Speaker 1: Hello, Welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome Jim Fellows, co
Speaker 1: president and CIO of First Eagle Alternative Credit.
Speaker 2: How are you, Jim, Good, Happy New Year.
Speaker 1: Happy new year to you. Thanks so much for joining
Speaker 1: us today. We're very excited to have you on the show,
Speaker 1: and also delighted to welcome back our co host David
Speaker 1: Havens from Bloomberg Intelligence.
Speaker 3: Hello, David, Hey, great to be with you on Go Eagles.
Speaker 1: So, just to set the scene here, credit markets are
Speaker 1: hot and borrowers globally are taking advantage. We're expecting a
Speaker 1: record amount of debt issuance from the US companies this month.
Speaker 1: Most of it is for refinancing. There's a lot of
Speaker 1: debt coming due. That means even more cash returning to
Speaker 1: invest who have already received a ton of inflows over
Speaker 1: the last year and are very keen to buy. Given
Speaker 1: how high all in yields are, you can get a
Speaker 1: yield of almost five point four percent right now on
Speaker 1: high grade debt with a very low chance of default.
Speaker 1: That's the highest in about six months the demands supply
Speaker 1: and balance, though, is keeping spreads raisor thin, and also
Speaker 1: pushing investors to other parts of credit like structured finance
Speaker 1: and private debt, where returns are even higher. Some fear
Speaker 1: it's also leading to complacency and mispricing of risk throughout
Speaker 1: credit markets, which is only expected to get worse in
Speaker 1: twenty twenty five. So, Jim, I want to bring you
Speaker 1: in here. What's your view? Are you very bullish for
Speaker 1: this year like everyone else, or do you see reasons
Speaker 1: to be cautious right now?
Speaker 2: I'm typically always cautious. That's that's a fault that I have. Yees,
Speaker 2: spreads are close to pre crisis tights across a lot
Speaker 2: of acid classes, loans, high yield, private credit, you know,
Speaker 2: areas that we focus on and you know, as you
Speaker 2: hit it on your opening statement, a lot of it
Speaker 2: is dependent on just lack of activity. We do have
Speaker 2: a fairly significant maturity wall that is being worked through,
Speaker 2: the cost of capital finally going up for some of
Speaker 2: these borrowers because of you know, a lot of the
Speaker 2: debt was put in place, you know, during crisis, during
Speaker 2: posts the Great Financial Crisis, when rates were hugging zero.
Speaker 2: So you're you're going to see an increase in the
Speaker 2: cost of capital going forward. And you know, I think
Speaker 2: everyone is expecting more net new issuance from M and
Speaker 2: A activity. I think that's a lot of that is
Speaker 2: wishful thinking. I think that there's still uncertainties globally that
Speaker 2: may subdued M and A activities, especially you know, with tariffs.
Speaker 2: I think a lot of companies may be less willing
Speaker 2: to commit to M and A give and the uncertainty
Speaker 2: of policy overall, so that that could constrain supply here
Speaker 2: for you know, the next three to six months. Hopefully
Speaker 2: things start to loosen up as we go, you know,
Speaker 2: you know, as we move into the second half of
Speaker 2: twenty twenty five.
Speaker 1: Does that mean even tied to credit spreads from here?
Speaker 2: Jim, It's possible. It is entirely possible. Uh. You know,
Speaker 2: we're seeing spreads tightening, tightening across the board. As I said,
Speaker 2: our three areas of focus, probably syndicated private credit and
Speaker 2: high you bonds spreads spreads have certainly tightened considerably. Yeah.
Speaker 3: I mean, Jim, we seem to be in a period,
Speaker 3: in a tale period in the markets. I mean, we've
Speaker 3: got the IG index down around seventy five eighty basis points,
Speaker 3: which that's territory that is probably occupied about one percent
Speaker 3: of its history. We actually have Invesco speak at a
Speaker 3: Bloomberg Intelligence Credit conference in December and New York, and
Speaker 3: their view is that that IG credit spreads could head
Speaker 3: towards fifty five basis points during the course of twenty
Speaker 3: twenty five. Is is that of you that you might share?
Speaker 3: You know, obviously there are reasons for caution out there
Speaker 3: that you that you explained as well, but there's so
Speaker 3: many technical factors that seem to be pushing towards towards
Speaker 3: tighter markets, you know, sort of modern GDP growth, relatively
Speaker 3: contained inflation, strong employment, and just a wall of cash
Speaker 3: out there.
