 1: us today. We're very excited to have you on the show,

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Speaker 1: and also delighted to welcome back our co host David

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Speaker 1: Havens from Bloomberg Intelligence.

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Speaker 3: Hello, David, Hey, great to be with you on Go Eagles.

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Speaker 1: So, just to set the scene here, credit markets are

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Speaker 1: hot and borrowers globally are taking advantage. We're expecting a

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Speaker 1: record amount of debt issuance from the US companies this month.

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Speaker 1: Most of it is for refinancing. There's a lot of

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Speaker 1: debt coming due. That means even more cash returning to

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Speaker 1: invest who have already received a ton of inflows over

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Speaker 1: the last year and are very keen to buy. Given

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Speaker 1: how high all in yields are, you can get a

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Speaker 1: yield of almost five point four percent right now on

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Speaker 1: high grade debt with a very low chance of default.

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Speaker 1: That's the highest in about six months the demands supply

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Speaker 1: and balance, though, is keeping spreads raisor thin, and also

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Speaker 1: pushing investors to other parts of credit like structured finance

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Speaker 1: and private debt, where returns are even higher. Some fear

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Speaker 1: it's also leading to complacency and mispricing of risk throughout

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Speaker 1: credit markets, which is only expected to get worse in

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Speaker 1: twenty twenty five. So, Jim, I want to bring you

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Speaker 1: in here. What's your view? Are you very bullish for

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Speaker 1: this year like everyone else, or do you see reasons

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Speaker 1: to be cautious right now?

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Speaker 2: I'm typically always cautious. That's that's a fault that I have. Yees,

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Speaker 2: spreads are close to pre crisis tights across a lot

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Speaker 2: of acid classes, loans, high yield, private credit, you know,

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Speaker 2: areas that we focus on and you know, as you

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Speaker 2: hit it on your opening statement, a lot of it

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Speaker 2: is dependent on just lack of activity. We do have

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Speaker 2: a fairly significant maturity wall that is being worked through,

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Speaker 2: the cost of capital finally going up for some of

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Speaker 2: these borrowers because of you know, a lot of the

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Speaker 2: debt was put in place, you know, during crisis, during

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Speaker 2: posts the Great Financial Crisis, when rates were hugging zero.

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Speaker 2: So you're you're going to see an increase in the

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Speaker 2: cost of capital going forward. And you know, I think

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Speaker 2: everyone is expecting more net new issuance from M and

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Speaker 2: A activity. I think that's a lot of that is

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Speaker 2: wishful thinking. I think that there's still uncertainties globally that

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Speaker 2: may subdued M and A activities, especially you know, with tariffs.

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Speaker 2: I think a lot of companies may be less willing

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Speaker 2: to commit to M and A give and the uncertainty

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Speaker 2: of policy overall, so that that could constrain supply here

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Speaker 2: for you know, the next three to six months. Hopefully

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Speaker 2: things start to loosen up as we go, you know,

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Speaker 2: you know, as we move into the second half of

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Speaker 2: twenty twenty five.

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Speaker 1: Does that mean even tied to credit spreads from here?

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Speaker 2: Jim, It's possible. It is entirely possible. Uh. You know,

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Speaker 2: we're seeing spreads tightening, tightening across the board. As I said,

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Speaker 2: our three areas of focus, probably syndicated private credit and

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Speaker 2: high you bonds spreads spreads have certainly tightened considerably. Yeah.

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Speaker 3: I mean, Jim, we seem to be in a period,

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Speaker 3: in a tale period in the markets. I mean, we've

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Speaker 3: got the IG index down around seventy five eighty basis points,

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Speaker 3: which that's territory that is probably occupied about one percent

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Speaker 3: of its history. We actually have Invesco speak at a

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Speaker 3: Bloomberg Intelligence Credit conference in December and New York, and

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Speaker 3: their view is that that IG credit spreads could head

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Speaker 3: towards fifty five basis points during the course of twenty

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Speaker 3: twenty five. Is is that of you that you might share?

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Speaker 3: You know, obviously there are reasons for caution out there

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Speaker 3: that you that you explained as well, but there's so

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Speaker 3: many technical factors that seem to be pushing towards towards

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Speaker 3: tighter markets, you know, sort of modern GDP growth, relatively

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Speaker 3: contained inflation, strong employment, and just a wall of cash

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Speaker 3: out there.

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Speaker 2: Yeah, I think that's entirely possible, you know, and you know,

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Speaker 2: again on my our focus in the loan the non

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Speaker 2: investment grade space, I think that's that's definitely going to

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Speaker 2: be the case because I believe that, as I mentioned earlier,

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Speaker 2: m and A activity could be subdued. I think the

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Speaker 2: most M and A activity that's first going to occur

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Speaker 2: will be strategy ex buying leverage finance companies and taking

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Speaker 2: net supply out of the market. Going forward, so that

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Speaker 2: certainly will support spreads tightening over you know, the next

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Speaker 2: six to nine months.

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Speaker 3: That's an interesting and interesting take on things.

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Speaker 2: Uh.

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Speaker 3: I haven't heard that all that much about the about

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Speaker 3: the you know, sort of leverage finance companies or leverage

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Speaker 3: leveraged companies being being taken out, but there's the consensus

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Speaker 3: seems to be pointing towards much increased M and A

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Speaker 3: just because you know, the the the the private equity

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Speaker 3: firms have been sitting on a lot of cash. They

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Speaker 3: need to put that money to work. They're under pressure

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Speaker 3: to put that money to uh, to work. Rates still

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Speaker 3: have I don't know, one or two you know, sort

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Speaker 3: of cuts in them at least that's what consensus is

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Speaker 3: pointing towards this year. So so what are you going

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Speaker 3: to do if if these if spreads keep on moving tighter.

