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

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

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Speaker 1: This week, we're very pleased to welcome James Reynolds, Global

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Speaker 1: head of direct Lending at Goldman Sachs. How are you, James.

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Speaker 2: I'm doing very well. Thank you for having me.

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Speaker 1: Thank you so much for joining us today. We're really

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Speaker 1: looking forward to getting your take on the credit markets.

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Speaker 1: We're also delighted to welcome back Bloomberg's own Lisa Lee.

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Speaker 1: How are you, Lisa fine?

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Speaker 3: Thank you.

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Speaker 1: Lisa covers credit markets from London, and it's great to

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Speaker 1: see you again. And from Bloomberg Intelligence. It's great to

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Speaker 1: see David Havens, who's based in New York. How are you, David.

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Speaker 4: I'm very good, looking forward to a little bit of

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Speaker 4: snow to it here tomorrow, So.

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Speaker 1: Let's start with you, James. Welcome. We spent a lot

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Speaker 1: of time on this show talking to private debt. Investment

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Speaker 1: is about what's widely being described as a golden age

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Speaker 1: for this very fast growing market. The so called non

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Speaker 1: banks are really very excited about the opportunity. Everyone from

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Speaker 1: KKR and Apollo to black Rock is all over it.

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Speaker 1: It's all the rage. You're in a somewhat different position though,

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Speaker 1: given your firms attachment to what we would call a

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Speaker 1: traditional lender, though of course Golden Sas is not really

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Speaker 1: a typical retail bank. So I just wanted to kind

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Speaker 1: of start by talking about the opportunity as you see it,

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Speaker 1: and what's the gold and Sacks edge when you think

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Speaker 1: about private credit.

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Speaker 2: Thank you, thank you for having me and asking the question.

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Speaker 2: And I would start by maybe stepping back and saying that,

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Speaker 2: you know, we have been in this market since nineteen

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Speaker 2: ninety six, and you know, for the last twenty seven

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Speaker 2: years we've really enjoyed it and explosive growth in private

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Speaker 2: credits and direct lending in particular. And so whilst you know,

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Speaker 2: some participants talk about a golden age, I think it

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Speaker 2: has been really the last three decades an amazing opportunity

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Speaker 2: for direct landing and and certany with with witnessed and

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Speaker 2: I joined these business twenty four years ago and we

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Speaker 2: have witnessed a lot of growth across a number of

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Speaker 2: strategies and also regions. You know, where where is our edge?

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Speaker 2: I think certainly you know, as I started by saying,

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Speaker 2: you know, having been around for a long time, you know,

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Speaker 2: being time tested through a number of cycles. Clearly, the

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Speaker 2: origination platform, I would say, is a real edge at Goldman.

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Speaker 2: It's how we work really hand in love with you know,

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Speaker 2: thousands of investment bankers all around the world that that

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Speaker 2: day to day connectivity, the trusts that we established on

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Speaker 2: both sides of our teams really that that is being

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Speaker 2: transcended by the one GS, which which is a huge

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Speaker 2: priority that you know, our executive office launched a few

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Speaker 2: years ago to really formalize what is effectively a way

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Speaker 2: to collaborate across across teams and across divisions, and something

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Speaker 2: that you know, we've done very well I think in

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Speaker 2: the last three decades between our private credit investing team

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Speaker 2: and all the other groups at the firm. And I

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Speaker 2: think it does give us an edge when we're you know,

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Speaker 2: dealing with you know, private equity owners of companies or

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Speaker 2: management teams. I think the ability to bring the firm

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Speaker 2: is something that we've refined over time, and I think

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Speaker 2: we're doing well and something is appreciated by the privaty

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Speaker 2: equity community, but also not only but also by our investors.

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Speaker 2: I think they do recognize that the origination platform is

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Speaker 2: highly differentiated.

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Speaker 3: So James Commensas is sort of unique among the global

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Speaker 3: banks for having a really strong leveraged finance group that

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Speaker 3: raises capital from higher bonds and average loan market, as

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Speaker 3: well as a really sizable direct lending platform that can

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Speaker 3: do both multi billion dollar deals at least participate in them.

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Speaker 3: So as direct lending is and bigger and starts eroding

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Speaker 3: into some of the investment banking share of the market,

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Speaker 3: how does Goman SAP navigate that? And and as other

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Speaker 3: banks try to sort of play into private credit, well,

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Speaker 3: how do you see that evolving?

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Speaker 2: Sure? And thanks Liza, and for us, that's not a

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Speaker 2: new phenomenon again because we've been operating very large vehicles

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Speaker 2: for for a long time, and so the ability to

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Speaker 2: to work well with our leveraged finance colleagues, I think it's,

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Speaker 2: you know, back to the edge. I think that's that's

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Speaker 2: one of the edge that we have this ability to

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Speaker 2: to go and peach together mandates and and also kind

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Speaker 2: of work together on large capital structures so that maybe

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Speaker 2: will anchor part of the capital structure, or maybe will

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Speaker 2: will anchor the junior part of the capital structure. When

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Speaker 2: you know the firm a underwrite another part of that structure,

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Speaker 2: and that ability to provide capital solutions to sponsors and

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Speaker 2: companies something that is truly unique. And there are situations

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Speaker 2: like take private where confidentiality is critical and so if

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Speaker 2: you can effectively speak to one party that can do

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Speaker 2: you know, the entire financing, either on our own or

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Speaker 2: together with leverage finance, and maybe also you'll get the

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Speaker 2: advisory from from Goldman. I think, you know, having that

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Speaker 2: kind of capital complete capital solution and advisory solution is

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Speaker 2: selt only very very different, and so we're used to

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Speaker 2: dealing with this. Actually I think you know, we we

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Speaker 2: we make the other side better and to make our

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Speaker 2: side better, and so that's that's very complimentary to have

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Speaker 2: both at Goldman. You know, we've noticed that all the

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Speaker 2: banks are also trying to figure out how to deal

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Speaker 2: with with private credit and direct lending, and every bank has,

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Speaker 2: you know, a different way maybe of dealing with it.

