Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome James Reynolds, Global
Speaker 1: head of direct Lending at Goldman Sachs. How are you, James.
Speaker 2: I'm doing very well. Thank you for having me.
Speaker 1: Thank you so much for joining us today. We're really
Speaker 1: looking forward to getting your take on the credit markets.
Speaker 1: We're also delighted to welcome back Bloomberg's own Lisa Lee.
Speaker 1: How are you, Lisa fine?
Speaker 3: Thank you.
Speaker 1: Lisa covers credit markets from London, and it's great to
Speaker 1: see you again. And from Bloomberg Intelligence. It's great to
Speaker 1: see David Havens, who's based in New York. How are you, David.
Speaker 4: I'm very good, looking forward to a little bit of
Speaker 4: snow to it here tomorrow, So.
Speaker 1: Let's start with you, James. Welcome. We spent a lot
Speaker 1: of time on this show talking to private debt. Investment
Speaker 1: is about what's widely being described as a golden age
Speaker 1: for this very fast growing market. The so called non
Speaker 1: banks are really very excited about the opportunity. Everyone from
Speaker 1: KKR and Apollo to black Rock is all over it.
Speaker 1: It's all the rage. You're in a somewhat different position though,
Speaker 1: given your firms attachment to what we would call a
Speaker 1: traditional lender, though of course Golden Sas is not really
Speaker 1: a typical retail bank. So I just wanted to kind
Speaker 1: of start by talking about the opportunity as you see it,
Speaker 1: and what's the gold and Sacks edge when you think
Speaker 1: about private credit.
Speaker 2: Thank you, thank you for having me and asking the question.
Speaker 2: And I would start by maybe stepping back and saying that,
Speaker 2: you know, we have been in this market since nineteen
Speaker 2: ninety six, and you know, for the last twenty seven
Speaker 2: years we've really enjoyed it and explosive growth in private
Speaker 2: credits and direct lending in particular. And so whilst you know,
Speaker 2: some participants talk about a golden age, I think it
Speaker 2: has been really the last three decades an amazing opportunity
Speaker 2: for direct landing and and certany with with witnessed and
Speaker 2: I joined these business twenty four years ago and we
Speaker 2: have witnessed a lot of growth across a number of
Speaker 2: strategies and also regions. You know, where where is our edge?
Speaker 2: I think certainly you know, as I started by saying,
Speaker 2: you know, having been around for a long time, you know,
Speaker 2: being time tested through a number of cycles. Clearly, the
Speaker 2: origination platform, I would say, is a real edge at Goldman.
Speaker 2: It's how we work really hand in love with you know,
Speaker 2: thousands of investment bankers all around the world that that
Speaker 2: day to day connectivity, the trusts that we established on
Speaker 2: both sides of our teams really that that is being
Speaker 2: transcended by the one GS, which which is a huge
Speaker 2: priority that you know, our executive office launched a few
Speaker 2: years ago to really formalize what is effectively a way
Speaker 2: to collaborate across across teams and across divisions, and something
Speaker 2: that you know, we've done very well I think in
Speaker 2: the last three decades between our private credit investing team
Speaker 2: and all the other groups at the firm. And I
Speaker 2: think it does give us an edge when we're you know,
Speaker 2: dealing with you know, private equity owners of companies or
Speaker 2: management teams. I think the ability to bring the firm
Speaker 2: is something that we've refined over time, and I think
Speaker 2: we're doing well and something is appreciated by the privaty
Speaker 2: equity community, but also not only but also by our investors.
Speaker 2: I think they do recognize that the origination platform is
Speaker 2: highly differentiated.
Speaker 3: So James Commensas is sort of unique among the global
Speaker 3: banks for having a really strong leveraged finance group that
Speaker 3: raises capital from higher bonds and average loan market, as
Speaker 3: well as a really sizable direct lending platform that can
Speaker 3: do both multi billion dollar deals at least participate in them.
Speaker 3: So as direct lending is and bigger and starts eroding
Speaker 3: into some of the investment banking share of the market,
Speaker 3: how does Goman SAP navigate that? And and as other
Speaker 3: banks try to sort of play into private credit, well,
Speaker 3: how do you see that evolving?