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Speaker 2: Stay conservative, stay conservative. I think that's that's the mantra

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Speaker 2: that we're operating under. It's uh, you know, you don't

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Speaker 2: see a lot of screaming value. I think in the

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Speaker 2: lower part of the direct lending space or private credit space,

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Speaker 2: you're not seeing as much compression and spreads. You're seeing

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Speaker 2: some of it, but not as not as dramatic as

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Speaker 2: you're seeing in the more liquid parts of the market.

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Speaker 2: You know that that's an area where you know, investors

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Speaker 2: can find value in an environment of tightening tightening spreads.

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Speaker 2: I do feel like rates the short end of the

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Speaker 2: curves are not going to move down as much. Obviously

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Speaker 2: the said probably is not going to tighten as much

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Speaker 2: as what people are expecting going into twenty twenty four.

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Speaker 2: So I think that's that's the you know, that's kind

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Speaker 2: of the curse as well. It's going to keep you know,

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Speaker 2: short rates relatively high. Therefore, more money is going to

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Speaker 2: flow into the credit markets and keep spread stight, vicious circle.

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Speaker 1: But by lower and Jim, do you mean lower quality

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Speaker 1: like you know triple cy or do you mean lower

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Speaker 1: as in smaller size like mid market.

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Speaker 2: Lower in size of company it? So, what kind of

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Speaker 2: sidement market?

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Speaker 1: When when you talk about middle market, I mean it's

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Speaker 1: a term that we often hear, but it seems to

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Speaker 1: be applied to all sorts of different things in different ways.

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Speaker 1: What does it mean to you?

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Speaker 2: Yeah, companies that have ebit on average of twenty to

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Speaker 2: fifty million dollars, so truly you know, true private privately

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Speaker 2: created credit to companies that are undergoing an acquisition by

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Speaker 2: a sponsor. That's typically Uh. When I say that, I

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Speaker 2: mean and right now that market is either side of

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Speaker 2: six percent. Uh, you know, it can't. In some cases,

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Speaker 2: it's tighter for credits that are substantially less levered. So

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Speaker 2: you know, you see a lot more dispersion in that

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Speaker 2: part of the marketplace. You've just given the nuances of

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Speaker 2: these type of companies.

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Speaker 3: Maybe you can walk us through the process of how

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Speaker 3: you go about accessing these these assets. It seems as

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Speaker 3: though different different shops have different ways of approaching the

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Speaker 3: market of sourcing the assets. And then who are you

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Speaker 3: seeing the most competition from in that twenty five to

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Speaker 3: fifty billion dollar segment.

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Speaker 2: Yeah, there's there's a number. You know, I think some

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Speaker 2: of the well we'll start with some of the larger

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Speaker 2: alternative credit managers. Some of them may start to come

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Speaker 2: down market as as Spreads Titan up market, so you know,

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Speaker 2: we may start seeing competition from the likes of you know,

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Speaker 2: the Apollos, Blackstones, et cetera. But you know, we typically

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Speaker 2: are focusing on companies that are sponsored by middle market

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Speaker 2: private equity companies that oftentimes it's a founder entrepreneurs selling

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Speaker 2: their company to you know, monetize their life's work, and

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Speaker 2: you know, they're looking to do sponsors to help effectuate

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Speaker 2: those types of transactions. We have we have a we

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Speaker 2: have a we have a number of originators that are

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Speaker 2: calling on sponsors looking to transact on on on on

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Speaker 2: deals and we're there to help finance these type of transactions.

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Speaker 2: And you know, typically, as I said, they typically have

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Speaker 2: twenty five million to fifty million dollars of viva DA

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Speaker 2: on average.

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Speaker 3: And is it only would you say it's mainly other

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Speaker 3: direct lenders that you're coming across, or are you seeing

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Speaker 3: banks beginning to get a little bit more active in

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Speaker 3: that market or are they still simply discentivized by regulations

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Speaker 3: from from you know, sort of lending into that single

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Speaker 3: bee sort of high triple C space.

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Speaker 2: Yeah, banks have been relatively quiet over the past couple

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Speaker 2: of years. We are now beginning to start seeing some

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Speaker 2: banks moving into that market and becoming more competitive. We

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Speaker 2: had a situation just recently where we ended up winning

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Speaker 2: because the private equity sponsor was worried about the banks

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Speaker 2: being able to you know, the private equity sponsor's initial

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Speaker 2: premise on buying that particular company was you It was

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Speaker 2: a buy and build strategy, and they were a little

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Speaker 2: concerned that the bank would not be as flexible or

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Speaker 2: as dynamic and growing that capital structure along with their

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Speaker 2: strategy of buying other other tack on acquisitions for that

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Speaker 2: particular company. So you know that that that is that

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Speaker 2: net positive for direct lenders still that are not banks.

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Speaker 2: So but you we are starting to see banks show

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Speaker 2: up more often in bidding processes and.

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Speaker 1: The kind of companies you're dealing with. Jim, what size

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Speaker 1: deal are we talking about here? Generally?

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Speaker 2: You know, you could you know, facility size, that quantum

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Speaker 2: you know, anywhere from sixty million up to two hundred million.