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Speaker 2: But I would say, you know, private credit is a

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Speaker 2: force to reckon with. It's going to stay. It's loud today,

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Speaker 2: it's approaching to trillion.

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Speaker 1: So you have about one hundred and ten billion in

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Speaker 1: assets right now dollars. You want to double that, what's

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Speaker 1: the time frame to get there and how do you

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Speaker 1: get there?

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Speaker 2: And we have we've not set a time frame, but

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Speaker 2: we're certainly ambitious here in our leadership team and all

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Speaker 2: our colleagues and and and we see great opportunities to grow.

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Speaker 2: And it comes from various strategies, and I would say

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Speaker 2: across different regions, right. And so if you think about

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Speaker 2: our platform, by the way, has doubled in the last

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Speaker 2: four years already to where we are today, we continue

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Speaker 2: to to be in the market and a number of strategies.

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Speaker 2: I think in the US, you know, we're getting into

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Speaker 2: larger financings. I think that's one way to grow, which

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Speaker 2: is to continue to penetrate the leverage finance market. Right

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Speaker 2: and and as you know, as as we do it,

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Speaker 2: maybe you know, either on our own or certainly or

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Speaker 2: maybe in club deals, you're seeing some of these private

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Speaker 2: financings getting to which you know, frankly maybe five years

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Speaker 2: ago would have been difficult to was certainly difficult to

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Speaker 2: execute and maybe even to imagine. And so that's one

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Speaker 2: way to grow here, which is, you know, just getting

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Speaker 2: a higher share of wallets of the entire leverage finance market.

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Speaker 2: But we're launching new strategies, we're going into new regions.

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Speaker 2: You know, Asia is an area of growth for us.

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Speaker 2: We continue to deploy a lot of capital in Europe,

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Speaker 2: for instance, even at times when M and A is slow.

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Speaker 2: We have the luxury of having a very large portfolio,

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Speaker 2: six hundred plus portfolio companies, and so staying close to

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Speaker 2: these companies provide us with lots of opportunities to continue

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Speaker 2: to deploy in this portfolio what we call the incumbency edge,

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Speaker 2: And certainly in twenty twenty three, a lot of what

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Speaker 2: we have deployed dollarwise came came from that portfolio. And

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Speaker 2: then you know, we have other ideas us when it

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Speaker 2: comes to private ig that's an area that we would

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Speaker 2: like to grow and get more into. And we think

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Speaker 2: we have again an edge here given at we're a bank,

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Speaker 2: and so we tend to traffic in the kind of

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Speaker 2: large corporate worlds or mid market corporate worlds.

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Speaker 1: In terms of the Asia opportunity you mentioned, is that

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Speaker 1: more on the lending side, in which case which countries

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Speaker 1: you mostly focus on, which sectors?

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Speaker 2: Yeah, I'm talking about credit here, and look, we've been

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Speaker 2: in Asia for a long time. We've been in Asia

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Speaker 2: for a long time, using our balance sheet initially and

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Speaker 2: then gradually transitioning away from only using the balance sheet

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Speaker 2: to having alignment of balance sheets alongside the party capital.

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Speaker 2: And so we've announced a few months ago a partnership.

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Speaker 2: We are active I was pretty much across Asia. We

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Speaker 2: have teams there by the way, located in the major market. Obviously,

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Speaker 2: government has been a formidable presence in Asia for a

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Speaker 2: very long time, multi multi decades. I think probably one

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Speaker 2: of the or if not the first, major US in

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Speaker 2: Esman Bank. And so we benefit from having this network

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Speaker 2: and having these long standing relationships with also the corporates

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Speaker 2: there sectors. I think when it comes to our dark

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Speaker 2: landing business, which you know we tend to really I

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Speaker 2: would say stick to our knitting around avoiding defaults, right.

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Speaker 2: And so the sectors in which we invest, whether it's

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Speaker 2: in the US, in Europeora in Asia, they tend to

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Speaker 2: be quite defensive and recession resilience. And you'll see the

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Speaker 2: same whether we invest in Australia or in India. And

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Speaker 2: then we have all our strategies where we look for

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Speaker 2: maybe higher reason but we're getting paid for it, and

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Speaker 2: they're in those strategies hybrid strategies. Then we've gone into

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Speaker 2: more sicly call sectors in Asia, including hospitality or other

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Speaker 2: type of more I would say, sickly call maybe retail

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Speaker 2: sectors or you know, we've we've invested in the golf

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Speaker 2: course or the largest operator in Japan for instance. We've

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Speaker 2: looked at the number of other I would say, probably

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Speaker 2: a bit different, and trying to bring capital solutions always

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Speaker 2: to these corporates and the owners of those companies.

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Speaker 1: In terms of fundraising, I mean, to get those assets

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Speaker 1: over two hundred billion. What's your first port of call

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Speaker 1: these as you flying more to Dubai or is it

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Speaker 1: Toronto or is it Sydney? Where are you going?

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Speaker 2: What's interesting about this environment is and it's helpful to

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Speaker 2: have many voices, by the way, to have you know, competitors, peers,

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Speaker 2: other platforms talk about private credits so that you know,

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Speaker 2: they can also educate the market and educate LPs. And

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Speaker 2: so to your question, we're flying and I'm flying everywhere literally,

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Speaker 2: I mean twenty twenty three it was a heavy europhone

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Speaker 2: raising for us, a successful one, and the nature of

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Speaker 2: our investor base is very diversified. I think that's one

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Speaker 2: of the strengths of our platform, you know, institutions, pension phones,

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Speaker 2: insurance companies, sovereigned but also wealth management clients. And we're

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Speaker 2: fortunate to have also long standing and loyal LPs on

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Speaker 2: our platform. I mean again into back to our roots.