Speaker 2: Yeah, I think that's entirely possible, you know, and you know,
Speaker 2: again on my our focus in the loan the non
Speaker 2: investment grade space, I think that's that's definitely going to
Speaker 2: be the case because I believe that, as I mentioned earlier,
Speaker 2: m and A activity could be subdued. I think the
Speaker 2: most M and A activity that's first going to occur
Speaker 2: will be strategy ex buying leverage finance companies and taking
Speaker 2: net supply out of the market. Going forward, so that
Speaker 2: certainly will support spreads tightening over you know, the next
Speaker 2: six to nine months.
Speaker 3: That's an interesting and interesting take on things.
Speaker 2: Uh.
Speaker 3: I haven't heard that all that much about the about
Speaker 3: the you know, sort of leverage finance companies or leverage
Speaker 3: leveraged companies being being taken out, but there's the consensus
Speaker 3: seems to be pointing towards much increased M and A
Speaker 3: just because you know, the the the the private equity
Speaker 3: firms have been sitting on a lot of cash. They
Speaker 3: need to put that money to work. They're under pressure
Speaker 3: to put that money to uh, to work. Rates still
Speaker 3: have I don't know, one or two you know, sort
Speaker 3: of cuts in them at least that's what consensus is
Speaker 3: pointing towards this year. So so what are you going
Speaker 3: to do if if these if spreads keep on moving tighter.
Speaker 2: Stay conservative, stay conservative. I think that's that's the mantra
Speaker 2: that we're operating under. It's uh, you know, you don't
Speaker 2: see a lot of screaming value. I think in the
Speaker 2: lower part of the direct lending space or private credit space,
Speaker 2: you're not seeing as much compression and spreads. You're seeing
Speaker 2: some of it, but not as not as dramatic as
Speaker 2: you're seeing in the more liquid parts of the market.
Speaker 2: You know that that's an area where you know, investors
Speaker 2: can find value in an environment of tightening tightening spreads.
Speaker 2: I do feel like rates the short end of the
Speaker 2: curves are not going to move down as much. Obviously
Speaker 2: the said probably is not going to tighten as much
Speaker 2: as what people are expecting going into twenty twenty four.
Speaker 2: So I think that's that's the you know, that's kind
Speaker 2: of the curse as well. It's going to keep you know,
Speaker 2: short rates relatively high. Therefore, more money is going to
Speaker 2: flow into the credit markets and keep spread stight, vicious circle.
Speaker 1: But by lower and Jim, do you mean lower quality
Speaker 1: like you know triple cy or do you mean lower
Speaker 1: as in smaller size like mid market.
Speaker 2: Lower in size of company it? So, what kind of
Speaker 2: sidement market?
Speaker 1: When when you talk about middle market, I mean it's
Speaker 1: a term that we often hear, but it seems to
Speaker 1: be applied to all sorts of different things in different ways.
Speaker 1: What does it mean to you?
Speaker 2: Yeah, companies that have ebit on average of twenty to
Speaker 2: fifty million dollars, so truly you know, true private privately
Speaker 2: created credit to companies that are undergoing an acquisition by
Speaker 2: a sponsor. That's typically Uh. When I say that, I
Speaker 2: mean and right now that market is either side of
Speaker 2: six percent. Uh, you know, it can't. In some cases,
Speaker 2: it's tighter for credits that are substantially less levered. So
Speaker 2: you know, you see a lot more dispersion in that
Speaker 2: part of the marketplace. You've just given the nuances of
Speaker 2: these type of companies.
Speaker 3: Maybe you can walk us through the process of how
Speaker 3: you go about accessing these these assets. It seems as
Speaker 3: though different different shops have different ways of approaching the
Speaker 3: market of sourcing the assets. And then who are you
Speaker 3: seeing the most competition from in that twenty five to
Speaker 3: fifty billion dollar segment.