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Speaker 2: That's typically you know what we're seeing what we're looking at.

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Speaker 2: Sometimes they're smaller if if it's really you know, you

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Speaker 2: have another We see a number of situations where it's

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Speaker 2: could be smaller, but the sponsor has a very direct

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Speaker 2: line of sight of additional acquisitions that they're looking to make.

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Speaker 2: So you know that that facility, you know, maybe thirty

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Speaker 2: million dollars, but it could grow very quickly. So you know,

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Speaker 2: you do see that type of dynamic from time to time.

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Speaker 1: And when you say six percent is that the margin

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Speaker 1: or is that the all in?

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Speaker 2: Yeah? That so the margin we're seeing sofur plus anywhere

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Speaker 2: from sofur plus five to six percent. That's that's the

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Speaker 2: range of we're seeing in the marketplace today. There's a

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Speaker 2: few situations that may be slightly tighter than that. The

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Speaker 2: market probably ends up going tighter to sub five, but

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Speaker 2: you know, right now we're seeing solidly in the five

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Speaker 2: to six percent over so range.

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Speaker 3: And obviously, you know, spread is is you know, the

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Speaker 3: cost of funding. Spread is one way that you can

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Speaker 3: that you can compete. There are other ways to compete also,

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Speaker 3: as you as you well know, terms and conditions and

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Speaker 3: things like that. So what sort of trends are you

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Speaker 3: what sort of compression or pressure you know, trends are

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Speaker 3: you seeing on the terms and conditions side of the equation.

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Speaker 2: Yeah, I mean there's there's you know a lot of

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Speaker 2: times there's significant or an aggressive ask for a large

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Speaker 2: d d t L to help fund future acquisitions. You

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Speaker 2: know for some people that are TL is delayed draw

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Speaker 2: term loan. So it's a term loan structured to be

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Speaker 2: drawn at a later date where you have, as you know,

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Speaker 2: define use of proceeds. Typically an acquisition you know, there's

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Speaker 2: covenant terms tied to the ability to access that d

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Speaker 2: D T L. So I mean we're we're seeing terms

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Speaker 2: hold fairly, fairly solidly. Maybe they're slipping a little bit,

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Speaker 2: but nothing like you're seeing further up the market, like

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Speaker 2: in the probably syndicated market or even the upper end

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Speaker 2: of the middle market, where there's very little structural sport

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Speaker 2: in terms included in the credit agreements.

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Speaker 1: Given little of this pressure we're talking about, you know,

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Speaker 1: money coming in competition from the big guys moving down

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Speaker 1: into the smaller deals and just this way of cash,

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Speaker 1: do you expect some titus spreads in the middle market

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Speaker 1: this year and also looser conditions was covenants, all of

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Speaker 1: that stuff.

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Speaker 2: I think that's that's a safe assumption in the environment

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Speaker 2: that we're currently operating.

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Speaker 3: Yes, yeah, And I guess one of the things that

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Speaker 3: you know, a lot of the investors that we talked

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Speaker 3: to and the folks that read our research here, I

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Speaker 3: think are they're not confounded by it, But I would

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Speaker 3: say that they're prized by the lack of of of

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Speaker 3: credit loss, the lack of credit problems that have that

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Speaker 3: have come to the forefront in private credit portfolios. I

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Speaker 3: mean you had a five hundred and twenty five basis

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Speaker 3: point rate increase. You know, at the FED in twenty

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Speaker 3: two to twenty three you had somewhat slower economic growth

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Speaker 3: and there were hardly any significant bankruptcies or credit losses.

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Speaker 3: Is that the same sort of thing that you're seeing

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Speaker 3: in your portfolio? And why aren't we seeing more of that?

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Speaker 2: Well? I mean you can look at the broadly syndicated

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Speaker 2: market as a guidepost, where you know, the fault rate

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Speaker 2: in the broly syndicated market is approaching five percent if

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Speaker 2: you include LM transactions and such, and you know, in

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Speaker 2: good old fashioned defaults and bankruptcies, So you know that

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Speaker 2: that you know that number is like five in the

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Speaker 2: broadly syndicated market, you go down market, it's so pike,

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Speaker 2: No one really knows, be perfectly honest. I you know,

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Speaker 2: I track a couple different indices. Fitch has a couple

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Speaker 2: data points that they publish on in terms of some

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Speaker 2: of the companies that they rate from a private standpoint.

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Speaker 2: Krauscour has a database where they're monitoring default rates. So

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Speaker 2: and it varies considerably. I mean, I've seen a delta

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Speaker 2: as high as seven and as low as two point

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Speaker 2: seven or a pool of private credit assets, depending on

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Speaker 2: who's providing that data, so it varies quite a bit.

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Speaker 2: There there could be situations where you know, assets are

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Speaker 2: picking and they're not quote unquote default because with lender

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Speaker 2: agreed to waive the default in lieu of a pick.

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Speaker 2: You know, my mind, that's technically a default. But there

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Speaker 2: there there's definitely definitional challenges as you look deeper into

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Speaker 2: the credit private credit market. Whereasn't it probably syndicated market,

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Speaker 2: it's pretty straightforward. You know, you have a market that's

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Speaker 2: telling you what it's worth. So it's it's a little different.

