WEBVTT - Wellington Passes on Data Center Debt, Questioning Long-Term Value 0:00:18.280 --> 0:00:20.800 Hello, Welcome to the Credit Edge of Wiki Markets podcast. 0:00:20.920 --> 0:00:22.960 My name is James Crumbie. I'm a senior edge at 0:00:22.960 --> 0:00:24.320 Bloomberg and. 0:00:24.160 --> 0:00:27.400 I'm David Haven's, a senior analyst of Bloomberg Intelligence covering 0:00:27.440 --> 0:00:31.160 non bank financial thing imagigs, including private credit. This week, 0:00:31.160 --> 0:00:35.080 we're very pleased to welcome Sonali Wilson, lead investment director 0:00:35.120 --> 0:00:38.400 for private credit at Wellington Management with one point three 0:00:38.440 --> 0:00:41.760 trillion dollars of assets under management. That's Wellington, not the 0:00:41.800 --> 0:00:44.600 private credit at Wellington necessarily, Sonali, how are you. 0:00:44.880 --> 0:00:47.600 I'm doing great? Thank you both for having me excellent. 0:00:47.680 --> 0:00:50.200 It's great to have you here. Just before we get 0:00:50.200 --> 0:00:54.000 into it, Sonali leads the firm's product and commercial strategy 0:00:54.040 --> 0:00:57.800 for private credit, overseeing the development, structuring, and distribution of 0:00:57.840 --> 0:01:01.480 Wellington's strategies in this area. She has a fantastic career, 0:01:01.520 --> 0:01:05.360 having also spent time at PIMCO, Blue Mountain Capital, Ox, ZIF, 0:01:05.360 --> 0:01:07.840 and Goldman Sachs. And James, I can tell you you're 0:01:07.880 --> 0:01:09.480 already itching to ask a question. 0:01:09.680 --> 0:01:12.160 Thanks David. Great to see you, Snalie. Private credit is 0:01:12.200 --> 0:01:15.360 going through a shakeout after years of stellar growth. Fears 0:01:15.360 --> 0:01:18.399 of software debt defaults, redemptions, from retail funds and bad 0:01:18.440 --> 0:01:20.399 loan marks are just some of the concerns about an 0:01:20.400 --> 0:01:23.280 asset class that expanded very quickly into a multi trillion 0:01:23.319 --> 0:01:26.840 dollar market. Wellington is well known for its participation in 0:01:26.880 --> 0:01:30.560 liquid public credit. You're now pushing into private markets. Why now, 0:01:30.600 --> 0:01:31.200 what's the pitch? 0:01:31.360 --> 0:01:34.560 That is a loaded question, James, So, I guess you're 0:01:34.640 --> 0:01:36.559 starting off and the gloves are already coming. 0:01:36.400 --> 0:01:37.479 Off to James does. 0:01:38.640 --> 0:01:41.720 I often like to say my partner in this business, 0:01:41.760 --> 0:01:44.920 Emily Banister, and I probably have one of the best 0:01:45.240 --> 0:01:48.480 and hardest jobs in private credit today, you know, standing 0:01:48.520 --> 0:01:52.920 up a newer platform and launching products. Quite frankly, it's 0:01:52.960 --> 0:01:56.800 not without its challenges. It does require a firm like 0:01:56.880 --> 0:02:00.240 Wellington to be really deliberate and be really thought full. 0:02:00.680 --> 0:02:02.560 And I think you've alluded to this right. There's been 0:02:02.560 --> 0:02:06.320 a lot of sensationalization in the headlines, but if you 0:02:06.360 --> 0:02:10.800 take a step back, we're actually really excited because private 0:02:10.840 --> 0:02:14.640 credit is not this monolith that everyone reduces down to 0:02:14.720 --> 0:02:17.800 corporate direct lending or where the headlines are. You know, 0:02:18.560 --> 0:02:20.520 from our view, a lot of the baby is getting 0:02:20.520 --> 0:02:24.680 thrown out with the bathwater, and if you can opportunistically 0:02:24.760 --> 0:02:26.880 lean in and we can. We don't have the overhang 0:02:26.919 --> 0:02:30.280 of of kind of priors that many of our peers do. 0:02:31.280 --> 0:02:34.480 We think it's a really interesting time to get into 0:02:34.520 --> 0:02:38.320 these markets and find niches and happy to talk about 0:02:39.080 --> 0:02:41.560 sort of how we're thinking about the build. But I 0:02:41.600 --> 0:02:46.240 think the philosophy, the ethos for Wellington is very much 0:02:46.280 --> 0:02:49.160 anchored in the same way that we've built many businesses 0:02:49.520 --> 0:02:50.040 at the firm. 0:02:50.280 --> 0:02:52.960 Well, why don't we level set just so you know, 0:02:53.000 --> 0:02:55.959 because I think private credit means different things to different people. 