Speaker 2: Sure? And thanks Liza, and for us, that's not a
Speaker 2: new phenomenon again because we've been operating very large vehicles
Speaker 2: for for a long time, and so the ability to
Speaker 2: to work well with our leveraged finance colleagues, I think it's,
Speaker 2: you know, back to the edge. I think that's that's
Speaker 2: one of the edge that we have this ability to
Speaker 2: to go and peach together mandates and and also kind
Speaker 2: of work together on large capital structures so that maybe
Speaker 2: will anchor part of the capital structure, or maybe will
Speaker 2: will anchor the junior part of the capital structure. When
Speaker 2: you know the firm a underwrite another part of that structure,
Speaker 2: and that ability to provide capital solutions to sponsors and
Speaker 2: companies something that is truly unique. And there are situations
Speaker 2: like take private where confidentiality is critical and so if
Speaker 2: you can effectively speak to one party that can do
Speaker 2: you know, the entire financing, either on our own or
Speaker 2: together with leverage finance, and maybe also you'll get the
Speaker 2: advisory from from Goldman. I think, you know, having that
Speaker 2: kind of capital complete capital solution and advisory solution is
Speaker 2: selt only very very different, and so we're used to
Speaker 2: dealing with this. Actually I think you know, we we
Speaker 2: we make the other side better and to make our
Speaker 2: side better, and so that's that's very complimentary to have
Speaker 2: both at Goldman. You know, we've noticed that all the
Speaker 2: banks are also trying to figure out how to deal
Speaker 2: with with private credit and direct lending, and every bank has,
Speaker 2: you know, a different way maybe of dealing with it.
Speaker 2: But I would say, you know, private credit is a
Speaker 2: force to reckon with. It's going to stay. It's loud today,
Speaker 2: it's approaching to trillion.
Speaker 1: So you have about one hundred and ten billion in
Speaker 1: assets right now dollars. You want to double that, what's
Speaker 1: the time frame to get there and how do you
Speaker 1: get there?
Speaker 2: And we have we've not set a time frame, but
Speaker 2: we're certainly ambitious here in our leadership team and all
Speaker 2: our colleagues and and and we see great opportunities to grow.
Speaker 2: And it comes from various strategies, and I would say
Speaker 2: across different regions, right. And so if you think about
Speaker 2: our platform, by the way, has doubled in the last
Speaker 2: four years already to where we are today, we continue
Speaker 2: to to be in the market and a number of strategies.
Speaker 2: I think in the US, you know, we're getting into
Speaker 2: larger financings. I think that's one way to grow, which
Speaker 2: is to continue to penetrate the leverage finance market. Right
Speaker 2: and and as you know, as as we do it,
Speaker 2: maybe you know, either on our own or certainly or
Speaker 2: maybe in club deals, you're seeing some of these private
Speaker 2: financings getting to which you know, frankly maybe five years
Speaker 2: ago would have been difficult to was certainly difficult to
Speaker 2: execute and maybe even to imagine. And so that's one
Speaker 2: way to grow here, which is, you know, just getting
Speaker 2: a higher share of wallets of the entire leverage finance market.
Speaker 2: But we're launching new strategies, we're going into new regions.
Speaker 2: You know, Asia is an area of growth for us.
Speaker 2: We continue to deploy a lot of capital in Europe,
Speaker 2: for instance, even at times when M and A is slow.
Speaker 2: We have the luxury of having a very large portfolio,
Speaker 2: six hundred plus portfolio companies, and so staying close to
Speaker 2: these companies provide us with lots of opportunities to continue
Speaker 2: to deploy in this portfolio what we call the incumbency edge,
Speaker 2: And certainly in twenty twenty three, a lot of what
Speaker 2: we have deployed dollarwise came came from that portfolio. And
Speaker 2: then you know, we have other ideas us when it
Speaker 2: comes to private ig that's an area that we would
Speaker 2: like to grow and get more into. And we think
Speaker 2: we have again an edge here given at we're a bank,
Speaker 2: and so we tend to traffic in the kind of
Speaker 2: large corporate worlds or mid market corporate worlds.
Speaker 1: In terms of the Asia opportunity you mentioned, is that
Speaker 1: more on the lending side, in which case which countries
Speaker 1: you mostly focus on, which sectors?
Speaker 2: Yeah, I'm talking about credit here, and look, we've been
Speaker 2: in Asia for a long time. We've been in Asia
Speaker 2: for a long time, using our balance sheet initially and
Speaker 2: then gradually transitioning away from only using the balance sheet
Speaker 2: to having alignment of balance sheets alongside the party capital.
Speaker 2: And so we've announced a few months ago a partnership.
Speaker 2: We are active I was pretty much across Asia. We
Speaker 2: have teams there by the way, located in the major market. Obviously,
Speaker 2: government has been a formidable presence in Asia for a
Speaker 2: very long time, multi multi decades. I think probably one
Speaker 2: of the or if not the first, major US in
Speaker 2: Esman Bank. And so we benefit from having this network
Speaker 2: and having these long standing relationships with also the corporates
Speaker 2: there sectors. I think when it comes to our dark
Speaker 2: landing business, which you know we tend to really I
Speaker 2: would say stick to our knitting around avoiding defaults, right.