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Speaker 3: Definitional challenges, I think is a pretty good way of

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Speaker 3: putting it. I tracked the BDC data here at Bloomberg

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Speaker 3: and that non accrule rate has remained quite low, but

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Speaker 3: pick has definitely come up, and you know, below the surface,

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Speaker 3: you know that there have also been a fair amount

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Speaker 3: of you know, sort of extensions and amendments and things

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Speaker 3: like that along the way.

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Speaker 2: Yep, yep, today's picks become tomorrow's non accruals.

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Speaker 1: Can you expand a bit on the sexes that you'd

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Speaker 1: like and the sex as.

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Speaker 2: You avoid, So you know today some of the positive.

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Speaker 2: Financials have some pretty good dynamics taking place. I think

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Speaker 2: deregulation with the new administration should be all very positive

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Speaker 2: for financial segment. You know, and in the broadly syndicated

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Speaker 2: and private credit markets, we see a lot of asset managers,

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Speaker 2: see a lot of you know, servicing companies that are

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Speaker 2: servicing a variety of financial institutions. We see insurance brokers,

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Speaker 2: and so there's there's a breath of you know, breath

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Speaker 2: of type, you know, various types of financial services companies

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Speaker 2: that come to market, you know, within financial services. Right now,

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Speaker 2: we're a little cautious on any financial services company that

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Speaker 2: relies on float to to generate incremental ebit duh, because

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Speaker 2: you know, rates are expected to come down. Maybe that's

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Speaker 2: probably not as much of the challenge going forward if

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Speaker 2: rates don't come down as much as people think. So

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Speaker 2: financials were positive on business services. There's a lot of

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Speaker 2: activity there. It tends to be countersick cool, and you know,

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Speaker 2: the one thing to watch in that sub segment today

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Speaker 2: is you know a lot of outsourcing and offshoring of labor,

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Speaker 2: and so you have to we have to be mindful

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Speaker 2: of that. And with some of the new administrative administration's

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Speaker 2: policy as it relates to labor. So we're but we

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Speaker 2: still are generally positive on business services utilities that that's

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Speaker 2: a segment that we were very cautious on five five,

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Speaker 2: seven years ago. Given the advent of renewables. Now abilities

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Speaker 2: are starting to turn around. You're seeing power prices increase,

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Speaker 2: you have demand for power as it relates to AI,

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Speaker 2: data centers, et cetera. So the wind is at their

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Speaker 2: backs from a from a sector standpoint, uh and then

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Speaker 2: some of the negatives, the automoti of bly chain that's

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Speaker 2: under a lot of pressure. We expect that to continue

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Speaker 2: be under a lot of pressure. Retail. I feel like

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Speaker 2: retail has always been a no go area for a decade.

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Speaker 2: And then healthcare. Healthcare is an area that's still I

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Speaker 2: think there's a lot of uncertainty as relates to healthcare,

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Speaker 2: especially with some of the ACA subsidies expiring in twenty

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Speaker 2: twenty five, which will increase the number of uninsured that

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Speaker 2: could pressure a bad debt expense within healthcare companies. And

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Speaker 2: I think the expansion of Medicaid and some of the

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Speaker 2: other federal federal programs as it relates to healthcare could

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Speaker 2: be under some pressure. So We're still fairly pautious on healthcare.

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Speaker 2: Healthcare actually has been you know, it's dealing with a

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Speaker 2: one two punch really to some extent. They had a

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Speaker 2: lot of labor issues during COVID. Now now they've seemed

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Speaker 2: to put that problem behind them in terms of contract

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Speaker 2: pricing and labor. But now they're facing popline issues. So

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Speaker 2: that's an area where we're fairly cautious. And actually the

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Speaker 2: correlate corollary to utilities renewables, you know, renewables are still

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Speaker 2: are now undergoing a lot of pressure because of over expansion,

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Speaker 2: et cetera. So those are just a few of the

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Speaker 2: sectors pros and cons that we're looking at today.

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Speaker 1: So in that context, Jim, where's the best value right

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Speaker 1: now for you? You know, you look at all sorts

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Speaker 1: of different kinds of credit products across the globe. Where's

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Speaker 1: the value? Where's the relative value?

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Speaker 2: I mean, I'm a I'm a corporate credit specialist specializing

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Speaker 2: in private credit, probably syndicated high yield. So don't I

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Speaker 2: don't have a broad you know, fixed income acid allocation mindset.

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Speaker 2: I know we have a sister organization, Napier Park. They

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Speaker 2: have more of a macro broader perspective on things. But personally,

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Speaker 2: I think mortgage backs are cheap relative to everything else.

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Speaker 2: That's that's me in the cheap seats. Looking at it

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Speaker 2: from like a personal investment perspective, you know, I do

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Speaker 2: think that the within private credit, asset based lending is

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Speaker 2: a very unique area, very esoteric, and it's it's an

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Speaker 2: area that you don't see a lot of competition in.

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Speaker 2: I see. I see some of the assets and opportunities

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Speaker 2: in that segment as some of the best risks return

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Speaker 2: out there because it's very short in duration, very high returns,

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Speaker 2: you know, but it has to be structured very carefully,

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Speaker 2: and you know, we have a team that does that.

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Speaker 2: It's it's some I think it's some of the best

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Speaker 2: I just said some of the best risks risk adjust

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Speaker 2: to return out there in my world that I look at.

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Speaker 3: When we talk about asset based lending, I think it

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Speaker 3: might mean you know different things to different people. So

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Speaker 3: from your perspective, when you talk about asset based lending,

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Speaker 3: what are you what are you really looking at?