0:02:55.960 --> 0:02:58.760 There's direct lending, and there's there's all. You know, it's 0:02:58.840 --> 0:03:01.440 just an enormous ego system. It's much larger than the 0:03:01.440 --> 0:03:04.799 two trillion dollar plus direct lending business. It extends into 0:03:05.639 --> 0:03:10.880 into asset based funding, high grade private credit. So level 0:03:10.919 --> 0:03:14.239 setting from the Wellington perspective, kind of what does your 0:03:14.400 --> 0:03:17.320 universe a private credit entail? And where are you seeing 0:03:17.480 --> 0:03:20.840 sort of the most interesting areas of growth or opportunity. 0:03:20.840 --> 0:03:25.000 I mean that is the question, right, David, You're exactly right. 0:03:25.200 --> 0:03:28.480 Private credit today is what we view as a forty 0:03:28.480 --> 0:03:32.679 trillion plus ecosystem, right, and the headlines are often very 0:03:32.680 --> 0:03:35.960 focused on the corporate segment, which is about two trillion 0:03:36.040 --> 0:03:38.560 dollars of that overall forty trillion dollars. 0:03:38.360 --> 0:03:41.320 And then even more focused on private BDCs. 0:03:40.840 --> 0:03:43.960 Right now, correct, right, which is about a quarter right 0:03:44.040 --> 0:03:46.880 of the of the overall exposure in that universe. And 0:03:46.960 --> 0:03:50.520 so you really do need to peel back the layers 0:03:50.560 --> 0:03:52.280 of that onion and say, Okay, what is it that 0:03:52.320 --> 0:03:56.880 we're talking about. And so for for Wellington, our build 0:03:57.320 --> 0:04:00.720 has really been focused, I'll say, in areas that check 0:04:00.720 --> 0:04:03.520 four boxes for us, and I'm happy to talk about 0:04:03.520 --> 0:04:05.839 the areas that are that are most interesting, but those 0:04:05.880 --> 0:04:09.960 four boxes have and will continue to be first and foremost, 0:04:10.400 --> 0:04:11.720 what do our clients need? 0:04:11.920 --> 0:04:12.080 Right? 0:04:12.120 --> 0:04:13.720 We are a client driven business at the end of 0:04:13.800 --> 0:04:15.760 the day, and so we need to be able to 0:04:15.800 --> 0:04:20.359 provide solutions that are more integrated across public and private markets. 0:04:20.400 --> 0:04:22.640 That is what the market is demanding. But we need 0:04:22.680 --> 0:04:25.320 to be selective about where we build, and so that 0:04:25.440 --> 0:04:30.080 build for us really looks at I'll say two big 0:04:30.120 --> 0:04:33.960 picture items. One where is the market going? And I 0:04:34.040 --> 0:04:38.279 think what's critical for private credit investors to understand today 0:04:38.839 --> 0:04:44.200 is yesterday's returns or not tomorrow's returns. And really looking 0:04:44.240 --> 0:04:49.880 for pockets of the market where the opportunity for private 0:04:49.920 --> 0:04:53.720 capital is opening up and not shrinking in. And that 0:04:53.839 --> 0:04:56.760 might be structural reasons, such as you know, the banks 0:04:56.839 --> 0:05:00.679 continue to rebalance and reallocate in areas like commer real estate. 0:05:01.560 --> 0:05:04.919 It may be reasons that there's just not enough financing 0:05:05.080 --> 0:05:08.880 in traditional markets for the complexity that issuers are looking for. 0:05:09.760 --> 0:05:13.240 So that's critical. I'll say that the other piece that's 0:05:13.279 --> 0:05:17.120 critical for us is where do we have a right 0:05:17.160 --> 0:05:21.320 to win. I don't think as a manager standing up 0:05:21.360 --> 0:05:23.760 a business in twenty twenty six, you can be all 0:05:23.760 --> 0:05:27.560 things to all people, and so we really think long 0:05:27.600 --> 0:05:30.920 and hard about where that intersection between public and private 0:05:31.000 --> 0:05:36.560 markets can create some sort of edge or mote for 0:05:36.720 --> 0:05:39.960 our clients in what we deliver and where we can 0:05:40.040 --> 0:05:43.080 supplement that expertise with At the end of the day, 0:05:43.560 --> 0:05:46.520 individuals that we bring in from the outside, that are 0:05:46.520 --> 0:05:50.680 