Speaker 2: Yeah, there's there's a number. You know, I think some
Speaker 2: of the well we'll start with some of the larger
Speaker 2: alternative credit managers. Some of them may start to come
Speaker 2: down market as as Spreads Titan up market, so you know,
Speaker 2: we may start seeing competition from the likes of you know,
Speaker 2: the Apollos, Blackstones, et cetera. But you know, we typically
Speaker 2: are focusing on companies that are sponsored by middle market
Speaker 2: private equity companies that oftentimes it's a founder entrepreneurs selling
Speaker 2: their company to you know, monetize their life's work, and
Speaker 2: you know, they're looking to do sponsors to help effectuate
Speaker 2: those types of transactions. We have we have a we
Speaker 2: have a we have a number of originators that are
Speaker 2: calling on sponsors looking to transact on on on on
Speaker 2: deals and we're there to help finance these type of transactions.
Speaker 2: And you know, typically, as I said, they typically have
Speaker 2: twenty five million to fifty million dollars of viva DA
Speaker 2: on average.
Speaker 3: And is it only would you say it's mainly other
Speaker 3: direct lenders that you're coming across, or are you seeing
Speaker 3: banks beginning to get a little bit more active in
Speaker 3: that market or are they still simply discentivized by regulations
Speaker 3: from from you know, sort of lending into that single
Speaker 3: bee sort of high triple C space.
Speaker 2: Yeah, banks have been relatively quiet over the past couple
Speaker 2: of years. We are now beginning to start seeing some
Speaker 2: banks moving into that market and becoming more competitive. We
Speaker 2: had a situation just recently where we ended up winning
Speaker 2: because the private equity sponsor was worried about the banks
Speaker 2: being able to you know, the private equity sponsor's initial
Speaker 2: premise on buying that particular company was you It was
Speaker 2: a buy and build strategy, and they were a little
Speaker 2: concerned that the bank would not be as flexible or
Speaker 2: as dynamic and growing that capital structure along with their
Speaker 2: strategy of buying other other tack on acquisitions for that
Speaker 2: particular company. So you know that that that is that
Speaker 2: net positive for direct lenders still that are not banks.
Speaker 2: So but you we are starting to see banks show
Speaker 2: up more often in bidding processes and.
Speaker 1: The kind of companies you're dealing with. Jim, what size
Speaker 1: deal are we talking about here? Generally?
Speaker 2: You know, you could you know, facility size, that quantum
Speaker 2: you know, anywhere from sixty million up to two hundred million.
Speaker 2: That's typically you know what we're seeing what we're looking at.
Speaker 2: Sometimes they're smaller if if it's really you know, you
Speaker 2: have another We see a number of situations where it's
Speaker 2: could be smaller, but the sponsor has a very direct
Speaker 2: line of sight of additional acquisitions that they're looking to make.
Speaker 2: So you know that that facility, you know, maybe thirty
Speaker 2: million dollars, but it could grow very quickly. So you know,
Speaker 2: you do see that type of dynamic from time to time.
Speaker 1: And when you say six percent is that the margin
Speaker 1: or is that the all in?
Speaker 2: Yeah? That so the margin we're seeing sofur plus anywhere
Speaker 2: from sofur plus five to six percent. That's that's the
Speaker 2: range of we're seeing in the marketplace today. There's a
Speaker 2: few situations that may be slightly tighter than that. The
Speaker 2: market probably ends up going tighter to sub five, but
Speaker 2: you know, right now we're seeing solidly in the five
Speaker 2: to six percent over so range.
Speaker 3: And obviously, you know, spread is is you know, the
Speaker 3: cost of funding. Spread is one way that you can
Speaker 3: that you can compete. There are other ways to compete also,
Speaker 3: as you as you well know, terms and conditions and
Speaker 3: things like that. So what sort of trends are you
Speaker 3: what sort of compression or pressure you know, trends are
Speaker 3: you seeing on the terms and conditions side of the equation.
Speaker 2: Yeah, I mean there's there's you know a lot of
Speaker 2: times there's significant or an aggressive ask for a large
Speaker 2: d d t L to help fund future acquisitions. You
Speaker 2: know for some people that are TL is delayed draw
Speaker 2: term loan. So it's a term loan structured to be
Speaker 2: drawn at a later date where you have, as you know,
Speaker 2: define use of proceeds. Typically an acquisition you know, there's
Speaker 2: covenant terms tied to the ability to access that d
Speaker 2: D T L. So I mean we're we're seeing terms
Speaker 2: hold fairly, fairly solidly. Maybe they're slipping a little bit,
Speaker 2: but nothing like you're seeing further up the market, like
Speaker 2: in the probably syndicated market or even the upper end
Speaker 2: of the middle market, where there's very little structural sport
Speaker 2: in terms included in the credit agreements.