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Speaker 2: We're looking at companies that are undergoing a need for

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Speaker 2: situational capital either either on a good perspective. They're looking

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Speaker 2: to expand they have assets that they incrementally can pledge

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Speaker 2: to lenders or a short period of time, and or

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Speaker 2: companies that are actually experiencing specific liquidity issues and they

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Speaker 2: may have some incremental assets that they can get financying

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Speaker 2: on to bridge them through either a bankruptcy or to

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Speaker 2: a turnaround. And you know, we underwrite to a liquidation

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Speaker 2: like an actual liquidation. So it's a it's a very

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Speaker 2: specific type of underwriting process. Uh and you know, every

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Speaker 2: you know, every situation could be different. We had a

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Speaker 2: I can't really get into specifics, but you know, we

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Speaker 2: had a uh an investment in that space recently that

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Speaker 2: it was a brand that was tied into an entity

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Speaker 2: that was in bankruptcy. We helped person who was behind

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Speaker 2: that brand finance the acquisition of that brand out of bankruptcy.

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Speaker 2: We were paid very well to do that. You know.

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Speaker 2: Unfortunately that you know, it was a nine month loan.

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Speaker 2: I wish, I wish it would have stayed out for

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Speaker 2: three years, five years, thirty years. But those are the

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Speaker 2: type of situations we get involved in in it. And

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Speaker 2: as I said, it's a very episodic type of opportunity

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Speaker 2: set and there's not a lot of competition. That's another

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Speaker 2: good thing about that part of the market that we

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Speaker 2: find attractive is, you know, on on our our core

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Speaker 2: middle market lower middle market direct lending strategy, you know,

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Speaker 2: we're peating. We're competing with ten to twenty different lenders

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Speaker 2: at any given time, depending on the situation. Here, it's

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Speaker 2: like five people. So it's it's it's a it's a

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Speaker 2: much different universe of h of institutions that we're competing against.

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Speaker 1: It sounds like it's a very labor intensive business and

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Speaker 1: quite hard to scale. But what kind of returns are

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Speaker 1: you seeing, le Jim.

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Speaker 2: We're seeing so fur plus six, the so for plus nine,

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Speaker 2: a lot of a lot of you know, incremental fees

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Speaker 2: associated with these type of transactions. And you know it's uh,

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Speaker 2: you're you're well protected because of the structure and the

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Speaker 2: you know, the I mean, these are these are the

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Speaker 2: most they're probably the most aggressive straight jackets out there

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Speaker 2: from a structural standpoint. H It's a it's a very

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Speaker 2: very specific type of deal.

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Speaker 3: Right Yeah. And this this whole asset based lending space

396
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Speaker 3: seems to be you know, sort of exploding in a

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Speaker 3: good way, exploding growth wise. Again, You've got you know,

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Speaker 3: sort of the largest alternative managers, Apollo and Blackstone, talking

399
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Speaker 3: about forty trillion dollar addressable markets. It includes the investment

400
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Speaker 3: grade space. Now, are you looking at some of these,

401
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Speaker 3: you know, sort of investment grade deals as well? Are

402
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Speaker 3: you partnering up with some of these other firms on

403
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Speaker 3: these these transactions.

404
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Speaker 2: That's not really our mandate from our clients. Napier Park

405
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Speaker 2: our affiliate, they do some of that type of those

406
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Speaker 2: type of transactions. But you know, I think I think

407
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Speaker 2: people when I say ABL, I'm saying asset based lending. Right,

408
00:25:51,320 --> 00:25:55,200
Speaker 2: the investment grade is asset backed, So different do you

409
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Speaker 2: have structurally it's a lot more commoditized structure is the structure,

410
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Speaker 2: you know, whether it's aircraft or consumer receivables or what

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Speaker 2: have you, whereas ours it's every the B is different,

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Speaker 2: The B is bespoke, it's not commoditized as in asset

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Speaker 2: backed deals. So's it varies widely?

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Speaker 3: Yeah, yeah, but yeah, but we we are seeing, you know,

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Speaker 3: sort of the these larger companies getting involved in more

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Speaker 3: of these base or backed transactions. Some of them are spoken, some.

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Speaker 1: Of them are telling us that they're not seeing the

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Speaker 1: value in moving from public markets where there's liquidity to

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Speaker 1: private markets where there's no transparency, no liquidity, no, you know, visibility,

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Speaker 1: all the things we've discussed, do you do you I

421
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Speaker 1: mean the kind of deals you're doing different. It seems

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Speaker 1: like there is still a pick up between broady syndicated

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Speaker 1: and private deals.

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Speaker 2: Yeah, there there is pick up. There is pick up.

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Speaker 2: You know, it's just you know, it's a different process.

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Speaker 2: It's a lot more labor intensive. Yeah. You think about

427
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Speaker 2: some of the larger competitors. I mean, they've gotten large

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Speaker 2: and their business models have had to adapt being larger.

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Speaker 2: You know, I would love to be able to put

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Speaker 2: a billion dollar private credit deal out there and get

431
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Speaker 2: paid fees up front and put you know, that kind

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Speaker 2: of capital to work very quickly. That's not what we do.

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Speaker 2: You know, the larger players, that's how they do it.

434
00:27:22,280 --> 00:27:24,440
Speaker 2: And once you get to that level. As a quote

435
00:27:24,520 --> 00:27:28,240
Speaker 2: unquote private credit deal, I mean, it's not any different

436
00:27:28,359 --> 00:27:33,280
Speaker 2: than a broadly syndicated deal except for maybe you know, marginally,

437
00:27:34,160 --> 00:27:37,480
Speaker 2: but it's much better from a business model standpoint.