Speaker 2: And so the sectors in which we invest, whether it's
Speaker 2: in the US, in Europeora in Asia, they tend to
Speaker 2: be quite defensive and recession resilience. And you'll see the
Speaker 2: same whether we invest in Australia or in India. And
Speaker 2: then we have all our strategies where we look for
Speaker 2: maybe higher reason but we're getting paid for it, and
Speaker 2: they're in those strategies hybrid strategies. Then we've gone into
Speaker 2: more sicly call sectors in Asia, including hospitality or other
Speaker 2: type of more I would say, sickly call maybe retail
Speaker 2: sectors or you know, we've we've invested in the golf
Speaker 2: course or the largest operator in Japan for instance. We've
Speaker 2: looked at the number of other I would say, probably
Speaker 2: a bit different, and trying to bring capital solutions always
Speaker 2: to these corporates and the owners of those companies.
Speaker 1: In terms of fundraising, I mean, to get those assets
Speaker 1: over two hundred billion. What's your first port of call
Speaker 1: these as you flying more to Dubai or is it
Speaker 1: Toronto or is it Sydney? Where are you going?
Speaker 2: What's interesting about this environment is and it's helpful to
Speaker 2: have many voices, by the way, to have you know, competitors, peers,
Speaker 2: other platforms talk about private credits so that you know,
Speaker 2: they can also educate the market and educate LPs. And
Speaker 2: so to your question, we're flying and I'm flying everywhere literally,
Speaker 2: I mean twenty twenty three it was a heavy europhone
Speaker 2: raising for us, a successful one, and the nature of
Speaker 2: our investor base is very diversified. I think that's one
Speaker 2: of the strengths of our platform, you know, institutions, pension phones,
Speaker 2: insurance companies, sovereigned but also wealth management clients. And we're
Speaker 2: fortunate to have also long standing and loyal LPs on
Speaker 2: our platform. I mean again into back to our roots.
Speaker 2: We started in nineties, and you know, when we launched
Speaker 2: our first new dig landing phone in two thousand and
Speaker 2: early two thousand and eight, we were heavy, heavily invested
Speaker 2: or heavy partner up with European pension phones. And today
Speaker 2: we're really diversified across the world. And what's interesting here
Speaker 2: is that we're still getting a lot of new investors,
Speaker 2: new logos, and that's really important because we think that
Speaker 2: if we do a good job at delivering the returns,
Speaker 2: having you know, this kind of close intimate relationships with
Speaker 2: our investors, hopefully they will want to continue to be
Speaker 2: with us. And we take a long term view here.
Speaker 2: As I said earlier, I've been doing this for twenty
Speaker 2: four years, and we take the long term view. We
Speaker 2: want to make sure that we provide a good customer
Speaker 2: experience to our investors.
Speaker 4: Hey, James, it's David Havens here. Switch it up a
Speaker 4: little bit. Big picture question, Golden Sachs. It's it's sort
Speaker 4: of the nexus of just about everything in global finance,
Speaker 4: except for maybe sort of the mass affluent market. You've got,
Speaker 4: you know, investment banking, contacts, contacts, private wealth, limited partnerships,
Speaker 4: et cetera, et cetera. There have been a number of
Speaker 4: incentives and disincentives that have caused the corporate credit market
Speaker 4: to change over the course of the last five, ten,
Speaker 4: twenty years or so. Where do we stand today, Like,
Speaker 4: isn't it the job of banks to lend to companies?
Speaker 4: I went through a credit training program a chemical bank
Speaker 4: way back when, and that's what we used to do.
Speaker 4: But it doesn't seem like banks do that much anymore.
Speaker 2: I think they still do that job, by the way,
Speaker 2: maybe in a slightly different form or maybe slightly different strategies.
Speaker 2: But we're not saying, by the way that you know,
Speaker 2: the banks will still be in the market. I actually think,
Speaker 2: you know, when we started in knowil seven o eight,
Speaker 2: and we would do a financing alongside us, if we're
Speaker 2: not the sole lender, we would have banks. And I
Speaker 2: think you know, now you see actually this type of
Speaker 2: collaboration partnership come back, and you know, there are situations
Speaker 2: that are totally private with a club deal of dark
Speaker 2: lenders and others that I could well see banks work
Speaker 2: with dark landers, and so I think you'll continue to see,
Speaker 2: you know, lending to good corporates too, high quality companies
Speaker 2: is a good business obviously the banks. I've gone through
Speaker 2: a number of regulation in the US and in Europe
Speaker 2: that we've had to comply with and adapt to ourselves.