cycle tested, that know what it is to originate and 0:05:50.839 --> 0:05:54.560 underwrite in private markets. We cannot forget that investing in 0:05:54.560 --> 0:05:58.839 private markets is not the same as investing in public markets, certainly, 0:05:59.720 --> 0:06:03.279 but when you can combine those two things, I think 0:06:03.360 --> 0:06:06.480 you can view the world from a more relative value 0:06:06.520 --> 0:06:10.280 perspective and maybe not fall into some of the fallacies 0:06:10.640 --> 0:06:13.640 of following the herd into what looks like the newest 0:06:13.640 --> 0:06:14.480 and shiniest toy. 0:06:14.960 --> 0:06:17.239 And when you talk about your clients and your client needs, 0:06:17.800 --> 0:06:22.880 just what you know obviously without naming names. Who are 0:06:22.960 --> 0:06:26.200 your clients? You know? And something that sort of comes 0:06:26.600 --> 0:06:28.440 is very important as part of this sort of build 0:06:28.440 --> 0:06:31.919 out of private credit is the liquidity expectations that your 0:06:31.960 --> 0:06:32.480 clients have. 0:06:32.920 --> 0:06:35.960 For sure, I think at Wellington overall our clients are 0:06:36.000 --> 0:06:40.360 pretty much mixed fifty to fifty between institutional clients, so 0:06:40.480 --> 0:06:45.960 think pension funds, sovereign wealth funds, nonprofit type investors, as 0:06:46.000 --> 0:06:49.040 well as the retail side of the business, the individual 0:06:49.080 --> 0:06:51.640 investor right, whether that be through some of the largest 0:06:51.760 --> 0:06:56.760 bank intermediaries or registered investment advisors. And David, I think 0:06:56.760 --> 0:06:59.000 you're hitting the nail on the head right when it 0:06:59.040 --> 0:07:03.320 comes to product developlopment and the mechanisms by which private 0:07:03.360 --> 0:07:07.359 credit will be transcribed into markets and buyers, which is 0:07:08.200 --> 0:07:11.480 the product development that I certainly and my team work 0:07:11.520 --> 0:07:18.400 on for institutional investors is a slightly different delivery than 0:07:18.400 --> 0:07:21.720 maybe with the wealth audience is seeking. Both are focused 0:07:21.720 --> 0:07:25.880 on yield. Both obviously care a lot about fundamental credit underwriting, 0:07:25.880 --> 0:07:28.160 and we can talk about that in terms of where 0:07:28.160 --> 0:07:33.160 the market is going, but how you deliver those and 0:07:33.200 --> 0:07:39.280 the expectation management of liquidity is of paramount importance. And 0:07:39.320 --> 0:07:43.280 I think two things can be true, right, the demand 0:07:43.760 --> 0:07:49.240 for wealth products for alternatives, right, This democratization of alts 0:07:49.240 --> 0:07:54.640 that everyone keeps talking about can and will continue. And 0:07:54.800 --> 0:07:59.760 at the same time, how we manage credit risk and 0:07:59.800 --> 0:08:04.320 liquidity risk still likely needs to evolve visa via the 0:08:04.440 --> 0:08:06.800 expectations of that market, which is what I think you're 0:08:06.880 --> 0:08:10.280 ultimately getting at. And that doesn't come down to the 0:08:10.280 --> 0:08:15.480 fact that these structures are bad. Right. The business development 0:08:15.480 --> 0:08:18.720 company is the interval funds, right that have these liquidity 0:08:18.760 --> 0:08:24.080 gates in place. That's not necessarily a negative. I think 0:08:24.120 --> 0:08:27.280 a big part of this equation is the education that's 0:08:27.280 --> 0:08:31.160 going to be needed and managing expectations and also recognizing 0:08:31.200 --> 0:08:34.800 that portfolio management the people you hire to manage these things. 