Speaker 1: Given little of this pressure we're talking about, you know,
Speaker 1: money coming in competition from the big guys moving down
Speaker 1: into the smaller deals and just this way of cash,
Speaker 1: do you expect some titus spreads in the middle market
Speaker 1: this year and also looser conditions was covenants, all of
Speaker 1: that stuff.
Speaker 2: I think that's that's a safe assumption in the environment
Speaker 2: that we're currently operating.
Speaker 3: Yes, yeah, And I guess one of the things that
Speaker 3: you know, a lot of the investors that we talked
Speaker 3: to and the folks that read our research here, I
Speaker 3: think are they're not confounded by it, But I would
Speaker 3: say that they're prized by the lack of of of
Speaker 3: credit loss, the lack of credit problems that have that
Speaker 3: have come to the forefront in private credit portfolios. I
Speaker 3: mean you had a five hundred and twenty five basis
Speaker 3: point rate increase. You know, at the FED in twenty
Speaker 3: two to twenty three you had somewhat slower economic growth
Speaker 3: and there were hardly any significant bankruptcies or credit losses.
Speaker 3: Is that the same sort of thing that you're seeing
Speaker 3: in your portfolio? And why aren't we seeing more of that?
Speaker 2: Well? I mean you can look at the broadly syndicated
Speaker 2: market as a guidepost, where you know, the fault rate
Speaker 2: in the broly syndicated market is approaching five percent if
Speaker 2: you include LM transactions and such, and you know, in
Speaker 2: good old fashioned defaults and bankruptcies, So you know that
Speaker 2: that you know that number is like five in the
Speaker 2: broadly syndicated market, you go down market, it's so pike,
Speaker 2: No one really knows, be perfectly honest. I you know,
Speaker 2: I track a couple different indices. Fitch has a couple
Speaker 2: data points that they publish on in terms of some
Speaker 2: of the companies that they rate from a private standpoint.
Speaker 2: Krauscour has a database where they're monitoring default rates. So
Speaker 2: and it varies considerably. I mean, I've seen a delta
Speaker 2: as high as seven and as low as two point
Speaker 2: seven or a pool of private credit assets, depending on
Speaker 2: who's providing that data, so it varies quite a bit.
Speaker 2: There there could be situations where you know, assets are
Speaker 2: picking and they're not quote unquote default because with lender
Speaker 2: agreed to waive the default in lieu of a pick.
Speaker 2: You know, my mind, that's technically a default. But there
Speaker 2: there there's definitely definitional challenges as you look deeper into
Speaker 2: the credit private credit market. Whereasn't it probably syndicated market,
Speaker 2: it's pretty straightforward. You know, you have a market that's
Speaker 2: telling you what it's worth. So it's it's a little different.
Speaker 3: Definitional challenges, I think is a pretty good way of
Speaker 3: putting it. I tracked the BDC data here at Bloomberg
Speaker 3: and that non accrule rate has remained quite low, but
Speaker 3: pick has definitely come up, and you know, below the surface,
Speaker 3: you know that there have also been a fair amount
Speaker 3: of you know, sort of extensions and amendments and things
Speaker 3: like that along the way.
Speaker 2: Yep, yep, today's picks become tomorrow's non accruals.
Speaker 1: Can you expand a bit on the sexes that you'd
Speaker 1: like and the sex as.
Speaker 2: You avoid, So you know today some of the positive.
Speaker 2: Financials have some pretty good dynamics taking place. I think
Speaker 2: deregulation with the new administration should be all very positive
Speaker 2: for financial segment. You know, and in the broadly syndicated
Speaker 2: and private credit markets, we see a lot of asset managers,
Speaker 2: see a lot of you know, servicing companies that are
Speaker 2: servicing a variety of financial institutions. We see insurance brokers,
Speaker 2: and so there's there's a breath of you know, breath
Speaker 2: of type, you know, various types of financial services companies
Speaker 2: that come to market, you know, within financial services. Right now,
Speaker 2: we're a little cautious on any financial services company that
Speaker 2: relies on float to to generate incremental ebit duh, because
Speaker 2: you know, rates are expected to come down. Maybe that's
Speaker 2: probably not as much of the challenge going forward if
Speaker 2: rates don't come down as much as people think. So
Speaker 2: financials were positive on business services. There's a lot of
Speaker 2: activity there. It tends to be countersick cool, and you know,
Speaker 2: the one thing to watch in that sub segment today
Speaker 2: is you know a lot of outsourcing and offshoring of labor,
Speaker 2: and so you have to we have to be mindful
Speaker 2: of that. And with some of the new administrative administration's
Speaker 2: policy as it relates to labor. So we're but we
Speaker 2: still are generally positive on business services utilities that that's
Speaker 2: a segment that we were very cautious on five five,
Speaker 2: seven years ago. Given the advent of renewables. Now abilities
Speaker 2: are starting to turn around. You're seeing power prices increase,
Speaker 2: you have demand for power as it relates to AI,
Speaker 2: data centers, et cetera. So the wind is at their
Speaker 2: backs from a from a sector standpoint, uh and then
Speaker 2: some of the negatives, the automoti of bly chain that's
Speaker 2: under a lot of pressure. We expect that to continue
Speaker 2: be under a lot of pressure. Retail. I feel like
Speaker 2: retail has always been a no go area for a decade.