438
00:27:38,160 --> 00:27:40,320
Speaker 1: The question I'd like to ask Jim is what's your edge?

439
00:27:40,359 --> 00:27:42,000
Speaker 1: It sounds like your edge is just you know, flying

440
00:27:42,040 --> 00:27:45,400
Speaker 1: below the radar and staying with the smaller area sort

441
00:27:45,400 --> 00:27:47,960
Speaker 1: of tougher deals to do others aren't doing. Is that

442
00:27:48,119 --> 00:27:49,879
Speaker 1: is that their their way of putting it.

443
00:27:50,720 --> 00:27:53,000
Speaker 2: I mean, I wouldn't say their harrier. I would just

444
00:27:53,000 --> 00:27:55,240
Speaker 2: say they're more labor intensive because you have to do

445
00:27:56,000 --> 00:28:01,040
Speaker 2: proper diligence on these transactions, you know. I mean, in

446
00:28:01,160 --> 00:28:04,280
Speaker 2: some ways I like the risk of the lower middle

447
00:28:04,320 --> 00:28:09,400
Speaker 2: market because you know, if I'm entrepreneur X who started

448
00:28:09,760 --> 00:28:13,120
Speaker 2: his or her business in you know, nineteen seventy five,

449
00:28:13,760 --> 00:28:17,080
Speaker 2: and it has thirty twenty million dollars eve it done,

450
00:28:17,119 --> 00:28:20,560
Speaker 2: and I sold it to a private equity sponsor for

451
00:28:20,760 --> 00:28:22,720
Speaker 2: four one hundred and fifty million dollars, I'm going to

452
00:28:22,760 --> 00:28:27,800
Speaker 2: finance it with eighty million dollars a debt. In some ways,

453
00:28:28,359 --> 00:28:33,320
Speaker 2: having private equity involved helps professionalize the business, you know,

454
00:28:33,600 --> 00:28:38,360
Speaker 2: and private equity, especially at that level, they're not looking

455
00:28:38,440 --> 00:28:42,880
Speaker 2: to financially engineer that capital structure. They just want certainty

456
00:28:42,920 --> 00:28:47,400
Speaker 2: of execution, the lender who understands their business and helps

457
00:28:47,480 --> 00:28:51,560
Speaker 2: them through the diligence process. So I think that's kind

458
00:28:51,600 --> 00:28:55,520
Speaker 2: of that is our edge from from a drugt lending perspective,

459
00:28:55,640 --> 00:28:58,600
Speaker 2: though I wouldn't say they're harrier deals. They're just newer

460
00:28:58,720 --> 00:29:02,560
Speaker 2: to operating with leverage leverage capital strug.

461
00:29:03,560 --> 00:29:05,640
Speaker 3: Maybe we can now just pivot for a moment. We

462
00:29:06,000 --> 00:29:07,959
Speaker 3: just have a few minutes left, but maybe we can

463
00:29:08,000 --> 00:29:11,920
Speaker 3: pivot to your your own fundraising and where you're seeing,

464
00:29:12,080 --> 00:29:15,280
Speaker 3: you know, sort of flows coming in from. Has there

465
00:29:15,320 --> 00:29:17,760
Speaker 3: been a change in terms of of you know, sort

466
00:29:17,800 --> 00:29:21,400
Speaker 3: of where you're seeing the uh, the customer flows coming

467
00:29:21,480 --> 00:29:25,440
Speaker 3: to you and and maybe changes in customer allocations as

468
00:29:25,480 --> 00:29:28,160
Speaker 3: well with more of an a sort of alternative bent

469
00:29:28,280 --> 00:29:28,560
Speaker 3: to them.

470
00:29:29,440 --> 00:29:31,920
Speaker 2: Sure, I mean you know that that you know, five

471
00:29:32,000 --> 00:29:38,160
Speaker 2: years ago we were purchased by Firstegal Investment Management with

472
00:29:38,280 --> 00:29:42,480
Speaker 2: the idea of bringing private credit products to the retail

473
00:29:42,640 --> 00:29:48,200
Speaker 2: distribution platform that they have. So we we have existing

474
00:29:48,320 --> 00:29:52,440
Speaker 2: fund that's been up and running for over four years

475
00:29:53,160 --> 00:29:56,520
Speaker 2: that's around a billion dollars. So that that that is

476
00:29:56,600 --> 00:30:00,640
Speaker 2: a blended product that has private credit as well as

477
00:30:00,680 --> 00:30:04,400
Speaker 2: probably syndicated assets as part of the asset base an

478
00:30:04,480 --> 00:30:09,000
Speaker 2: interval structure. We also have another product that's I can't

479
00:30:09,360 --> 00:30:11,160
Speaker 2: I'm not sure what I can say or cannot say,

480
00:30:11,200 --> 00:30:14,120
Speaker 2: but we'll be launched relatively soon that does it's more

481
00:30:14,200 --> 00:30:18,560
Speaker 2: private oriented. So we're seeing more more demand coming out

482
00:30:18,600 --> 00:30:21,680
Speaker 2: of retail side of the equation. I think that's true

483
00:30:21,720 --> 00:30:25,680
Speaker 2: for the industry. I think I was reading where there

484
00:30:25,760 --> 00:30:29,720
Speaker 2: is a forty percent increase of capital allocated by retail

485
00:30:29,800 --> 00:30:36,240
Speaker 2: into alternative and private credit products twenty twenty four, So

486
00:30:37,360 --> 00:30:40,320
Speaker 2: you know, I think that's that's where we're seeing flows

487
00:30:40,560 --> 00:30:44,760
Speaker 2: that we're seeing demand Institutionally, I think a lot of

488
00:30:45,560 --> 00:30:49,920
Speaker 2: institutions are they would like to allocate more to private equity.