0:08:35.160 --> 0:08:37.880 It's not just about underwriting credit risk. You have to 0:08:37.920 --> 0:08:41.360 be able to manage liquidity and have that skill set. 0:08:41.720 --> 0:08:43.520 I'm interested in digging a bit more into what you 0:08:43.600 --> 0:08:47.000 describe as the full areas of most interests right now 0:08:47.400 --> 0:08:51.079 that comes from your clients needs your clients' demands in 0:08:51.120 --> 0:08:53.360 terms of what they want to get into. But investment 0:08:53.360 --> 0:08:58.640 grade private, commercial, real estate, structured, and growth lending. Those 0:08:58.679 --> 0:09:03.719 are four start with investment grade private. And you know, 0:09:03.760 --> 0:09:06.800 a question that often comes up when we look at 0:09:06.960 --> 0:09:09.559 public against private in that context is that there is 0:09:09.600 --> 0:09:13.160 an incredibly efficient investment grade bond market that is doing 0:09:13.240 --> 0:09:16.120 very well at funding you know, very large size, very 0:09:16.480 --> 0:09:19.480 very tight spreads. So if you're coming to an issue 0:09:19.720 --> 0:09:23.320 a borrower with a private option, then how is that 0:09:23.360 --> 0:09:25.680 better than just going to the you know, investment grade 0:09:25.720 --> 0:09:26.240 bond market. 0:09:26.320 --> 0:09:29.520 Well, I think James, you're hitting on maybe one of 0:09:29.080 --> 0:09:31.960 the fallacies that we need to break down today. Right, 0:09:32.040 --> 0:09:34.840 It's I don't think the market is any longer about 0:09:34.920 --> 0:09:41.480 private credit competing with public markets, Right. It's one interconnected ecosystem, 0:09:41.600 --> 0:09:44.160 and so I don't think that's what the future is. Right. 0:09:44.320 --> 0:09:50.120 It's borrowers are increasingly able to choose a variety of financing, Right, 0:09:50.120 --> 0:09:53.800 They're able to choose between banks, the public bond market, 0:09:54.160 --> 0:09:57.480 private credit markets all at the same time, Right, And 0:09:58.040 --> 0:10:01.240 having that perspective across those markets think is really valuable, 0:10:02.320 --> 0:10:05.800 and ultimately the choice of which market you want to 0:10:05.920 --> 0:10:10.080 use to finance a project or your company is going 0:10:10.120 --> 0:10:12.920 to be based on I think more factors than just 0:10:13.280 --> 0:10:18.240 pricing right where historically right banks public credit markets might 0:10:18.280 --> 0:10:23.199 have the tightest spreads or the most attractive pricing. Borrowers 0:10:23.200 --> 0:10:29.400 care about flexibility, borrows care about structuring. Oftentimes, investment grade 0:10:29.440 --> 0:10:34.280 private credit borrowers, large multinational corporations might be pursuing an 0:10:34.360 --> 0:10:37.280 m and a transaction that they do not want the 0:10:37.320 --> 0:10:41.160 public to know about, right, they want to finance it quietly, 0:10:41.559 --> 0:10:44.400 and so they'll use the investment grade private credit markets 0:10:44.480 --> 0:10:48.000 to do so. You're seeing more and more project finance 0:10:48.400 --> 0:10:52.280 get done through the investment grade private market, right, these 0:10:52.400 --> 0:10:55.640 these private placements or for a two type of deals. 0:10:56.520 --> 0:10:59.960 And I think that is both a recognition that borrowers 0:11:00.280 --> 0:11:03.600 have had that the ways in which they finance their 0:11:03.640 --> 0:11:07.240 businesses in the past, whether for liquidity reasons or broader 0:11:07.320 --> 0:11:11.120 macro reasons like post COVID World is a great example 0:11:11.200 --> 0:11:14.640 of that those markets may not always be open to them. 0:11:14.800 --> 0:11:18.280 There's just talking to a portfolio manager earlier today who's 0:11:18.320 --> 0:11:23.800 been investing in securitizations of auto loans and some of 0:11:23.840 --> 0:11:27.800 these issuers who have very limited balance sheet, so therefore 0:11:27.960 --> 0:11:31.000 need to sell their loans into the market historically use 0:11:31.040 --> 0:11:37.600 the structured products markets. In COVID, that liquidity wasn't there, right, 0:11:37.640 --> 0:11:39.880 but they still needed to move that risk off their 0:11:39.920 --> 0:11:42.320 balance sheet. They don't have the depth of balance sheet 0:11:42.360 --> 0:11:44.760 to hold on to that type of risk, and so 0:11:44.840 --> 0:11:49.360 they're increasingly looking to the investment grade private debt market. 0:11:49.600 --> 0:11:53.600 They're increasingly looking to private credit managers to take on 0:11:53.760 --> 0:11:57.199 some of that whole loan origination, right, So they want 0:11:57.400 --> 0:12:01.240 to work with folks or work across lender through the 0:12:01.280 --> 0:12:05.439 liquidity spectrum and then from everything from private to public. 