Speaker 2: And then healthcare. Healthcare is an area that's still I
Speaker 2: think there's a lot of uncertainty as relates to healthcare,
Speaker 2: especially with some of the ACA subsidies expiring in twenty
Speaker 2: twenty five, which will increase the number of uninsured that
Speaker 2: could pressure a bad debt expense within healthcare companies. And
Speaker 2: I think the expansion of Medicaid and some of the
Speaker 2: other federal federal programs as it relates to healthcare could
Speaker 2: be under some pressure. So We're still fairly pautious on healthcare.
Speaker 2: Healthcare actually has been you know, it's dealing with a
Speaker 2: one two punch really to some extent. They had a
Speaker 2: lot of labor issues during COVID. Now now they've seemed
Speaker 2: to put that problem behind them in terms of contract
Speaker 2: pricing and labor. But now they're facing popline issues. So
Speaker 2: that's an area where we're fairly cautious. And actually the
Speaker 2: correlate corollary to utilities renewables, you know, renewables are still
Speaker 2: are now undergoing a lot of pressure because of over expansion,
Speaker 2: et cetera. So those are just a few of the
Speaker 2: sectors pros and cons that we're looking at today.
Speaker 1: So in that context, Jim, where's the best value right
Speaker 1: now for you? You know, you look at all sorts
Speaker 1: of different kinds of credit products across the globe. Where's
Speaker 1: the value? Where's the relative value?
Speaker 2: I mean, I'm a I'm a corporate credit specialist specializing
Speaker 2: in private credit, probably syndicated high yield. So don't I
Speaker 2: don't have a broad you know, fixed income acid allocation mindset.
Speaker 2: I know we have a sister organization, Napier Park. They
Speaker 2: have more of a macro broader perspective on things. But personally,
Speaker 2: I think mortgage backs are cheap relative to everything else.
Speaker 2: That's that's me in the cheap seats. Looking at it
Speaker 2: from like a personal investment perspective, you know, I do
Speaker 2: think that the within private credit, asset based lending is
Speaker 2: a very unique area, very esoteric, and it's it's an
Speaker 2: area that you don't see a lot of competition in.
Speaker 2: I see. I see some of the assets and opportunities
Speaker 2: in that segment as some of the best risks return
Speaker 2: out there because it's very short in duration, very high returns,
Speaker 2: you know, but it has to be structured very carefully,
Speaker 2: and you know, we have a team that does that.
Speaker 2: It's it's some I think it's some of the best
Speaker 2: I just said some of the best risks risk adjust
Speaker 2: to return out there in my world that I look at.
Speaker 3: When we talk about asset based lending, I think it
Speaker 3: might mean you know different things to different people. So
Speaker 3: from your perspective, when you talk about asset based lending,
Speaker 3: what are you what are you really looking at?
Speaker 2: We're looking at companies that are undergoing a need for
Speaker 2: situational capital either either on a good perspective. They're looking
Speaker 2: to expand they have assets that they incrementally can pledge
Speaker 2: to lenders or a short period of time, and or
Speaker 2: companies that are actually experiencing specific liquidity issues and they
Speaker 2: may have some incremental assets that they can get financying
Speaker 2: on to bridge them through either a bankruptcy or to
Speaker 2: a turnaround. And you know, we underwrite to a liquidation
Speaker 2: like an actual liquidation. So it's a it's a very
Speaker 2: specific type of underwriting process. Uh and you know, every
Speaker 2: you know, every situation could be different. We had a
Speaker 2: I can't really get into specifics, but you know, we
Speaker 2: had a uh an investment in that space recently that
Speaker 2: it was a brand that was tied into an entity
Speaker 2: that was in bankruptcy. We helped person who was behind
Speaker 2: that brand finance the acquisition of that brand out of bankruptcy.