Speaker 2: But I do think that you could see, you know,
Speaker 2: this kind of collaboration work between between banks and uh
Speaker 2: and and other forms of capital and celtany. You know
Speaker 2: that we we bring that to our advantage internally. As
Speaker 2: I was saying earlier, you know, to the question around
Speaker 2: the edge, we we bring into our advantage. The one
Speaker 2: thing that has changed maybe between when I started in
Speaker 2: two thousand and and today, the banks have incredible origination platforms,
Speaker 2: right and we certainly benefit from from it at at
Speaker 2: Goldman Sacks. But when I started, maybe twenty plus years ago,
Speaker 2: the banks would hold more on their balance sheets. Whilst
Speaker 2: you know, maybe they started, you know, the movement from
Speaker 2: under from holding on the balance sheets to underwriting and syndicating,
Speaker 2: and that that movement we've seen probably nearly two thousands
Speaker 2: I think the banks today, whilst they continue to be
Speaker 2: very active in certainly in direct lending, they probably hold
Speaker 2: less on their balance sheets to be fair. And then
Speaker 2: you know that that would that would depend yeah, exactly,
Speaker 2: also from banks to banks exactly.
Speaker 4: And I think that according to some of the data
Speaker 4: that we have a Bloomberg intelligence, it looks like twenty
Speaker 4: twenty two twenty three was actually the first year where
Speaker 4: non non non bank financial institutions made more loans to
Speaker 4: corporations than banks actually did, which is which is interesting.
Speaker 2: I think that's right. And also in the market has
Speaker 2: been dislocated. Yes, let's face it, right, I mean we
Speaker 2: are in between markets. Yeah, and we came from twenty
Speaker 2: twenty one lots of activity and then rates certainly shot up,
Speaker 2: and that really shook up the fixing call market. Hence
Speaker 2: the banks were not as active.
Speaker 3: To your point that banks needs to hold more of
Speaker 3: this lending. When I look at the direct lending market,
Speaker 3: it looks early similar to the early days of the
Speaker 3: leverage law market, where banks needs to hold more and
Speaker 3: things didn't trade. So when you look forward to direct lending,
Speaker 3: do you expect trading activity to start picking up? I
Speaker 3: know there is some trading just for liquidity purposes, but
Speaker 3: more of that and perhaps at different levels. And if
Speaker 3: that happens, and what happens to the liquidity premium that
Speaker 3: you guys.
Speaker 2: Enjoy and thanks Liza. I think, first of all, when
Speaker 2: we commit capital, we have pre syndicated it. It's by
Speaker 2: having fund raised and our investors are, in particular the
Speaker 2: institutional investors, they're patients. This is patient capital, this is
Speaker 2: long term patient capital, and so we don't have the
Speaker 2: need to go and sell our positions, right, I mean,
Speaker 2: we can hold on to our loand for a very
Speaker 2: long time, and so that that's a major advantage of
Speaker 2: dark glanders for instance. Now, what you may see at
Speaker 2: the start, you know, when you put together a financing,
Speaker 2: is that a lot of our investors quite enjoy having
Speaker 2: co investment opportunities, and so we may commit for a
Speaker 2: bit more with a view that some of our key
Speaker 2: large LPs could get access to co investment opportunities. This way,
Speaker 2: I think to the point that you're making, and very
Speaker 2: similar to what we have seen in the private equity
Speaker 2: industry as we saw the explosive growth of private equity
Speaker 2: and as a result, you know, the first derivative is
Speaker 2: going to be secondary, and I think you're going to
Speaker 2: see you know, the staff and it's already started, and
Speaker 2: I think it's going to be a much much larger
Speaker 2: business of a credit secondary as a class. By the way,
Speaker 2: you start hearing about maybe some LPs that would like
Speaker 2: maybe to sell positions, and you know, there's there's a
Speaker 2: growing market here. And so whilst the underlying is ill
Speaker 2: liquid I think at the LP level, I think we're
Speaker 2: going to see growth of credit secondary where LPs can
Speaker 2: effectively fine liquidity in this in this way as well. Right,
Speaker 2: And we're quite excited actually about these market development. When
Speaker 2: you have an asset class that is getting close to
Speaker 2: two trillion dollar, you're certainly going to see you know,
Speaker 2: some some more strategies kind of flourishing out of the growth. Right.