489
00:30:50,080 --> 00:30:53,320
Speaker 2: I'm sorry, private credit, I misspoke here. They would like

490
00:30:53,400 --> 00:30:57,880
Speaker 2: to allocate more to private credit. However, it's dependent on

491
00:30:58,000 --> 00:31:01,560
Speaker 2: what happens to their private equity book. They start getting

492
00:31:01,640 --> 00:31:05,600
Speaker 2: realizations in the private equity side of their portfolios, they

493
00:31:05,720 --> 00:31:10,320
Speaker 2: will look to allocate to private credit. So I've heard

494
00:31:10,360 --> 00:31:14,320
Speaker 2: that from a number of different consultants and LPs UH

495
00:31:15,360 --> 00:31:18,280
Speaker 2: and a lot of it is dependent on getting some

496
00:31:18,400 --> 00:31:21,000
Speaker 2: realizations on the private equity side of their portfolios.

497
00:31:22,040 --> 00:31:25,200
Speaker 1: Last question, Jim, when you look at the markets that

498
00:31:25,280 --> 00:31:28,880
Speaker 1: you're directly covering, is there something you're particularly contrarian on

499
00:31:29,000 --> 00:31:31,040
Speaker 1: that you think that you're doing differently the others aren't,

500
00:31:31,120 --> 00:31:33,240
Speaker 1: or you think the others are missing that that you

501
00:31:33,320 --> 00:31:35,120
Speaker 1: know you've you've got an edge on.

502
00:31:36,320 --> 00:31:39,520
Speaker 2: I don't really think. I think we stick to our knitting.

503
00:31:41,200 --> 00:31:44,719
Speaker 2: You know, we we don't deviate from our strategy. I mean,

504
00:31:44,840 --> 00:31:47,640
Speaker 2: if if anything, we would like to go maybe further

505
00:31:47,800 --> 00:31:50,680
Speaker 2: up market at some point when we see value there

506
00:31:52,560 --> 00:31:56,800
Speaker 2: and we have the ability to force in that part

507
00:31:56,840 --> 00:32:00,000
Speaker 2: of the market. But I don't know if that's really contrariant,

508
00:32:00,280 --> 00:32:03,880
Speaker 2: uh so to speak. Uh, I do believe asset based

509
00:32:04,240 --> 00:32:09,160
Speaker 2: lending is contraying in itself. You're lending into very situation

510
00:32:09,840 --> 00:32:14,680
Speaker 2: oriented type of deals that a lot can happen, but

511
00:32:16,040 --> 00:32:21,360
Speaker 2: structure it properly, your returns will be good. So maybe

512
00:32:21,440 --> 00:32:24,640
Speaker 2: that's a little bit more contrarian, so to speak. But

513
00:32:24,760 --> 00:32:28,200
Speaker 2: you know, first Eagle is a value oriented investment shop

514
00:32:28,280 --> 00:32:31,479
Speaker 2: in general. Uh I wish I wish credit was more

515
00:32:31,640 --> 00:32:34,280
Speaker 2: value oriented, where you can be in cash and uh

516
00:32:35,040 --> 00:32:37,360
Speaker 2: have the luxury of being in cash in a portfolio.

517
00:32:37,440 --> 00:32:42,280
Speaker 2: But that that doesn't work because you know, these markets

518
00:32:42,640 --> 00:32:47,720
Speaker 2: do get fickle, uh during times of volatility, and again

519
00:32:47,800 --> 00:32:51,280
Speaker 2: we haven't seen volatility for some time. Yeah, maybe we'll, we'll,

520
00:32:51,760 --> 00:32:54,440
Speaker 2: but we we always operate our funds with a degree

521
00:32:54,520 --> 00:32:57,920
Speaker 2: of of dry powder to the extent that we can

522
00:32:58,040 --> 00:33:01,040
Speaker 2: have it. Uh. Present in port fully to take advantage

523
00:33:01,080 --> 00:33:03,800
Speaker 2: of opportunities. We did that in twenty twenty two in

524
00:33:03,880 --> 00:33:09,040
Speaker 2: our interval fun you know, so we do our best

525
00:33:09,080 --> 00:33:11,320
Speaker 2: to create those options for us in the future.

526
00:33:12,240 --> 00:33:14,280
Speaker 1: With that in mind, with the potential for volatility in

527
00:33:14,320 --> 00:33:16,080
Speaker 1: twenty twenty five, let me ask you both. Do you

528
00:33:16,160 --> 00:33:20,160
Speaker 1: expect private markets private credit markets specifically to be the

529
00:33:21,360 --> 00:33:23,320
Speaker 1: hot thing for twenty twenty five or do you think

530
00:33:23,320 --> 00:33:25,280
Speaker 1: there'll be some blow up that turns people away. I'll

531
00:33:25,280 --> 00:33:26,040
Speaker 1: start with you, David.