Speaker 2: We were paid very well to do that. You know.
Speaker 2: Unfortunately that you know, it was a nine month loan.
Speaker 2: I wish, I wish it would have stayed out for
Speaker 2: three years, five years, thirty years. But those are the
Speaker 2: type of situations we get involved in in it. And
Speaker 2: as I said, it's a very episodic type of opportunity
Speaker 2: set and there's not a lot of competition. That's another
Speaker 2: good thing about that part of the market that we
Speaker 2: find attractive is, you know, on on our our core
Speaker 2: middle market lower middle market direct lending strategy, you know,
Speaker 2: we're peating. We're competing with ten to twenty different lenders
Speaker 2: at any given time, depending on the situation. Here, it's
Speaker 2: like five people. So it's it's it's a it's a
Speaker 2: much different universe of h of institutions that we're competing against.
Speaker 1: It sounds like it's a very labor intensive business and
Speaker 1: quite hard to scale. But what kind of returns are
Speaker 1: you seeing, le Jim.
Speaker 2: We're seeing so fur plus six, the so for plus nine,
Speaker 2: a lot of a lot of you know, incremental fees
Speaker 2: associated with these type of transactions. And you know it's uh,
Speaker 2: you're you're well protected because of the structure and the
Speaker 2: you know, the I mean, these are these are the
Speaker 2: most they're probably the most aggressive straight jackets out there
Speaker 2: from a structural standpoint. H It's a it's a very
Speaker 2: very specific type of deal.
Speaker 3: Right Yeah. And this this whole asset based lending space
Speaker 3: seems to be you know, sort of exploding in a
Speaker 3: good way, exploding growth wise. Again, You've got you know,
Speaker 3: sort of the largest alternative managers, Apollo and Blackstone, talking
Speaker 3: about forty trillion dollar addressable markets. It includes the investment
Speaker 3: grade space. Now, are you looking at some of these,
Speaker 3: you know, sort of investment grade deals as well? Are
Speaker 3: you partnering up with some of these other firms on
Speaker 3: these these transactions.
Speaker 2: That's not really our mandate from our clients. Napier Park
Speaker 2: our affiliate, they do some of that type of those
Speaker 2: type of transactions. But you know, I think I think
Speaker 2: people when I say ABL, I'm saying asset based lending. Right,
Speaker 2: the investment grade is asset backed, So different do you
Speaker 2: have structurally it's a lot more commoditized structure is the structure,
Speaker 2: you know, whether it's aircraft or consumer receivables or what
Speaker 2: have you, whereas ours it's every the B is different,
Speaker 2: The B is bespoke, it's not commoditized as in asset
Speaker 2: backed deals. So's it varies widely?
Speaker 3: Yeah, yeah, but yeah, but we we are seeing, you know,
Speaker 3: sort of the these larger companies getting involved in more
Speaker 3: of these base or backed transactions. Some of them are spoken, some.
Speaker 1: Of them are telling us that they're not seeing the
Speaker 1: value in moving from public markets where there's liquidity to
Speaker 1: private markets where there's no transparency, no liquidity, no, you know, visibility,
Speaker 1: all the things we've discussed, do you do you I
Speaker 1: mean the kind of deals you're doing different. It seems
Speaker 1: like there is still a pick up between broady syndicated
Speaker 1: and private deals.
Speaker 2: Yeah, there there is pick up. There is pick up.
Speaker 2: You know, it's just you know, it's a different process.
Speaker 2: It's a lot more labor intensive. Yeah. You think about
Speaker 2: some of the larger competitors. I mean, they've gotten large
Speaker 2: and their business models have had to adapt being larger.
Speaker 2: You know, I would love to be able to put
Speaker 2: a billion dollar private credit deal out there and get
Speaker 2: paid fees up front and put you know, that kind
Speaker 2: of capital to work very quickly. That's not what we do.
Speaker 2: You know, the larger players, that's how they do it.