0:12:05.920 --> 0:12:08.360 And I think James, you and I have talked in 0:12:08.400 --> 0:12:13.040 the past about AI right as a big theme and 0:12:13.400 --> 0:12:16.959 data centers. Ten years ago, you probably would have just 0:12:17.000 --> 0:12:20.920 gone to a bank and done that deal by yourself, 0:12:21.040 --> 0:12:26.840 right with a banking institution. Today the banks are financing 0:12:26.960 --> 0:12:31.240 data centers. Investment grade is financing data centers, Infra managers 0:12:31.320 --> 0:12:34.840 or financing data centers. Our commercial real estate guys are 0:12:34.880 --> 0:12:38.840 seeing the construction loans come up. So there's many ways 0:12:38.880 --> 0:12:41.400 in which you're going to finance that ecosystem. 0:12:41.960 --> 0:12:44.360 When you get involved in one of the financings for 0:12:44.760 --> 0:12:47.880 one of these large you know, sort of investment grade 0:12:48.200 --> 0:12:53.480 type issues. How exactly does it work for you? Are 0:12:53.520 --> 0:12:56.240 you originating it or are you part of a syndicate, 0:12:56.400 --> 0:13:02.880 you know, sort of purchasing the club, purchasing the asset. 0:13:03.600 --> 0:13:09.839 So it really depends on what project or asset we're financing. 0:13:10.000 --> 0:13:12.720 So our commercial real estate debt teams as an example, 0:13:13.040 --> 0:13:15.600 which play across sort of on an un levered basis 0:13:15.600 --> 0:13:17.480 what i'll call investment grade like risk, and on a 0:13:17.520 --> 0:13:20.440 levered basis some of that higher yielding risk that's more 0:13:20.480 --> 0:13:24.319 traditional and private credit markets. If they're seeing a data 0:13:24.360 --> 0:13:29.360 center construction loan as an example, oftentimes they are either 0:13:29.480 --> 0:13:32.920 a sole lender or in a very very small group 0:13:33.320 --> 0:13:37.720 of lenders. But having control in those situations is really important, 0:13:37.720 --> 0:13:40.000 So you want to have a significant piece of that 0:13:40.720 --> 0:13:44.400 in some of the more broadly I'll say broadly syndicated 0:13:44.440 --> 0:13:47.840 is the wrong word. But in some of those deals 0:13:47.880 --> 0:13:51.599 that are negotiated off market, where you have multiple players, 0:13:51.440 --> 0:13:56.040 as our IG team often will see, they might be 0:13:56.280 --> 0:13:59.160 not a controlling investor, but a significant investor. And what 0:13:59.200 --> 0:14:02.439 we like about the private investment grade markets is whether 0:14:02.440 --> 0:14:04.760 you're one of the first to show up or you 0:14:04.840 --> 0:14:07.160 come in later on as the syndicate is being formed. 0:14:07.640 --> 0:14:11.960 In those markets, you still have influence your respective of 0:14:12.000 --> 0:14:15.240 your size of structure. And I think when it comes 0:14:15.280 --> 0:14:21.040 to private credit, some of the best protection that you 0:14:21.160 --> 0:14:25.800 get as an investor is in structuring right and really 0:14:25.840 --> 0:14:30.640 getting the deal mechanics and the underwriting right that saves 0:14:30.680 --> 0:14:33.360 you ninety percent of the time in the future when 0:14:33.360 --> 0:14:38.600 things go awry, which inevitably they will, structure and underwrite 0:14:38.880 --> 0:14:42.560 is always first. David and I think whether we're investing 0:14:42.560 --> 0:14:45.360 in investment grade markets, or we're in commercial real estate markets, 0:14:46.040 --> 0:14:48.720 or we're in the COLO markets, we spend a lot 0:14:48.760 --> 0:14:55.040 of time understanding the idiosyncratic risk and then ensuring that 0:14:55.120 --> 0:14:58.160 the structures that we've put in place have the proper 0:14:58.200 --> 0:15:02.200 covenants and protections in place so that if things go sideways, 0:15:03.400 --> 0:15:05.640 we have remedy and we have an ability to work 0:15:05.680 --> 0:15:06.040 through it. 0:15:06.800 --> 0:15:09.560 How does that relate to the current AI data centers 0:15:09.720 --> 0:15:10.280 you're seeing. 