Speaker 4: And we've we've also obviously, as you mentioned, we've seen
Speaker 4: quite a bit of growth that we've words probably come
Speaker 4: up quite a bit in this conversation. Uh, private equity credit,
Speaker 4: I'm sorry, private credit has kind of gone mainstream. Maybe
Speaker 4: you can spend a few minutes talking about terms and conditions.
Speaker 4: You're seeing terms and conditions in the market evolving as
Speaker 4: newer entrants come in as sort of new quote unquote
Speaker 4: technologies are employed in the private credit.
Speaker 2: Space absolutely, And to the point you just made around mainstream,
Speaker 2: I think, you know, we collectively need to just demystify
Speaker 2: what we do, which is, in simple words, you know,
Speaker 2: lending to corporates. And but yeah, look the terms and
Speaker 2: conditions they do vary depending on market conditions, right, And
Speaker 2: so if you you need to step back and look
Speaker 2: at long period of time, you know, ten twenty years,
Speaker 2: and you certainly see a direk correlation of the activity
Speaker 2: of direct lending with dishuans of loans, right, So that
Speaker 2: really means that even when the banks are back on
Speaker 2: the writing, you have certainly more volume in the markets,
Speaker 2: more and many activity, more volume. I think that's overall
Speaker 2: good for the industry as well. When when you see
Speaker 2: a drop in loan issuance, when the markets turn more
Speaker 2: volatile and less MNA activity, what you see is, you know,
Speaker 2: less volume in direct lending, but you see somewhat higher pricing,
Speaker 2: maybe wider origination fees. And I would say probably we
Speaker 2: as an industry have more leverage when we negotiate documentation,
Speaker 2: and so the documentation tends to be maybe a bit
Speaker 2: tighter in those kind of cycles where volativity is hitting.
Speaker 2: I mean, as we saw the rates increase, for instance,
Speaker 2: in twenty twenty two, what happened is sponsors management teams
Speaker 2: were very focused on leverage ability of these assets and
Speaker 2: you know, what the true casual generation coming out of
Speaker 2: the corporate and how much you know, kind of quantum
Speaker 2: of that can this corporate effectively sustain. And what you
Speaker 2: saw as a result was lower leverage levels for the
Speaker 2: crop of deals that happened, I would say from me
Speaker 2: twenty twenty two and the subsequent year and a half.
Speaker 2: And so those those terms, you know, they tend to
Speaker 2: vary very much dependent on market relativity and market conditions.
Speaker 1: So as you know, James, you've been doing this a while,
Speaker 1: typically what blows up in finances what's just been growing
Speaker 1: the most quickly. Private credit is growing very quickly, and
Speaker 1: we've had a lot of guests on this show talking about,
Speaker 1: you know, red flags the speed of the market's growth.
Speaker 1: It's already bigger than the US highyeld bond market, which
Speaker 1: took a lot longer to get there. Plus the lack
Speaker 1: of transparency and liquidity and the risks of companies just
Speaker 1: falling behind on debt payments rates stay high for much
Speaker 1: longer than people had expected. There's also the fear that
Speaker 1: new entrants will spoil the party. You know, that the
Speaker 1: so called private debt tourists will do bad underwriting that
Speaker 1: ends in tiers and some people just calling it a bubble. So,
Speaker 1: you know, what do you think about that.
Speaker 2: It's a love of a lot of themes here. I
Speaker 2: think at the core of direct landing it's all about
Speaker 2: credit discipline, underwriting discipline. And you know, we've been doing
Speaker 2: this for twenty seven years. If you stick to lending
Speaker 2: to very high quality businesses and the discipline and you
Speaker 2: don't lose that discipline, you don't get the POMO. You know,
Speaker 2: our experience, you know, through those more volatile environments or
Speaker 2: even crises like the GFC, you know, the these these
Speaker 2: corporates that tend to be more resilient I have certainly proven
Speaker 2: to be the case. And so will we see more dispersion,
Speaker 2: Absolutely we will. You know, there's been very little dispersion
Speaker 2: for about ten years, as as the rates were low
Speaker 2: or even negative, and so I think, you know, in
Speaker 2: this environment of the system, you know, kind of receiving
Speaker 2: a shock, a certain shock I think you'll see that
Speaker 2: managers will fare very differently over time. It will be
Speaker 2: it will be seen in their ability to raise capital.
Speaker 2: And and it's no different than you know, when I started.
Speaker 2: You know, there were names on the private EQUII that
Speaker 2: don't exist anymore, right, and so I think you're going
Speaker 2: to see you know, more of that. Obviously, this is
Speaker 2: these are the pride markets. Things tend to take some time.