Speaker 2: And once you get to that level. As a quote
Speaker 2: unquote private credit deal, I mean, it's not any different
Speaker 2: than a broadly syndicated deal except for maybe you know, marginally,
Speaker 2: but it's much better from a business model standpoint.
Speaker 1: The question I'd like to ask Jim is what's your edge?
Speaker 1: It sounds like your edge is just you know, flying
Speaker 1: below the radar and staying with the smaller area sort
Speaker 1: of tougher deals to do others aren't doing. Is that
Speaker 1: is that their their way of putting it.
Speaker 2: I mean, I wouldn't say their harrier. I would just
Speaker 2: say they're more labor intensive because you have to do
Speaker 2: proper diligence on these transactions, you know. I mean, in
Speaker 2: some ways I like the risk of the lower middle
Speaker 2: market because you know, if I'm entrepreneur X who started
Speaker 2: his or her business in you know, nineteen seventy five,
Speaker 2: and it has thirty twenty million dollars eve it done,
Speaker 2: and I sold it to a private equity sponsor for
Speaker 2: four one hundred and fifty million dollars, I'm going to
Speaker 2: finance it with eighty million dollars a debt. In some ways,
Speaker 2: having private equity involved helps professionalize the business, you know,
Speaker 2: and private equity, especially at that level, they're not looking
Speaker 2: to financially engineer that capital structure. They just want certainty
Speaker 2: of execution, the lender who understands their business and helps
Speaker 2: them through the diligence process. So I think that's kind
Speaker 2: of that is our edge from from a drugt lending perspective,
Speaker 2: though I wouldn't say they're harrier deals. They're just newer
Speaker 2: to operating with leverage leverage capital strug.
Speaker 3: Maybe we can now just pivot for a moment. We
Speaker 3: just have a few minutes left, but maybe we can
Speaker 3: pivot to your your own fundraising and where you're seeing,
Speaker 3: you know, sort of flows coming in from. Has there
Speaker 3: been a change in terms of of you know, sort
Speaker 3: of where you're seeing the uh, the customer flows coming
Speaker 3: to you and and maybe changes in customer allocations as
Speaker 3: well with more of an a sort of alternative bent
Speaker 3: to them.
Speaker 2: Sure, I mean you know that that you know, five
Speaker 2: years ago we were purchased by Firstegal Investment Management with
Speaker 2: the idea of bringing private credit products to the retail
Speaker 2: distribution platform that they have. So we we have existing
Speaker 2: fund that's been up and running for over four years
Speaker 2: that's around a billion dollars. So that that that is
Speaker 2: a blended product that has private credit as well as
Speaker 2: probably syndicated assets as part of the asset base an
Speaker 2: interval structure. We also have another product that's I can't
Speaker 2: I'm not sure what I can say or cannot say,
Speaker 2: but we'll be launched relatively soon that does it's more
Speaker 2: private oriented. So we're seeing more more demand coming out
Speaker 2: of retail side of the equation. I think that's true
Speaker 2: for the industry. I think I was reading where there
Speaker 2: is a forty percent increase of capital allocated by retail
Speaker 2: into alternative and private credit products twenty twenty four, So
Speaker 2: you know, I think that's that's where we're seeing flows
Speaker 2: that we're seeing demand Institutionally, I think a lot of
Speaker 2: institutions are they would like to allocate more to private equity.
Speaker 2: I'm sorry, private credit, I misspoke here. They would like
Speaker 2: to allocate more to private credit. However, it's dependent on
Speaker 2: what happens to their private equity book. They start getting
Speaker 2: realizations in the private equity side of their portfolios, they
Speaker 2: will look to allocate to private credit. So I've heard
Speaker 2: that from a number of different consultants and LPs UH
Speaker 2: and a lot of it is dependent on getting some
Speaker 2: realizations on the private equity side of their portfolios.
Speaker 1: Last question, Jim, when you look at the markets that
Speaker 1: you're directly covering, is there something you're particularly contrarian on
Speaker 1: that you think that you're doing differently the others aren't,
Speaker 1: or you think the others are missing that that you
Speaker 1: know you've you've got an edge on.
Speaker 2: I don't really think. I think we stick to our knitting.