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Speaker 2: We started in nineties, and you know, when we launched

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Speaker 2: our first new dig landing phone in two thousand and

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Speaker 2: early two thousand and eight, we were heavy, heavily invested

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Speaker 2: or heavy partner up with European pension phones. And today

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Speaker 2: we're really diversified across the world. And what's interesting here

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Speaker 2: is that we're still getting a lot of new investors,

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Speaker 2: new logos, and that's really important because we think that

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Speaker 2: if we do a good job at delivering the returns,

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Speaker 2: having you know, this kind of close intimate relationships with

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Speaker 2: our investors, hopefully they will want to continue to be

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Speaker 2: with us. And we take a long term view here.

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Speaker 2: As I said earlier, I've been doing this for twenty

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Speaker 2: four years, and we take the long term view. We

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Speaker 2: want to make sure that we provide a good customer

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Speaker 2: experience to our investors.

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Speaker 4: Hey, James, it's David Havens here. Switch it up a

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Speaker 4: little bit. Big picture question, Golden Sachs. It's it's sort

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Speaker 4: of the nexus of just about everything in global finance,

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Speaker 4: except for maybe sort of the mass affluent market. You've got,

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Speaker 4: you know, investment banking, contacts, contacts, private wealth, limited partnerships,

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Speaker 4: et cetera, et cetera. There have been a number of

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Speaker 4: incentives and disincentives that have caused the corporate credit market

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Speaker 4: to change over the course of the last five, ten,

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Speaker 4: twenty years or so. Where do we stand today, Like,

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Speaker 4: isn't it the job of banks to lend to companies?

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Speaker 4: I went through a credit training program a chemical bank

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Speaker 4: way back when, and that's what we used to do.

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Speaker 4: But it doesn't seem like banks do that much anymore.

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Speaker 2: I think they still do that job, by the way,

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Speaker 2: maybe in a slightly different form or maybe slightly different strategies.

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Speaker 2: But we're not saying, by the way that you know,

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Speaker 2: the banks will still be in the market. I actually think,

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Speaker 2: you know, when we started in knowil seven o eight,

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Speaker 2: and we would do a financing alongside us, if we're

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Speaker 2: not the sole lender, we would have banks. And I

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Speaker 2: think you know, now you see actually this type of

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Speaker 2: collaboration partnership come back, and you know, there are situations

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Speaker 2: that are totally private with a club deal of dark

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Speaker 2: lenders and others that I could well see banks work

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Speaker 2: with dark landers, and so I think you'll continue to see,

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Speaker 2: you know, lending to good corporates too, high quality companies

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Speaker 2: is a good business obviously the banks. I've gone through

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Speaker 2: a number of regulation in the US and in Europe

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Speaker 2: that we've had to comply with and adapt to ourselves.

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Speaker 2: But I do think that you could see, you know,

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Speaker 2: this kind of collaboration work between between banks and uh

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Speaker 2: and and other forms of capital and celtany. You know

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Speaker 2: that we we bring that to our advantage internally. As

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Speaker 2: I was saying earlier, you know, to the question around

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Speaker 2: the edge, we we bring into our advantage. The one

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Speaker 2: thing that has changed maybe between when I started in

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Speaker 2: two thousand and and today, the banks have incredible origination platforms,

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Speaker 2: right and we certainly benefit from from it at at

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Speaker 2: Goldman Sacks. But when I started, maybe twenty plus years ago,

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Speaker 2: the banks would hold more on their balance sheets. Whilst

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Speaker 2: you know, maybe they started, you know, the movement from

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Speaker 2: under from holding on the balance sheets to underwriting and syndicating,

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Speaker 2: and that that movement we've seen probably nearly two thousands

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Speaker 2: I think the banks today, whilst they continue to be

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Speaker 2: very active in certainly in direct lending, they probably hold

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Speaker 2: less on their balance sheets to be fair. And then

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Speaker 2: you know that that would that would depend yeah, exactly,

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Speaker 2: also from banks to banks exactly.

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Speaker 4: And I think that according to some of the data

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Speaker 4: that we have a Bloomberg intelligence, it looks like twenty

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Speaker 4: twenty two twenty three was actually the first year where

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Speaker 4: non non non bank financial institutions made more loans to

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Speaker 4: corporations than banks actually did, which is which is interesting.

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Speaker 2: I think that's right. And also in the market has

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Speaker 2: been dislocated. Yes, let's face it, right, I mean we

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Speaker 2: are in between markets. Yeah, and we came from twenty

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Speaker 2: twenty one lots of activity and then rates certainly shot up,

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Speaker 2: and that really shook up the fixing call market. Hence

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Speaker 2: the banks were not as active.

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Speaker 3: To your point that banks needs to hold more of

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Speaker 3: this lending. When I look at the direct lending market,

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Speaker 3: it looks early similar to the early days of the

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Speaker 3: leverage law market, where banks needs to hold more and

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Speaker 3: things didn't trade. So when you look forward to direct lending,

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Speaker 3: do you expect trading activity to start picking up? I

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Speaker 3: know there is some trading just for liquidity purposes, but

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Speaker 3: more of that and perhaps at different levels. And if

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Speaker 3: that happens, and what happens to the liquidity premium that

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Speaker 3: you guys.