0:15:10.640 --> 0:15:14.480 Yeah, I think this is probably one of the areas 0:15:14.520 --> 0:15:18.120 where we will generally agree with the market that this 0:15:18.280 --> 0:15:23.280 is a multi year secular theme, but probably an area 0:15:23.520 --> 0:15:26.920 from a real estate lens as an example, where we're 0:15:27.360 --> 0:15:31.120 less excited maybe relative to other parts of the market 0:15:31.160 --> 0:15:37.440 where that AI theme is continuing to make its way through. 0:15:37.520 --> 0:15:42.360 So in data centers specifically, our real estate team sees 0:15:42.400 --> 0:15:46.800 a lot of the construction lending type opportunities and they 0:15:46.800 --> 0:15:49.800 were an early investor in that space four or five 0:15:49.880 --> 0:15:53.840 years ago, and at that time, spreads were kind of 0:15:53.880 --> 0:15:57.760 in the four hundred plus basis point range. Financing levels 0:15:57.800 --> 0:16:01.600 were very moderate, right, so these were modest levered, know, 0:16:01.920 --> 0:16:08.680 sixty seventy percent loan to value type opportunities. Today, when 0:16:08.680 --> 0:16:11.840 we look at that space, advance rates have gone up, right, 0:16:11.920 --> 0:16:15.560 so there's a lot more leverage ninety percent in some cases, 0:16:16.440 --> 0:16:19.760 and spreads have compressed about two hundred basis points, and 0:16:19.800 --> 0:16:23.280 so when we think about that risk that we're taking 0:16:24.400 --> 0:16:27.840 relative to their return, it's a little less exciting today. 0:16:28.120 --> 0:16:31.680 That doesn't mean all data center construction is off the table. 0:16:32.400 --> 0:16:35.160 What that means for us is that the team, as 0:16:35.200 --> 0:16:38.600 they always have, thinks a lot about the location of 0:16:38.640 --> 0:16:43.160 the data center, access to power. We think a lot 0:16:43.200 --> 0:16:46.520 about sort of the less ye and what the terms 0:16:46.560 --> 0:16:51.160 of those leases are and how long that lease term 0:16:51.240 --> 0:16:54.760 is visa vis the loan, and then importantly, what our 0:16:54.800 --> 0:17:00.360 team has been very focused on lately, is terminal value exit? 0:17:00.920 --> 0:17:06.560 Right if the existing lessee or the tenant that's supposed 0:17:06.600 --> 0:17:10.480 to come in up in leaves, which they can, and 0:17:10.680 --> 0:17:14.919 and we're seeing that in structure, is what is the 0:17:15.040 --> 0:17:18.560 value of that real estate? Is it easy for somebody 0:17:18.600 --> 0:17:21.199 else to come in and take that over or is 0:17:21.240 --> 0:17:23.800 it going to be really difficult because that data center 0:17:23.920 --> 0:17:27.600 was built in a remote area where there's not a 0:17:27.640 --> 0:17:30.760 tremendous amount of demand. So we think a lot about 0:17:30.760 --> 0:17:35.320 that replacement value when evaluating data centers in today. I'll 0:17:35.320 --> 0:17:41.159 say not every situation, but by and large it's a pass. 0:17:41.400 --> 0:17:45.040 We would rather play that AI theme and I'll stick 0:17:45.080 --> 0:17:48.879 to the real estate analogy, like the way we work, 0:17:49.119 --> 0:17:51.640 the way we live, the way we travel, the way 0:17:51.640 --> 0:17:57.800 we consume right, is all being upended by AI and 0:17:57.800 --> 0:18:00.760 by the transformation that's that's here to come from our 0:18:00.800 --> 0:18:03.159 seat that means real estate's going to have to be redesigned, 0:18:03.400 --> 0:18:07.840 it's going to be reimagined. We would rather invest and 0:18:07.880 --> 0:18:11.399 play the quote unquote AI theme through some of that 0:18:11.440 --> 0:18:14.720 transition that's about to take place and lean into where 0:18:14.760 --> 0:18:17.800 we see a lot of alignment between our borrowers and 0:18:17.840 --> 0:18:21.439 ourselves versus maybe getting the top of the iceberg. That 0:18:21.520 --> 0:18:25.560 being said, James, there is a place for data center 0:18:25.600 --> 0:18:29.880 credit in client portfolios, particularly if you're viewing it as 0:18:29.880 --> 0:18:33.520 a replacement to buying the corporate issuer as an example, right, 0:18:33.760 --> 0:18:37.080 and you're getting paid some incremental spread to take on 0:18:37.480 --> 0:18:42.760 Microsoft risk or Meta risk, and there is that relative 0:18:42.840 --> 0:18:45.400 value in fixing come portfolios. We've seen it, We're investing 0:18:45.400 --> 0:18:48.720 in it, but from a private credit lens, not our 0:18:48.800 --> 0:18:52.200 highest conviction opportunity. We like beds and sheds instead. 