Speaker 2: Another advantage that you have as a lender is that
Speaker 2: you can things don't go according to plan, and as
Speaker 2: a you know, a default, a lender can also take
Speaker 2: over an asset and then continue as as as the
Speaker 2: owner of the asset. And so that that's why I
Speaker 2: think to play out and be able to say, well,
Speaker 2: this was a good vintage or not, and and this
Speaker 2: is what the average prior credit returns have been. Well,
Speaker 2: we'll have to have another podcast probably in about eight
Speaker 2: to ten years.
Speaker 1: Now we're going into you know, the slower economy. Earnings
Speaker 1: of suffering rates are still going to stay high. It's
Speaker 1: a tougher environment than let's say, last year or the
Speaker 1: year before.
Speaker 2: I wouldn't say so. When we look at the performance
Speaker 2: of our portfolio companies, it remains very resilient, and it's
Speaker 2: really surprised us too. On the upside, I would say
Speaker 2: including you know, I would say around twenty twenty one,
Speaker 2: when inflation was running very high and out of twenty
Speaker 2: twenty two, we saw our companies in particular having pricing
Speaker 2: power and having the ability to maintain their operating mal genes.
Speaker 2: So I wouldn't say that it's a more complicated environment
Speaker 2: given the slowdown in the macro. That is not what
Speaker 2: we're experiencing our portfolio.
Speaker 3: For instance, James, you recently got a new title Global
Speaker 3: Head of Direct Lending. When you look at US and
Speaker 3: Europe and you look at the opportunities there, especially as
Speaker 3: inflation seems to be monitoring at a different pace between
Speaker 3: the two regions, where do you see the better opportunities.
Speaker 2: I wouldn't say better opportunities, but certainly I would say
Speaker 2: in terms of size of the opportunity set right now.
Speaker 2: Clearly the US market has woken up and shown signs
Speaker 2: of activity earlier than the European market. So starting in
Speaker 2: June of last year July, we started seeing a lot
Speaker 2: of processes, you know, buyers and sellers, kind of a
Speaker 2: green price and hand you know, the second half of
Speaker 2: the year for US was very busy, in particular in
Speaker 2: the US. It's also a bigger market size wise, and
Speaker 2: so we're very active across the world. But I would
Speaker 2: say probably in the last six months and getting into
Speaker 2: twenty twenty four, we're seeing more opportunities in the US. Now.
Speaker 2: If I step back and I look at twenty twenty three,
Speaker 2: sixty percent of our deployment globally happen in Q four, right,
Speaker 2: and so you can see the optic of activity. And
Speaker 2: I think everybody's talking, you know, CEO banks are also
Speaker 2: talking and seeing that you know, self, working with r
Speaker 2: M and A colleagues, we sent you know, a renewed
Speaker 2: optimism here about activity in the US but also but
Speaker 2: also in Europe, and we tend to see that activity
Speaker 2: very early on, given that you know, we have our
Speaker 2: colleagues kind of winning mandates for sales side byside, and
Speaker 2: usually takes six months for those deals to happen. So
Speaker 2: I think I'm optimistic that twenty twenty four could be
Speaker 2: a more active year in terms of deployment. As I
Speaker 2: said earlier, it's all about deploying well and being disciplined.
Speaker 2: So it's not about the volume, but I you know,
Speaker 2: I see our teams and the pipeline across various regions
Speaker 2: really having stepped up in the last couple of quarters.
Speaker 3: So EM and A after is picking up. So when
Speaker 3: should we start to see some big M and A,
Speaker 3: especially LBO deals which quite a bit of financing to
Speaker 3: get done. When we should we start seeing those announced?
Speaker 2: Look, in all fairness, we've already started seeing deals being
Speaker 2: announced in Q four, certainly in the US, but also
Speaker 2: in Europe. There were a number of situations announced pably
Speaker 2: too private for instance, But it takes time for these
Speaker 2: processes to play out. And I think what happened in
Speaker 2: twenty twenty two, twenty twenty three is that usually you
Speaker 2: would have a gap between you know, the buyer and
Speaker 2: the seller, and you know that gap remains. And I think,
Speaker 2: certainly anecdotally, when I looked at the number of situations
Speaker 2: in Q four, it seemed that, you know, buyers and
Speaker 2: sellers were getting much closer in terms of their respective
Speaker 2: expectations to transact. I think that bodes well. I think
Speaker 2: on top of these, given the lack of harvest and
Speaker 2: exit in the last eighteen months for the private equity industry,
Speaker 2: certainly their investors there LPs are also demanding some you
Speaker 2: know what's called DPI, so distribution and so. And if
Speaker 2: the rates you know, go down, which you know might
Speaker 2: be the expectations of experts, I think, you know, you
Speaker 2: have a number of factors that certainly could fuel higher
Speaker 2: activity in twenty twenty four.