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Speaker 2: Enjoy and thanks Liza. I think, first of all, when

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Speaker 2: we commit capital, we have pre syndicated it. It's by

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Speaker 2: having fund raised and our investors are, in particular the

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Speaker 2: institutional investors, they're patients. This is patient capital, this is

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Speaker 2: long term patient capital, and so we don't have the

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Speaker 2: need to go and sell our positions, right, I mean,

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Speaker 2: we can hold on to our loand for a very

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Speaker 2: long time, and so that that's a major advantage of

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Speaker 2: dark glanders for instance. Now, what you may see at

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Speaker 2: the start, you know, when you put together a financing,

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Speaker 2: is that a lot of our investors quite enjoy having

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Speaker 2: co investment opportunities, and so we may commit for a

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Speaker 2: bit more with a view that some of our key

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Speaker 2: large LPs could get access to co investment opportunities. This way,

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Speaker 2: I think to the point that you're making, and very

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Speaker 2: similar to what we have seen in the private equity

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Speaker 2: industry as we saw the explosive growth of private equity

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Speaker 2: and as a result, you know, the first derivative is

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Speaker 2: going to be secondary, and I think you're going to

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Speaker 2: see you know, the staff and it's already started, and

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Speaker 2: I think it's going to be a much much larger

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Speaker 2: business of a credit secondary as a class. By the way,

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Speaker 2: you start hearing about maybe some LPs that would like

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Speaker 2: maybe to sell positions, and you know, there's there's a

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Speaker 2: growing market here. And so whilst the underlying is ill

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Speaker 2: liquid I think at the LP level, I think we're

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Speaker 2: going to see growth of credit secondary where LPs can

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Speaker 2: effectively fine liquidity in this in this way as well. Right,

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Speaker 2: And we're quite excited actually about these market development. When

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Speaker 2: you have an asset class that is getting close to

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Speaker 2: two trillion dollar, you're certainly going to see you know,

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Speaker 2: some some more strategies kind of flourishing out of the growth. Right.

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Speaker 4: And we've we've also obviously, as you mentioned, we've seen

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Speaker 4: quite a bit of growth that we've words probably come

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Speaker 4: up quite a bit in this conversation. Uh, private equity credit,

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Speaker 4: I'm sorry, private credit has kind of gone mainstream. Maybe

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Speaker 4: you can spend a few minutes talking about terms and conditions.

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Speaker 4: You're seeing terms and conditions in the market evolving as

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Speaker 4: newer entrants come in as sort of new quote unquote

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Speaker 4: technologies are employed in the private credit.

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Speaker 2: Space absolutely, And to the point you just made around mainstream,

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Speaker 2: I think, you know, we collectively need to just demystify

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Speaker 2: what we do, which is, in simple words, you know,

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Speaker 2: lending to corporates. And but yeah, look the terms and

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Speaker 2: conditions they do vary depending on market conditions, right, And

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Speaker 2: so if you you need to step back and look

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Speaker 2: at long period of time, you know, ten twenty years,

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Speaker 2: and you certainly see a direk correlation of the activity

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Speaker 2: of direct lending with dishuans of loans, right, So that

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Speaker 2: really means that even when the banks are back on

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Speaker 2: the writing, you have certainly more volume in the markets,

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Speaker 2: more and many activity, more volume. I think that's overall

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Speaker 2: good for the industry as well. When when you see

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Speaker 2: a drop in loan issuance, when the markets turn more

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Speaker 2: volatile and less MNA activity, what you see is, you know,

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Speaker 2: less volume in direct lending, but you see somewhat higher pricing,

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Speaker 2: maybe wider origination fees. And I would say probably we

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Speaker 2: as an industry have more leverage when we negotiate documentation,

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Speaker 2: and so the documentation tends to be maybe a bit

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Speaker 2: tighter in those kind of cycles where volativity is hitting.

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Speaker 2: I mean, as we saw the rates increase, for instance,

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Speaker 2: in twenty twenty two, what happened is sponsors management teams

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Speaker 2: were very focused on leverage ability of these assets and

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Speaker 2: you know, what the true casual generation coming out of

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Speaker 2: the corporate and how much you know, kind of quantum

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Speaker 2: of that can this corporate effectively sustain. And what you

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Speaker 2: saw as a result was lower leverage levels for the

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Speaker 2: crop of deals that happened, I would say from me

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Speaker 2: twenty twenty two and the subsequent year and a half.

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Speaker 2: And so those those terms, you know, they tend to

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Speaker 2: vary very much dependent on market relativity and market conditions.

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Speaker 1: So as you know, James, you've been doing this a while,

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Speaker 1: typically what blows up in finances what's just been growing

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Speaker 1: the most quickly. Private credit is growing very quickly, and

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Speaker 1: we've had a lot of guests on this show talking about,

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Speaker 1: you know, red flags the speed of the market's growth.

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Speaker 1: It's already bigger than the US highyeld bond market, which

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Speaker 1: took a lot longer to get there. Plus the lack

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Speaker 1: of transparency and liquidity and the risks of companies just

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Speaker 1: falling behind on debt payments rates stay high for much

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Speaker 1: longer than people had expected. There's also the fear that

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Speaker 1: new entrants will spoil the party. You know, that the

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Speaker 1: so called private debt tourists will do bad underwriting that

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Speaker 1: ends in tiers and some people just calling it a bubble. So,

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Speaker 1: you know, what do you think about that.

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Speaker 2: It's a love of a lot of themes here. I

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Speaker 2: think at the core of direct landing it's all about

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Speaker 2: credit discipline, underwriting discipline. And you know, we've been doing

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Speaker 2: this for twenty seven years. If you stick to lending

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Speaker 2: to very high quality businesses and the discipline and you

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Speaker 2: don't lose that discipline, you don't get the POMO. You know,

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Speaker 2: our experience, you know, through those more volatile environments or

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Speaker 2: even crises like the GFC, you know, the these these

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Speaker 2: corporates that tend to be more resilient I have certainly proven

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Speaker 2: to be the case. And so will we see more dispersion,

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Speaker 2: Absolutely we will. You know, there's been very little dispersion

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Speaker 2: for about ten years, as as the rates were low

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Speaker 2: or even negative, and so I think, you know, in

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Speaker 2: this environment of the system, you know, kind of receiving

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Speaker 2: a shock, a certain shock I think you'll see that

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Speaker 2: managers will fare very differently over time. It will be

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Speaker 2: it will be seen in their ability to raise capital.

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Speaker 2: And and it's no different than you know, when I started.

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Speaker 2: You know, there were names on the private EQUII that

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Speaker 2: don't exist anymore, right, and so I think you're going

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Speaker 2: to see you know, more of that. Obviously, this is

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Speaker 2: these are the pride markets. Things tend to take some time.

