WEBVTT - Understanding Infrastructure, Building Innovation 

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<v Speaker 1>Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside

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<v Speaker 1>my co host Matt Miller. Every business day, we bring

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<v Speaker 1>you interviews from CEOs, market pros, and Bloomberg experts, along

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<v Speaker 1>with essential market moving news. Find the Bloomberg Markets Podcast

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<v Speaker 1>on Apple Podcasts or wherever you listen to podcasts, and

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<v Speaker 1>at Bloomberg dot com slash podcast. So when I think, uh,

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<v Speaker 1>infrastructure plans, all I think about really is the Gateway project,

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<v Speaker 1>getting those railroad tunnels under the Hudson River. So these

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<v Speaker 1>tunnels that are there and a hundred years old tumble

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<v Speaker 1>in on me one day while I'm commuting. But there's

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<v Speaker 1>a lot more to it than that, and a lot

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<v Speaker 1>of folks think this is an opportunity for America to

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<v Speaker 1>get smart with their infrastructure. Andre Brumfield, Cities and Urban

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<v Speaker 1>design leader for Gensler, joins us. Andre, thanks so much

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<v Speaker 1>for joining us here. Again, people think about infrastructure, and

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<v Speaker 1>I think bridges and tunnels and roads. How should we

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<v Speaker 1>be thinking about infrastructure in this country? We're about to

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<v Speaker 1>go on a pretty big spending spree. Well, good morning.

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<v Speaker 1>The first, thanks for having me on. Second, I think

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<v Speaker 1>to at least address your question I think this is

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<v Speaker 1>an opportunity to think much bigger uh than than uh

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<v Speaker 1>you know, tunnels, uh and some of the obvious things

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<v Speaker 1>that we see day to day. But if you look

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<v Speaker 1>back at history, you think about the aspirations of Lenny

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<v Speaker 1>Johnson's Great Society Programs in the nineteen sixties, you know,

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<v Speaker 1>or some of the successful elements of President rooseveltsd Deal

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<v Speaker 1>program as related to pw A profit projects. I think

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<v Speaker 1>this is our opportunity for the Infrastructure Bill to, you know,

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<v Speaker 1>think about how we can actually have a lasting impact

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<v Speaker 1>on a number of things that have been neglected over

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<v Speaker 1>the last twenty, maybe even thirty years as it relates

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<v Speaker 1>to roadways, public transportation. You know. Hopefully, I think we

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<v Speaker 1>look back in another ten or fifteen years, you know,

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<v Speaker 1>we will know that this was not only money well spent,

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<v Speaker 1>the money well invested, but this could be a turning

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<v Speaker 1>point of how we actually start to reposition a number

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<v Speaker 1>of our cities. You Know. The problem is, I think

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<v Speaker 1>a lot of people would agree that we need to

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<v Speaker 1>do something about the infrastructure in the US, and would

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<v Speaker 1>have no problem paying for it as well. If they

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<v Speaker 1>trusted the government to spend the money well Isn't that

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<v Speaker 1>a big concern. Doesn't the federal government waste a ton

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<v Speaker 1>of money? Isn't there even in America a lot of corruption? Well,

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<v Speaker 1>I think this is where you know, and I know

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<v Speaker 1>that the Biden administration will be open to this, which

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<v Speaker 1>is you know, really about transparency and it really comes

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<v Speaker 1>from you know, not only at the federal level, but

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<v Speaker 1>also at the state in the local level. I think

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<v Speaker 1>when you talk about and you think about transparency through

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<v Speaker 1>this process and how the money is invested and where

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<v Speaker 1>it's invested, you know, I think the more that people

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<v Speaker 1>are aware and the more that people have a say

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<v Speaker 1>in this, or more that people actually understand how the

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<v Speaker 1>moneys are being spent, you know that you trust will

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<v Speaker 1>get stronger over time. So you know, I think for me,

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<v Speaker 1>this is not about criticizing at least you know, um,

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<v Speaker 1>how the money is going to necessarily be spent, uh,

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<v Speaker 1>in terms of you know, distrust with the government. It's

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<v Speaker 1>really more about you know, how it to we actually

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<v Speaker 1>be creative and making sure that you know, this infrastructure

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<v Speaker 1>bill is really touching you know, the places in our

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<v Speaker 1>urban and our suburban environments, even our rural environments where

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<v Speaker 1>it needs to be touching. You know, I just read

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<v Speaker 1>the book on Robert Moses, the guy who effectively built

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<v Speaker 1>modern New York City, and it's just we're amazing the

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<v Speaker 1>long ranging impact that guy had about a lot of

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<v Speaker 1>good but a lot of bad. Um. I'm thinking about

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<v Speaker 1>the highways that cut apart neighborhoods all across New York

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<v Speaker 1>City and kind of read, you know, kind of redistricted,

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<v Speaker 1>if you will, neighborhoods that have been around forever. Going forward,

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<v Speaker 1>You've got to feel like mass transportation needs to be

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<v Speaker 1>more ingrained or integrated into our infrastructures. That's something you

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<v Speaker 1>think has support. I think that's something that's critical. And

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<v Speaker 1>you know you can't drop Robert Moses into power broker