Speaker 1: This year, James, do you expect the default rate in
Speaker 1: private credit to be higher or lower than last year?
Speaker 2: It's it's a difficult question.
Speaker 3: But the.
Speaker 2: You know, plus you know, we don't have a crystal ball,
Speaker 2: so no idea what may happen in the market and
Speaker 2: what shock you know, we may see or not see.
Speaker 2: So but usually the default happened after, you know, a
Speaker 2: few years of stress in the company. They rarely happened overnight,
Speaker 2: although certainly when everybody went into lockdown in March twenty
Speaker 2: twenty it created a sudden shock. But that's unusual. I
Speaker 2: would say, usually you have some sort of red flags
Speaker 2: for a while before a company declaredes and effective default.
Speaker 2: And I think in the market there's been a steady
Speaker 2: but slow increase in default rates across sectors, by the way,
Speaker 2: not necessarily only linked to you know, the sickly goals
Speaker 2: and so on across sectors. We're monitoring carefully. I think,
Speaker 2: you know, more importantly, we're focused on our portfolio and
Speaker 2: making sure that our companies are healthy and so far touchoo,
Speaker 2: but that is deltenly the case.
Speaker 1: And when you look across everything that you currently cover,
Speaker 1: which is a lot, what is the best opportunity for
Speaker 1: twenty twenty four. You know, you can talk about sectors,
Speaker 1: you can talk about regions, talk about country if you want,
Speaker 1: but as specifically as possible, if you had to put
Speaker 1: your money somewhere in private credit this year, where would
Speaker 1: it be?
Speaker 2: You know, all we love all our kids and we
Speaker 2: put our money or we try to put it everywhere.
Speaker 2: As as employees, you know, we invest in in a
Speaker 2: lot of different strategies. And I'm not trying not to
Speaker 2: answer the question, but that that is really what we're
Speaker 2: doing here. We're pursuing a number of strategies existing where
Speaker 2: we're trying to be bigger and new, where we're trying
Speaker 2: to effectively launch, and we're doing all of these at
Speaker 2: the same time. We're fortunate that we've got the support
Speaker 2: of our executive office. I think very openly they talk
Speaker 2: about asset wealth management and prior credit in particular, and
Speaker 2: so they're getting used now to answering questions about prior credit.
Speaker 2: It certainly helps us internally to get support, you know,
Speaker 2: in infrastructure, hiring more and getting you know, the backing
Speaker 2: of Goldman Sacks.
Speaker 1: And on the risk you kind of boil it down
Speaker 1: to just avoid the faults, which is kind of easier
Speaker 1: said than done. Is there a specific week link in
Speaker 1: the system. Is there a week sector or a you know,
Speaker 1: a week kind of borrow that you really have to avoid?
Speaker 2: I wouldn't say so. And also various rategies may have
Speaker 2: various resk appetites and hence also expected returns, so I
Speaker 2: wouldn't say so, but certainly on the performing direct lending sides,
Speaker 2: where I was saying earlier that you know the name
Speaker 2: of the game is really to avoid default, because that's
Speaker 2: how effectively your returns will be measured. Eventually, we tend
Speaker 2: to stick to stable and defensive sectors and not really
Speaker 2: look at the sikly calls or not even wanting to
Speaker 2: price Sikly calls. Great stuff.
Speaker 1: James Reynolds, Global head of direct Lending at Golden Sechs.
Speaker 1: Great to have you on the credit edge.
Speaker 2: Thank you very much, and please do.
Speaker 1: Come back on the show on all the best of
Speaker 1: twenty twenty four. I also want to say big thanks
Speaker 1: to Lisa Lee of Bloomberg News in London. Brilliant to
Speaker 1: have you again.
Speaker 3: Thanks, thank you so much.
Speaker 1: So David Havens with Bloomberg Intelligence in New York. You
Speaker 1: look at the BDC's, the business development companies, they're all
Speaker 1: going public. Now what's that all about? Is this the top?
Speaker 1: Is this the end of private credit? Is it downhill
Speaker 1: from Hey? What's going on?