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Speaker 2: Another advantage that you have as a lender is that

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Speaker 2: you can things don't go according to plan, and as

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Speaker 2: a you know, a default, a lender can also take

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Speaker 2: over an asset and then continue as as as the

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Speaker 2: owner of the asset. And so that that's why I

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Speaker 2: think to play out and be able to say, well,

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Speaker 2: this was a good vintage or not, and and this

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Speaker 2: is what the average prior credit returns have been. Well,

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Speaker 2: we'll have to have another podcast probably in about eight

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Speaker 2: to ten years.

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Speaker 1: Now we're going into you know, the slower economy. Earnings

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Speaker 1: of suffering rates are still going to stay high. It's

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Speaker 1: a tougher environment than let's say, last year or the

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Speaker 1: year before.

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Speaker 2: I wouldn't say so. When we look at the performance

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Speaker 2: of our portfolio companies, it remains very resilient, and it's

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Speaker 2: really surprised us too. On the upside, I would say

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Speaker 2: including you know, I would say around twenty twenty one,

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Speaker 2: when inflation was running very high and out of twenty

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Speaker 2: twenty two, we saw our companies in particular having pricing

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Speaker 2: power and having the ability to maintain their operating mal genes.

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Speaker 2: So I wouldn't say that it's a more complicated environment

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Speaker 2: given the slowdown in the macro. That is not what

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Speaker 2: we're experiencing our portfolio.

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Speaker 3: For instance, James, you recently got a new title Global

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Speaker 3: Head of Direct Lending. When you look at US and

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Speaker 3: Europe and you look at the opportunities there, especially as

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Speaker 3: inflation seems to be monitoring at a different pace between

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Speaker 3: the two regions, where do you see the better opportunities.

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Speaker 2: I wouldn't say better opportunities, but certainly I would say

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Speaker 2: in terms of size of the opportunity set right now.

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Speaker 2: Clearly the US market has woken up and shown signs

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Speaker 2: of activity earlier than the European market. So starting in

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Speaker 2: June of last year July, we started seeing a lot

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Speaker 2: of processes, you know, buyers and sellers, kind of a

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Speaker 2: green price and hand you know, the second half of

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Speaker 2: the year for US was very busy, in particular in

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Speaker 2: the US. It's also a bigger market size wise, and

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Speaker 2: so we're very active across the world. But I would

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Speaker 2: say probably in the last six months and getting into

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Speaker 2: twenty twenty four, we're seeing more opportunities in the US. Now.

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Speaker 2: If I step back and I look at twenty twenty three,

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Speaker 2: sixty percent of our deployment globally happen in Q four, right,

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Speaker 2: and so you can see the optic of activity. And

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Speaker 2: I think everybody's talking, you know, CEO banks are also

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Speaker 2: talking and seeing that you know, self, working with r

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Speaker 2: M and A colleagues, we sent you know, a renewed

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Speaker 2: optimism here about activity in the US but also but

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Speaker 2: also in Europe, and we tend to see that activity

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Speaker 2: very early on, given that you know, we have our

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Speaker 2: colleagues kind of winning mandates for sales side byside, and

434
00:26:27,320 --> 00:26:30,280
Speaker 2: usually takes six months for those deals to happen. So

435
00:26:30,920 --> 00:26:35,199
Speaker 2: I think I'm optimistic that twenty twenty four could be

436
00:26:35,680 --> 00:26:39,080
Speaker 2: a more active year in terms of deployment. As I

437
00:26:39,119 --> 00:26:43,439
Speaker 2: said earlier, it's all about deploying well and being disciplined.

438
00:26:43,480 --> 00:26:46,600
Speaker 2: So it's not about the volume, but I you know,

439
00:26:46,680 --> 00:26:49,680
Speaker 2: I see our teams and the pipeline across various regions

440
00:26:49,720 --> 00:26:53,520
Speaker 2: really having stepped up in the last couple of quarters.

441
00:26:54,080 --> 00:26:56,320
Speaker 3: So EM and A after is picking up. So when

442
00:26:56,320 --> 00:26:58,199
Speaker 3: should we start to see some big M and A,

443
00:26:58,480 --> 00:27:01,760
Speaker 3: especially LBO deals which quite a bit of financing to

444
00:27:01,760 --> 00:27:04,600
Speaker 3: get done. When we should we start seeing those announced?

445
00:27:05,840 --> 00:27:09,600
Speaker 2: Look, in all fairness, we've already started seeing deals being

446
00:27:09,600 --> 00:27:13,160
Speaker 2: announced in Q four, certainly in the US, but also

447
00:27:13,760 --> 00:27:17,040
Speaker 2: in Europe. There were a number of situations announced pably

448
00:27:17,080 --> 00:27:22,560
Speaker 2: too private for instance, But it takes time for these

449
00:27:22,600 --> 00:27:25,800
Speaker 2: processes to play out. And I think what happened in

450
00:27:25,800 --> 00:27:28,359
Speaker 2: twenty twenty two, twenty twenty three is that usually you

451
00:27:28,359 --> 00:27:31,840
Speaker 2: would have a gap between you know, the buyer and

452
00:27:31,880 --> 00:27:36,639
Speaker 2: the seller, and you know that gap remains. And I think,

453
00:27:37,040 --> 00:27:40,520
Speaker 2: certainly anecdotally, when I looked at the number of situations

454
00:27:40,560 --> 00:27:43,480
Speaker 2: in Q four, it seemed that, you know, buyers and

455
00:27:43,520 --> 00:27:47,600
Speaker 2: sellers were getting much closer in terms of their respective

456
00:27:47,640 --> 00:27:50,960
Speaker 2: expectations to transact. I think that bodes well. I think

457
00:27:51,000 --> 00:27:55,280
Speaker 2: on top of these, given the lack of harvest and

458
00:27:55,359 --> 00:27:57,960
Speaker 2: exit in the last eighteen months for the private equity industry,

459
00:27:58,480 --> 00:28:03,240
Speaker 2: certainly their investors there LPs are also demanding some you

460
00:28:03,320 --> 00:28:08,000
Speaker 2: know what's called DPI, so distribution and so. And if

461
00:28:08,040 --> 00:28:10,920
Speaker 2: the rates you know, go down, which you know might

462
00:28:10,960 --> 00:28:14,840
Speaker 2: be the expectations of experts, I think, you know, you

463
00:28:15,359 --> 00:28:21,000
Speaker 2: have a number of factors that certainly could fuel higher

464
00:28:21,080 --> 00:28:22,600
Speaker 2: activity in twenty twenty four.