0:18:52.600 --> 0:18:55.359 There's no pressure to deploy just because it's Microsoft and 0:18:55.400 --> 0:18:57.000 you need to get in on all the other deals 0:18:57.040 --> 0:18:59.200 that are coming down from that. You don't feel that price. 0:18:59.520 --> 0:19:02.719 We don't feel that pressure. I think as a private 0:19:02.760 --> 0:19:09.360 credit investor, what we really pride ourselves on is in situations, right, 0:19:09.760 --> 0:19:12.439 these are relationship businesses, as many of these things are. 0:19:12.520 --> 0:19:16.920 Right when you're getting access to deals you're underwriting, being 0:19:16.960 --> 0:19:21.840 able to say no is actually a superpower, and I 0:19:21.840 --> 0:19:28.360 think people forget that. Our teams are quick to say 0:19:28.400 --> 0:19:31.119 this makes sense for the type of capital that we're running, 0:19:31.200 --> 0:19:34.160 or for the portfolio that we're building, and I think 0:19:34.280 --> 0:19:38.439 for many sponsors in this business, a quick not is 0:19:38.560 --> 0:19:43.600 actually as valuable as a yes, because you're building relationships 0:19:43.600 --> 0:19:46.160 for the long term. So not everything that a certain 0:19:46.200 --> 0:19:48.399 sponsor is going to originate is going to work for 0:19:48.520 --> 0:19:52.280 our pool of capital, and that's okay. They want to 0:19:52.320 --> 0:19:55.400 know that when you are there and you show up, 0:19:55.920 --> 0:19:59.520 that there is the ability to execute. There's the flexibility 0:19:59.520 --> 0:20:01.800 in the struct suring to work with the barrower to 0:20:01.840 --> 0:20:05.080 kind of meet the needs that they have and to 0:20:05.200 --> 0:20:10.119 do it quickly and to be there when when the 0:20:10.160 --> 0:20:13.200 opportunity arises and there is alignment. And so I think 0:20:14.760 --> 0:20:16.960 quick nos are just as good as quick yesses. 0:20:17.000 --> 0:20:19.639 But just on the AI theme, you know, it is 0:20:19.680 --> 0:20:22.879 a massive, multi trillion dollar funding effort that's going to 0:20:22.880 --> 0:20:25.920 go on for several years. We're already seeing pushback in 0:20:25.960 --> 0:20:30.200 the public markets always already some you know, bad trading 0:20:30.240 --> 0:20:32.760 in names like SpaceX, and that's worrying some people. But 0:20:33.160 --> 0:20:35.480 is there any sign of indigestion on the private side 0:20:35.520 --> 0:20:38.600 for all this AI funding that's going on. 0:20:40.119 --> 0:20:42.520 I think it depends on the pool of capital right 0:20:44.359 --> 0:20:47.360 there still seems to be you know, every time I'm 0:20:47.359 --> 0:20:52.760 out talking to various clients, there's certainly an eye towards 0:20:53.200 --> 0:20:56.720 I'll say, we've seen a lot more infrastructure allocations from 0:20:56.760 --> 0:21:00.000 the client side this year to buy into the long 0:21:00.119 --> 0:21:04.800 term theme. Ultimately, James like it, and I don't mean 0:21:04.800 --> 0:21:07.200 for this to be a cop out, right, but it's 0:21:07.240 --> 0:21:10.919 about aligning your expectations and your time horizon with the 0:21:11.000 --> 0:21:14.400 return right. And so I think for those that view 0:21:14.440 --> 0:21:17.600 this as sort of that core opportunity where you're going 0:21:17.680 --> 0:21:23.679 to get kind of mid single digit type returns, there's 0:21:23.720 --> 0:21:25.760 a lot of opportunity. And I don't think that you've 0:21:25.760 --> 0:21:28.840 seen the tissue rejection, but it's just recognizing it for 0:21:28.880 --> 0:21:32.480 what it is. Right, if you, as an allocator or 0:21:32.520 --> 0:21:36.320 an investor, say, look, I'm looking for my fifteen plus 0:21:36.359 --> 0:21:41.160 percent return, I'm not sure that you're going to get 0:21:41.160 --> 0:21:45.879 