Speaker 4: Well? I guess it depends on who you ask. There
Speaker 4: are some people that will if you were to liken
Speaker 4: it to a baseball game, some people would say, we're
Speaker 4: not even in the in the first inning, yet we're
Speaker 4: still in spring training in terms of where we are
Speaker 4: in a nine inning baseball game. Other people will say
Speaker 4: that the cycle could be problematic, particularly if we're in
Speaker 4: a recession or have a recession. Why is money coming
Speaker 4: into the sector. I think money is coming into the
Speaker 4: sector because it's performed well. Default rates across BDC's, which
Speaker 4: are about two hundred and fifty billion dollars in total
Speaker 4: assets right now, have been minimal, which I think comes
Speaker 4: as a surprise to many observers. Given the move that
Speaker 4: we've had in rates, the stress that that place is
Speaker 4: on interest costs for highly leveraged companies, the investments that
Speaker 4: they've made have held up well. And I think that
Speaker 4: there's a general view that private credit has gone mainstream
Speaker 4: and BDCs are a way for private investors public investors
Speaker 4: to play the credit market and earn a nice dividend
Speaker 4: in the process.
Speaker 1: So the IPOs aren't assigned necessarily of a top it's
Speaker 1: just these BDCs. It is a chance for them to
Speaker 1: raise funding more cheaply or more efficiently elsewhere.
Speaker 4: It's I think that what we're seeing is companies want
Speaker 4: to they see a growth opportunity, and they want to
Speaker 4: diversify their sources of capital as much as possible. So
Speaker 4: having access to public capital markets gives them a currency
Speaker 4: that they can use to to grow further, that they
Speaker 4: can use to to make acquisitions. So it's a dynamically
Speaker 4: growing segment, and you tend to see companies that tap
Speaker 4: the public markets when when you've got some dynamic growth
Speaker 4: going on.
Speaker 1: So you would on the call just now with James
Speaker 1: Reynolds with Golden Sachs, head of direct Lending, there he
Speaker 1: sounds very positive to me, very bullish. He's seems to
Speaker 1: not think it's a bubble or a risky market right now.
Speaker 1: Obviously he's, you know, in the game of telling people
Speaker 1: it's growing because he's trying to raise assets. But from
Speaker 1: your perspective, David, is it riskier than he's making it
Speaker 1: seem it's risky.
Speaker 4: Risky doesn't mean that you're going to end that it's
Speaker 4: going to end in tiers. Necessarily, risk means that there's risk,
Speaker 4: and if you can manage that risk, then you can
Speaker 4: do quite well. Goldman certainly seems to have the intellectual
Speaker 4: horsepower and experience to manage credit risk very well, and
Speaker 4: it's done so for a number of years. The way
Speaker 4: that I like in it too, is is that if
Speaker 4: you sort of think about the credit markets as one
Speaker 4: gigantic ski hill, you've got expert terrain, and you've got
Speaker 4: you've got terrain for low risk players. Low risk players
Speaker 4: might take the magic carpet, and that would be the
Speaker 4: government bond market or the muni market or something high
Speaker 4: grade investment grade credits. The BBC's and private credit to
Speaker 4: some extenter are on the double black diamonds there. They're
Speaker 4: going down areas where they're cliffs, but they're prepared, they've
Speaker 4: been through this before, they're familiar with the terrain. There's
Speaker 4: always danger out there, but if you're familiar with the
Speaker 4: terrain and you've got the capabilities, you can manage that risk.
Speaker 4: Usually that's what that's that seems to be what's going
Speaker 4: on right now. The biggest risk from my point of view,
Speaker 4: is an exogenous factor, is some sort of geopolitical you know,
Speaker 4: uh thing that we haven't anticipated yet. So it's it's
Speaker 4: it's if you're looking out for buses that are going
Speaker 4: to hit you in Credit, you're going to see the
Speaker 4: buses coming. It's the one that you don't see that's
Speaker 4: going to cause the problem. So right now we see
Speaker 4: it seems to me that we see a lot of
Speaker 4: the buses out there.
Speaker 1: Wise words, and it's also skiing seasons. Are those analogies
Speaker 1: hit home. Thank you so much, David Havens at Bloomberg Intelligence,
Speaker 1: and we look forward to reading all of your analysis
Speaker 1: on the Bloomberg terminal. Thank you, James, and thanks also
Speaker 1: to James Reynolds, Global head of direct at Girl and Sechs.
Speaker 1: It was great to have him on the Credit edge.
Speaker 1: We look forward to having him back, and to Lisa
Speaker 1: Lee with Bloomberg News in London. Please do subscribe wherever
Speaker 1: you get your podcasts. We're on Apple, Google and Spotify.
Speaker 1: Give us a review, tell your friends, or email me
Speaker 1: directly at JCROMB eight at Bloomberg dot net. That's j
Speaker 1: c R O M B I E as in my
Speaker 1: name the number eight at Bloomberg dot net. I'm James Cromby.
Speaker 1: It's been a pleasure having you join us again next
Speaker 1: week on the Credit Edge