465
00:28:23,280 --> 00:28:25,919
Speaker 1: This year, James, do you expect the default rate in

466
00:28:25,960 --> 00:28:28,000
Speaker 1: private credit to be higher or lower than last year?

467
00:28:28,760 --> 00:28:30,080
Speaker 2: It's it's a difficult question.

468
00:28:30,240 --> 00:28:31,639
Speaker 3: But the.

469
00:28:33,320 --> 00:28:35,880
Speaker 2: You know, plus you know, we don't have a crystal ball,

470
00:28:36,040 --> 00:28:38,280
Speaker 2: so no idea what may happen in the market and

471
00:28:38,320 --> 00:28:40,800
Speaker 2: what shock you know, we may see or not see.

472
00:28:40,880 --> 00:28:44,880
Speaker 2: So but usually the default happened after, you know, a

473
00:28:44,920 --> 00:28:49,760
Speaker 2: few years of stress in the company. They rarely happened overnight,

474
00:28:49,920 --> 00:28:55,720
Speaker 2: although certainly when everybody went into lockdown in March twenty

475
00:28:55,800 --> 00:29:00,040
Speaker 2: twenty it created a sudden shock. But that's unusual. I

476
00:29:00,040 --> 00:29:03,280
Speaker 2: would say, usually you have some sort of red flags

477
00:29:03,480 --> 00:29:10,560
Speaker 2: for a while before a company declaredes and effective default.

478
00:29:10,640 --> 00:29:14,880
Speaker 2: And I think in the market there's been a steady

479
00:29:15,520 --> 00:29:21,840
Speaker 2: but slow increase in default rates across sectors, by the way,

480
00:29:23,040 --> 00:29:26,080
Speaker 2: not necessarily only linked to you know, the sickly goals

481
00:29:26,120 --> 00:29:29,440
Speaker 2: and so on across sectors. We're monitoring carefully. I think,

482
00:29:29,480 --> 00:29:32,400
Speaker 2: you know, more importantly, we're focused on our portfolio and

483
00:29:32,440 --> 00:29:35,960
Speaker 2: making sure that our companies are healthy and so far touchoo,

484
00:29:36,040 --> 00:29:37,800
Speaker 2: but that is deltenly the case.

485
00:29:38,280 --> 00:29:41,800
Speaker 1: And when you look across everything that you currently cover,

486
00:29:42,200 --> 00:29:44,960
Speaker 1: which is a lot, what is the best opportunity for

487
00:29:45,000 --> 00:29:48,160
Speaker 1: twenty twenty four. You know, you can talk about sectors,

488
00:29:48,160 --> 00:29:50,480
Speaker 1: you can talk about regions, talk about country if you want,

489
00:29:50,840 --> 00:29:53,680
Speaker 1: but as specifically as possible, if you had to put

490
00:29:53,680 --> 00:29:55,840
Speaker 1: your money somewhere in private credit this year, where would

491
00:29:55,840 --> 00:29:56,040
Speaker 1: it be?

492
00:29:57,440 --> 00:30:01,440
Speaker 2: You know, all we love all our kids and we

493
00:30:01,440 --> 00:30:04,040
Speaker 2: put our money or we try to put it everywhere.

494
00:30:05,040 --> 00:30:07,560
Speaker 2: As as employees, you know, we invest in in a

495
00:30:07,560 --> 00:30:10,360
Speaker 2: lot of different strategies. And I'm not trying not to

496
00:30:10,400 --> 00:30:12,880
Speaker 2: answer the question, but that that is really what we're

497
00:30:12,920 --> 00:30:16,240
Speaker 2: doing here. We're pursuing a number of strategies existing where

498
00:30:16,240 --> 00:30:19,000
Speaker 2: we're trying to be bigger and new, where we're trying

499
00:30:19,040 --> 00:30:22,040
Speaker 2: to effectively launch, and we're doing all of these at

500
00:30:22,040 --> 00:30:24,920
Speaker 2: the same time. We're fortunate that we've got the support

501
00:30:25,000 --> 00:30:28,480
Speaker 2: of our executive office. I think very openly they talk

502
00:30:28,560 --> 00:30:33,000
Speaker 2: about asset wealth management and prior credit in particular, and

503
00:30:33,040 --> 00:30:36,840
Speaker 2: so they're getting used now to answering questions about prior credit.

504
00:30:37,360 --> 00:30:41,440
Speaker 2: It certainly helps us internally to get support, you know,

505
00:30:41,600 --> 00:30:46,720
Speaker 2: in infrastructure, hiring more and getting you know, the backing

506
00:30:46,800 --> 00:30:48,200
Speaker 2: of Goldman Sacks.

507
00:30:48,800 --> 00:30:51,240
Speaker 1: And on the risk you kind of boil it down

508
00:30:51,280 --> 00:30:53,080
Speaker 1: to just avoid the faults, which is kind of easier

509
00:30:53,080 --> 00:30:55,600
Speaker 1: said than done. Is there a specific week link in

510
00:30:55,640 --> 00:30:57,640
Speaker 1: the system. Is there a week sector or a you know,

511
00:30:57,640 --> 00:30:59,520
Speaker 1: a week kind of borrow that you really have to avoid?