Speaker 2: You know, we we don't deviate from our strategy. I mean,
Speaker 2: if if anything, we would like to go maybe further
Speaker 2: up market at some point when we see value there
Speaker 2: and we have the ability to force in that part
Speaker 2: of the market. But I don't know if that's really contrariant,
Speaker 2: uh so to speak. Uh, I do believe asset based
Speaker 2: lending is contraying in itself. You're lending into very situation
Speaker 2: oriented type of deals that a lot can happen, but
Speaker 2: structure it properly, your returns will be good. So maybe
Speaker 2: that's a little bit more contrarian, so to speak. But
Speaker 2: you know, first Eagle is a value oriented investment shop
Speaker 2: in general. Uh I wish I wish credit was more
Speaker 2: value oriented, where you can be in cash and uh
Speaker 2: have the luxury of being in cash in a portfolio.
Speaker 2: But that that doesn't work because you know, these markets
Speaker 2: do get fickle, uh during times of volatility, and again
Speaker 2: we haven't seen volatility for some time. Yeah, maybe we'll, we'll,
Speaker 2: but we we always operate our funds with a degree
Speaker 2: of of dry powder to the extent that we can
Speaker 2: have it. Uh. Present in port fully to take advantage
Speaker 2: of opportunities. We did that in twenty twenty two in
Speaker 2: our interval fun you know, so we do our best
Speaker 2: to create those options for us in the future.
Speaker 1: With that in mind, with the potential for volatility in
Speaker 1: twenty twenty five, let me ask you both. Do you
Speaker 1: expect private markets private credit markets specifically to be the
Speaker 1: hot thing for twenty twenty five or do you think
Speaker 1: there'll be some blow up that turns people away. I'll
Speaker 1: start with you, David.
Speaker 3: Well, if you just look at what the consensus is saying,
Speaker 3: the the odds are that there's not going to be
Speaker 3: a blow up. So it's a you know, there are
Speaker 3: a lot of buses out there. I think that we
Speaker 3: see those buses is just the one that we can't
Speaker 3: see that we got to watch out for.
Speaker 1: Jim. Private credit for twenty twenty five still, Hut.
Speaker 2: You know, I don't see a blow up, but you know,
Speaker 2: I think the blow up, if it does occur, is no.
Speaker 2: I think that the there's a lot of financing that
Speaker 2: goes into the private credit markets from banks. That's how
Speaker 2: they compete. And I think I feel like if banks
Speaker 2: start to brain in their their risk appetite in terms
Speaker 2: of lending to private credit managers, private credit funds that
Speaker 2: could really start to blow down the enthusiasm. I don't
Speaker 2: know if that creates a blow up, Uh when when
Speaker 2: acids aren't valued as frequently as they are in the
Speaker 2: probably syndicated market, you know, it's probably it's it's more
Speaker 2: of a slow death as opposed to a blow up.
Speaker 2: That's how I would look at it. Sorry to have
Speaker 2: such a morbid analogy, but you know, the the you know,
Speaker 2: liquidity is good and it's a great discipline that have
Speaker 2: a market that you have to respect and look at
Speaker 2: on a daily basis. Private credit really doesn't have to
Speaker 2: do that, so that probably lends for less of a
Speaker 2: blow up type of scenario. I think it would be
Speaker 2: on the financing side or some of these products that
Speaker 2: have liquidity provided to investors. How what if there is
Speaker 2: a you know, we didn't even get into the ETFs
Speaker 2: for private credit, which is being spoken about right now. Yeah,
Speaker 2: maybe that works, Maybe it doesn't. I don't know. I
Speaker 2: do know people who bandage probably syndicated loans in ETF rappers,
Speaker 2: and they'd love it because they don't they rarely have
Speaker 2: to touch their portfolio because all the liquidity happens outside
Speaker 2: of the portfolio, so maybe that happens in private credit.
Speaker 2: But I think that's that seems like that's pretty out
Speaker 2: there the ETF for private credit. That's that's good luck.
Speaker 3: Yeah, the liquidity did is and quite match up, does it?
Speaker 1: We shall now great stuff. Jim Fellow's co president and
Speaker 1: CEO of First Eagle Alternative Credit. It's been a pleasure
Speaker 1: having you on the Credit Edge. Many thanks, thank you,
Speaker 1: thank you very much, and of course we're very grateful
Speaker 1: to David Havens from Bloomberg AND's eligence. Thanks so much
Speaker 1: for joining us today.
Speaker 3: A terrific being with you both and all of you.
Speaker 1: And for more credit market analysis and insight, read all
Speaker 1: of David Havens's great work on the Bloomberg terminal. Bloomberg
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