that from a data center loan today, given where the 0:21:45.920 --> 0:21:48.560 market is, and if you are or that is what 0:21:48.920 --> 0:21:53.720 one is promised, there's probably some other risk that's permeating 0:21:53.760 --> 0:21:55.520 in the system. So I don't think there's been any 0:21:55.880 --> 0:21:59.720 sort of oversaturation of the market. I think you're just 0:21:59.720 --> 0:22:04.360 seeing more segmented pools of capital for the various opportunities 0:22:04.440 --> 0:22:06.440 that are out there, and that's where we as investors 0:22:06.480 --> 0:22:09.560 need to be really disserting of am I getting compensated 0:22:09.560 --> 0:22:11.560 for the risks that I'm taking and for the time 0:22:11.600 --> 0:22:13.160 horizon upon which I'm investing. 0:22:13.480 --> 0:22:15.879 Yeah, I was going to ask what you've seen just 0:22:16.040 --> 0:22:19.440 from trend to wise on a year to date basis 0:22:19.480 --> 0:22:26.000 for spread premiums between private financings and public financings for 0:22:26.440 --> 0:22:27.920 high grade assets. 0:22:28.040 --> 0:22:31.159 For high grade assets, I think it certainly ebbs and flows. 0:22:31.200 --> 0:22:35.040 In the more syndicated parts of the market. I'm certainly 0:22:35.040 --> 0:22:39.160 still at a premium relative to history, but you can 0:22:39.200 --> 0:22:43.399 see things in the one hundred to two hundred basis 0:22:43.440 --> 0:22:47.600 point range. I think as you get out on the 0:22:48.440 --> 0:22:52.080 more risky, the heavier transitional side of the world in 0:22:52.119 --> 0:22:56.840 areas like real estate, that premium today is probably somewhere 0:22:56.840 --> 0:23:00.760 between two to four hundred basis points, depending on what 0:23:00.840 --> 0:23:04.159 part of the spectrum that you're playing on, and what. 0:23:04.359 --> 0:23:07.960 What is the risk premium compensating you for it. Is 0:23:07.960 --> 0:23:11.879 it all liquidity or is it complexity? Is it you know, 0:23:12.040 --> 0:23:14.520 like if I were an insurance life insurance company with 0:23:14.560 --> 0:23:18.760 sticky liabilities and you know, a pretty good actuarial level 0:23:18.760 --> 0:23:21.040 of certainty around how long they're going to stick around for, 0:23:21.720 --> 0:23:24.320 I should be waiving this in every. 0:23:24.200 --> 0:23:29.040 Day and some are, and they are right because I 0:23:29.400 --> 0:23:32.119 think they certainly see the opportunity and they have the 0:23:32.200 --> 0:23:35.400 duration of the capital didd To answer your question directly, 0:23:36.440 --> 0:23:40.480 it's all of the above, yeah, right, And and that's 0:23:40.480 --> 0:23:42.359 why I say there's an illiquidity premium and there's a 0:23:42.400 --> 0:23:46.120 complexity premia. I think we often think about them and aggregate, right, 0:23:46.160 --> 0:23:49.639 And many of our clients in this space when they 0:23:49.680 --> 0:23:52.840 think about private credit really are looking at what is 0:23:52.880 --> 0:23:56.000 the premium relative to public markets that I'm getting right. 0:23:56.040 --> 0:23:59.199 So oftentimes the quote unquote benchmark will be, you know, 0:23:59.359 --> 0:24:03.280 high yield or levered bank loans plus some spread of 0:24:03.800 --> 0:24:07.200 two three hundred basis points, and that's how you assess, 0:24:07.320 --> 0:24:12.879 am I getting compensated for that premia. Certainly the duration 0:24:13.320 --> 0:24:16.720 of these loans sort of on the short end can 0:24:16.760 --> 0:24:20.520 be three to five years. On the longer end, there's 0:24:20.680 --> 0:24:24.119 ten to twenty year paper out there as well, and 0:24:24.200 --> 0:24:27.200 so in the longer dated paper it might be more 0:24:27.240 --> 0:24:29.760 investment grade like in terms of the issuer, So your 0:24:30.119 --> 0:24:33.399 aggregate spread is not going to be huge. But in 0:24:33.440 --> 0:24:36.360 those instances, that's where you may see the premia actually 0:24:36.440 --> 0:24:40.439 be wider to the public market because you're taking on 0:24:40.480 --> 0:24:43.800 that additional illiquidity, and then on the complexity of the deal. 0:24:45.040 --> 0:24:48.920