512
00:31:01,040 --> 00:31:04,400
Speaker 2: I wouldn't say so. And also various rategies may have

513
00:31:04,520 --> 00:31:08,680
Speaker 2: various resk appetites and hence also expected returns, so I

514
00:31:08,720 --> 00:31:13,160
Speaker 2: wouldn't say so, but certainly on the performing direct lending sides,

515
00:31:13,920 --> 00:31:16,520
Speaker 2: where I was saying earlier that you know the name

516
00:31:16,520 --> 00:31:19,680
Speaker 2: of the game is really to avoid default, because that's

517
00:31:19,800 --> 00:31:24,560
Speaker 2: how effectively your returns will be measured. Eventually, we tend

518
00:31:24,560 --> 00:31:28,280
Speaker 2: to stick to stable and defensive sectors and not really

519
00:31:28,960 --> 00:31:32,360
Speaker 2: look at the sikly calls or not even wanting to

520
00:31:32,400 --> 00:31:34,840
Speaker 2: price Sikly calls. Great stuff.

521
00:31:34,960 --> 00:31:37,400
Speaker 1: James Reynolds, Global head of direct Lending at Golden Sechs.

522
00:31:37,440 --> 00:31:38,720
Speaker 1: Great to have you on the credit edge.

523
00:31:38,760 --> 00:31:40,360
Speaker 2: Thank you very much, and please do.

524
00:31:40,360 --> 00:31:42,040
Speaker 1: Come back on the show on all the best of

525
00:31:42,040 --> 00:31:44,200
Speaker 1: twenty twenty four. I also want to say big thanks

526
00:31:44,200 --> 00:31:46,400
Speaker 1: to Lisa Lee of Bloomberg News in London. Brilliant to

527
00:31:46,440 --> 00:31:46,920
Speaker 1: have you again.

528
00:31:47,000 --> 00:31:48,680
Speaker 3: Thanks, thank you so much.

529
00:31:49,400 --> 00:31:52,160
Speaker 1: So David Havens with Bloomberg Intelligence in New York. You

530
00:31:52,200 --> 00:31:55,640
Speaker 1: look at the BDC's, the business development companies, they're all

531
00:31:55,680 --> 00:31:58,320
Speaker 1: going public. Now what's that all about? Is this the top?

532
00:31:58,400 --> 00:32:00,520
Speaker 1: Is this the end of private credit? Is it downhill

533
00:32:00,520 --> 00:32:01,360
Speaker 1: from Hey? What's going on?

534
00:32:02,240 --> 00:32:04,640
Speaker 4: Well? I guess it depends on who you ask. There

535
00:32:04,640 --> 00:32:06,920
Speaker 4: are some people that will if you were to liken

536
00:32:06,960 --> 00:32:10,920
Speaker 4: it to a baseball game, some people would say, we're

537
00:32:11,000 --> 00:32:13,400
Speaker 4: not even in the in the first inning, yet we're

538
00:32:13,400 --> 00:32:16,240
Speaker 4: still in spring training in terms of where we are

539
00:32:16,240 --> 00:32:18,600
Speaker 4: in a nine inning baseball game. Other people will say

540
00:32:18,680 --> 00:32:22,959
Speaker 4: that the cycle could be problematic, particularly if we're in

541
00:32:23,080 --> 00:32:26,840
Speaker 4: a recession or have a recession. Why is money coming

542
00:32:26,840 --> 00:32:28,800
Speaker 4: into the sector. I think money is coming into the

543
00:32:28,840 --> 00:32:34,360
Speaker 4: sector because it's performed well. Default rates across BDC's, which

544
00:32:34,360 --> 00:32:36,600
Speaker 4: are about two hundred and fifty billion dollars in total

545
00:32:36,640 --> 00:32:41,040
Speaker 4: assets right now, have been minimal, which I think comes

546
00:32:41,080 --> 00:32:45,200
Speaker 4: as a surprise to many observers. Given the move that

547
00:32:45,240 --> 00:32:47,640
Speaker 4: we've had in rates, the stress that that place is

548
00:32:47,640 --> 00:32:52,320
Speaker 4: on interest costs for highly leveraged companies, the investments that

549
00:32:52,320 --> 00:32:54,800
Speaker 4: they've made have held up well. And I think that

550
00:32:54,800 --> 00:32:59,080
Speaker 4: there's a general view that private credit has gone mainstream

551
00:32:59,560 --> 00:33:05,200
Speaker 4: and BDCs are a way for private investors public investors

552
00:33:05,240 --> 00:33:08,880
Speaker 4: to play the credit market and earn a nice dividend

553
00:33:08,920 --> 00:33:09,560
Speaker 4: in the process.

554
00:33:10,120 --> 00:33:13,160
Speaker 1: So the IPOs aren't assigned necessarily of a top it's

555
00:33:13,200 --> 00:33:15,720
Speaker 1: just these BDCs. It is a chance for them to

556
00:33:15,800 --> 00:33:19,040
Speaker 1: raise funding more cheaply or more efficiently elsewhere.

557
00:33:19,760 --> 00:33:23,720
Speaker 4: It's I think that what we're seeing is companies want

558
00:33:23,760 --> 00:33:27,719
Speaker 4: to they see a growth opportunity, and they want to

559
00:33:27,760 --> 00:33:31,920
Speaker 4: diversify their sources of capital as much as possible. So

560
00:33:32,400 --> 00:33:36,320
Speaker 4: having access to public capital markets gives them a currency

561
00:33:36,480 --> 00:33:38,880
Speaker 4: that they can use to to grow further, that they

562
00:33:38,880 --> 00:33:43,600
Speaker 4: can use to to make acquisitions. So it's a dynamically

563
00:33:43,640 --> 00:33:47,080
Speaker 4: growing segment, and you tend to see companies that tap

564
00:33:47,120 --> 00:33:50,000
Speaker 4: the public markets when when you've got some dynamic growth

565
00:33:50,000 --> 00:33:50,360
Speaker 4: going on.