532
00:33:27,560 --> 00:33:30,000
Speaker 3: Well, if you just look at what the consensus is saying,

533
00:33:30,920 --> 00:33:33,320
Speaker 3: the the odds are that there's not going to be

534
00:33:33,360 --> 00:33:35,280
Speaker 3: a blow up. So it's a you know, there are

535
00:33:35,280 --> 00:33:36,760
Speaker 3: a lot of buses out there. I think that we

536
00:33:36,840 --> 00:33:39,400
Speaker 3: see those buses is just the one that we can't

537
00:33:39,440 --> 00:33:40,600
Speaker 3: see that we got to watch out for.

538
00:33:42,120 --> 00:33:45,360
Speaker 1: Jim. Private credit for twenty twenty five still, Hut.

539
00:33:45,640 --> 00:33:48,640
Speaker 2: You know, I don't see a blow up, but you know,

540
00:33:48,960 --> 00:33:52,840
Speaker 2: I think the blow up, if it does occur, is no.

541
00:33:53,000 --> 00:33:55,800
Speaker 2: I think that the there's a lot of financing that

542
00:33:55,960 --> 00:33:58,840
Speaker 2: goes into the private credit markets from banks. That's how

543
00:33:58,880 --> 00:34:03,040
Speaker 2: they compete. And I think I feel like if banks

544
00:34:03,520 --> 00:34:07,640
Speaker 2: start to brain in their their risk appetite in terms

545
00:34:07,680 --> 00:34:12,880
Speaker 2: of lending to private credit managers, private credit funds that

546
00:34:13,000 --> 00:34:18,560
Speaker 2: could really start to blow down the enthusiasm. I don't

547
00:34:18,600 --> 00:34:21,600
Speaker 2: know if that creates a blow up, Uh when when

548
00:34:21,680 --> 00:34:24,640
Speaker 2: acids aren't valued as frequently as they are in the

549
00:34:24,719 --> 00:34:29,239
Speaker 2: probably syndicated market, you know, it's probably it's it's more

550
00:34:29,280 --> 00:34:31,560
Speaker 2: of a slow death as opposed to a blow up.

551
00:34:32,200 --> 00:34:35,080
Speaker 2: That's how I would look at it. Sorry to have

552
00:34:35,200 --> 00:34:39,480
Speaker 2: such a morbid analogy, but you know, the the you know,

553
00:34:40,280 --> 00:34:44,719
Speaker 2: liquidity is good and it's a great discipline that have

554
00:34:44,920 --> 00:34:47,440
Speaker 2: a market that you have to respect and look at

555
00:34:47,600 --> 00:34:52,080
Speaker 2: on a daily basis. Private credit really doesn't have to

556
00:34:52,239 --> 00:34:56,600
Speaker 2: do that, so that probably lends for less of a

557
00:34:57,440 --> 00:34:59,200
Speaker 2: blow up type of scenario. I think it would be

558
00:34:59,320 --> 00:35:02,160
Speaker 2: on the financing side or some of these products that

559
00:35:02,239 --> 00:35:06,800
Speaker 2: have liquidity provided to investors. How what if there is

560
00:35:06,880 --> 00:35:09,799
Speaker 2: a you know, we didn't even get into the ETFs

561
00:35:09,880 --> 00:35:16,560
Speaker 2: for private credit, which is being spoken about right now. Yeah,

562
00:35:16,640 --> 00:35:20,400
Speaker 2: maybe that works, Maybe it doesn't. I don't know. I

563
00:35:20,520 --> 00:35:24,680
Speaker 2: do know people who bandage probably syndicated loans in ETF rappers,

564
00:35:24,840 --> 00:35:28,759
Speaker 2: and they'd love it because they don't they rarely have

565
00:35:28,880 --> 00:35:32,360
Speaker 2: to touch their portfolio because all the liquidity happens outside

566
00:35:32,360 --> 00:35:35,919
Speaker 2: of the portfolio, so maybe that happens in private credit.

567
00:35:35,960 --> 00:35:38,520
Speaker 2: But I think that's that seems like that's pretty out

568
00:35:38,560 --> 00:35:43,520
Speaker 2: there the ETF for private credit. That's that's good luck.

569
00:35:44,239 --> 00:35:46,440
Speaker 3: Yeah, the liquidity did is and quite match up, does it?

570
00:35:47,520 --> 00:35:51,040
Speaker 1: We shall now great stuff. Jim Fellow's co president and

571
00:35:51,200 --> 00:35:53,760
Speaker 1: CEO of First Eagle Alternative Credit. It's been a pleasure

572
00:35:53,800 --> 00:35:56,120
Speaker 1: having you on the Credit Edge. Many thanks, thank you,

573
00:35:56,239 --> 00:35:58,600
Speaker 1: thank you very much, and of course we're very grateful

574
00:35:58,640 --> 00:36:00,719
Speaker 1: to David Havens from Bloomberg AND's eligence. Thanks so much

575
00:36:00,719 --> 00:36:01,439
Speaker 1: for joining us today.

576
00:36:01,640 --> 00:36:03,520
Speaker 3: A terrific being with you both and all of you.

577
00:36:03,960 --> 00:36:06,319
Speaker 1: And for more credit market analysis and insight, read all

578
00:36:06,360 --> 00:36:09,680
Speaker 1: of David Havens's great work on the Bloomberg terminal. Bloomberg

579
00:36:09,719 --> 00:36:12,200
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581
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583
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588
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Speaker 1: It's been a pleasure having you join us again. Next

589
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Speaker 1: week on the Credit Edge,