566
00:33:51,040 --> 00:33:53,360
Speaker 1: So you would on the call just now with James

567
00:33:53,440 --> 00:33:56,840
Speaker 1: Reynolds with Golden Sachs, head of direct Lending, there he

568
00:33:57,000 --> 00:34:00,600
Speaker 1: sounds very positive to me, very bullish. He's seems to

569
00:34:00,640 --> 00:34:04,480
Speaker 1: not think it's a bubble or a risky market right now.

570
00:34:04,880 --> 00:34:09,120
Speaker 1: Obviously he's, you know, in the game of telling people

571
00:34:09,640 --> 00:34:12,120
Speaker 1: it's growing because he's trying to raise assets. But from

572
00:34:12,120 --> 00:34:15,759
Speaker 1: your perspective, David, is it riskier than he's making it

573
00:34:15,760 --> 00:34:17,880
Speaker 1: seem it's risky.

574
00:34:19,000 --> 00:34:21,239
Speaker 4: Risky doesn't mean that you're going to end that it's

575
00:34:21,239 --> 00:34:24,879
Speaker 4: going to end in tiers. Necessarily, risk means that there's risk,

576
00:34:24,960 --> 00:34:27,960
Speaker 4: and if you can manage that risk, then you can

577
00:34:27,960 --> 00:34:33,279
Speaker 4: do quite well. Goldman certainly seems to have the intellectual

578
00:34:33,320 --> 00:34:37,000
Speaker 4: horsepower and experience to manage credit risk very well, and

579
00:34:37,040 --> 00:34:39,399
Speaker 4: it's done so for a number of years. The way

580
00:34:39,440 --> 00:34:41,279
Speaker 4: that I like in it too, is is that if

581
00:34:41,320 --> 00:34:43,480
Speaker 4: you sort of think about the credit markets as one

582
00:34:43,560 --> 00:34:46,960
Speaker 4: gigantic ski hill, you've got expert terrain, and you've got

583
00:34:47,320 --> 00:34:51,680
Speaker 4: you've got terrain for low risk players. Low risk players

584
00:34:51,719 --> 00:34:53,440
Speaker 4: might take the magic carpet, and that would be the

585
00:34:53,440 --> 00:34:56,680
Speaker 4: government bond market or the muni market or something high

586
00:34:56,760 --> 00:35:02,560
Speaker 4: grade investment grade credits. The BBC's and private credit to

587
00:35:02,600 --> 00:35:05,600
Speaker 4: some extenter are on the double black diamonds there. They're

588
00:35:05,640 --> 00:35:09,080
Speaker 4: going down areas where they're cliffs, but they're prepared, they've

589
00:35:09,120 --> 00:35:12,640
Speaker 4: been through this before, they're familiar with the terrain. There's

590
00:35:12,640 --> 00:35:15,000
Speaker 4: always danger out there, but if you're familiar with the

591
00:35:15,080 --> 00:35:17,520
Speaker 4: terrain and you've got the capabilities, you can manage that risk.

592
00:35:17,640 --> 00:35:20,600
Speaker 4: Usually that's what that's that seems to be what's going

593
00:35:20,680 --> 00:35:23,640
Speaker 4: on right now. The biggest risk from my point of view,

594
00:35:23,800 --> 00:35:28,319
Speaker 4: is an exogenous factor, is some sort of geopolitical you know,

595
00:35:28,640 --> 00:35:32,640
Speaker 4: uh thing that we haven't anticipated yet. So it's it's

596
00:35:33,080 --> 00:35:35,440
Speaker 4: it's if you're looking out for buses that are going

597
00:35:35,520 --> 00:35:38,800
Speaker 4: to hit you in Credit, you're going to see the

598
00:35:38,840 --> 00:35:41,040
Speaker 4: buses coming. It's the one that you don't see that's

599
00:35:41,080 --> 00:35:43,399
Speaker 4: going to cause the problem. So right now we see

600
00:35:43,400 --> 00:35:44,960
Speaker 4: it seems to me that we see a lot of

601
00:35:44,960 --> 00:35:46,120
Speaker 4: the buses out there.

602
00:35:46,320 --> 00:35:48,880
Speaker 1: Wise words, and it's also skiing seasons. Are those analogies

603
00:35:49,120 --> 00:35:52,000
Speaker 1: hit home. Thank you so much, David Havens at Bloomberg Intelligence,

604
00:35:52,040 --> 00:35:54,080
Speaker 1: and we look forward to reading all of your analysis

605
00:35:54,120 --> 00:35:57,880
Speaker 1: on the Bloomberg terminal. Thank you, James, and thanks also

606
00:35:57,960 --> 00:36:00,920
Speaker 1: to James Reynolds, Global head of direct at Girl and Sechs.

607
00:36:01,120 --> 00:36:02,719
Speaker 1: It was great to have him on the Credit edge.

608
00:36:02,760 --> 00:36:05,080
Speaker 1: We look forward to having him back, and to Lisa

609
00:36:05,120 --> 00:36:09,160
Speaker 1: Lee with Bloomberg News in London. Please do subscribe wherever

610
00:36:09,200 --> 00:36:12,000
Speaker 1: you get your podcasts. We're on Apple, Google and Spotify.

611
00:36:12,200 --> 00:36:14,200
Speaker 1: Give us a review, tell your friends, or email me

612
00:36:14,239 --> 00:36:17,759
Speaker 1: directly at JCROMB eight at Bloomberg dot net. That's j

613
00:36:18,000 --> 00:36:19,560
Speaker 1: c R O M B I E as in my

614
00:36:19,680 --> 00:36:23,800
Speaker 1: name the number eight at Bloomberg dot net. I'm James Cromby.

615
00:36:24,200 --> 00:36:26,439
Speaker 1: It's been a pleasure having you join us again next

616
00:36:26,440 --> 00:36:28,440
Speaker 1: week on the Credit Edge