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<v Speaker 1>here in this short interview. I mean that's going to

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<v Speaker 1>take them exactly. Have you read the book, oh, I mean,

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<v Speaker 1>you know, that's one of the few books and if

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<v Speaker 1>you haven't read it, for those are listening, it's it's

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<v Speaker 1>a must read. But you have to allocate a lot

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<v Speaker 1>of time because it is a very big book and

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<v Speaker 1>very long. It took me the entire summer on the beach,

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<v Speaker 1>right and you almost have to jump around depending on

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<v Speaker 1>what your sweet spot is it relates to urban planning

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<v Speaker 1>and the built environment. But I think you know, UM,

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<v Speaker 1>we you know, to answer the second part of your question,

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<v Speaker 1>UH related to infrastructure and public transportation. If we think

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<v Speaker 1>about where we've been and where we currently are with

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<v Speaker 1>COVID UH and public transportation of how people do get

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<v Speaker 1>around what we can't do is slide back into or

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<v Speaker 1>go deeper into an auto dominated society or at least

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<v Speaker 1>how we actually moved throughout our cities. UM. If anything

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<v Speaker 1>that we've learned, at least in the last two or

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<v Speaker 1>three weeks with some of the latest reports coming back

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<v Speaker 1>on where we are in terms of climate change and UM,

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<v Speaker 1>how that's impacting our built environment. UH, in our world

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<v Speaker 1>as a whole, we have to think about public transportation.

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<v Speaker 1>And if you look at um, you know this is

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<v Speaker 1>also not about rails. If you look at some of

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<v Speaker 1>the great investment I think that the city of Cleveland,

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<v Speaker 1>for instance, has done over the past uh seven eight years,

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<v Speaker 1>are really expanding and implementing your blessed blessed rapid transit

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<v Speaker 1>systems throughout their city. And this is about how not

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<v Speaker 1>only get people moving to different parts of the city,

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<v Speaker 1>but how you actually get people who are underserved in

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<v Speaker 1>you know, um underserved neighborhoods to employment centers without having

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<v Speaker 1>to necessarily get in their car and sometimes people don't

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<v Speaker 1>have public transfer a car to get to the places

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<v Speaker 1>of employment. This is about connecting I think, you know,

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<v Speaker 1>UM different employment centers, you know, through blessed rap or transit,

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<v Speaker 1>through other investment that's needed, uh and public transportation as

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<v Speaker 1>a whole. So I think there's anything that this bill

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<v Speaker 1>will do will start to not only address that in

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<v Speaker 1>terms of you know, getting beyond just you know, repairing

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<v Speaker 1>of streets and bridges, you know, but how do we

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<v Speaker 1>actually think about manstering expectation of where we actually need

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<v Speaker 1>to kind of double down and invest because it's a

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<v Speaker 1>long run. It's a long term investment that I know

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<v Speaker 1>the next generation will benefit from, even though we can't

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<v Speaker 1>fully realize it now. All right, Andre, thank you so

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<v Speaker 1>much for joining us. We really appreciate it. Andre Brumfeld,

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<v Speaker 1>Cities and Urban Design leader firm name is Gensler. Talking

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<v Speaker 1>about the you know, fiscal stimulus coming down, We're looking

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<v Speaker 1>at some infrastructure bill winding its way through Congress. UH,

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<v Speaker 1>many many billions of dollars UH need to spend it.

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<v Speaker 1>Invested wisely is the operative word here. We're gonna more

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<v Speaker 1>coming up. This is Bloomberg. Now, the Conference Boards Leading

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<v Speaker 1>Economic Index rose zero point nine percent in July. UM.

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<v Speaker 1>The estimate was for a gain of zero point seven

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<v Speaker 1>per cent. So looks good. I guess let's bring in

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<v Speaker 1>Adam on ozol Drum. He's the director of Economic Research

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<v Speaker 1>and a global Research Chair at the Conference Board. UM,

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<v Speaker 1>what do we take from these numbers? Out of on?

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<v Speaker 1>Good morning, good to be here. UM, the l EI

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<v Speaker 1>has been rising pretty strongly over the last several months,

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<v Speaker 1>in fact since last year. So all of that really

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<v Speaker 1>points to UH, strong growth, a robust growth environment for

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<v Speaker 1>the economy in the US, at least for the second

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<v Speaker 1>half of the year. I don't give us that what

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<v Speaker 1>really drives this index that a lot of investors really

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<v Speaker 1>focused on one of the key drivers. Sure, the US

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<v Speaker 1>Leading Economic Index has ten components. Uh. These are all

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<v Speaker 1>leading indicators that have proven to help to anticipate major

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<v Speaker 1>business cycle recessions. So they turned down ahead of the recession,

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<v Speaker 1>and you know, putting them all together in this index

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<v Speaker 1>is giving us a clearer view of you know, where

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<v Speaker 1>the risks lie in the economy. UM, and whether a

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<v Speaker 1>recession peak turning point is approaching or not. So they

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<v Speaker 1>are objectives UM measures UM. And in this case, you know,

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<v Speaker 1>all ten components rose in July UM. And these types

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<v Speaker 1>of readings have been pretty common over the last few months,

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<v Speaker 1>so it is pointing to a pretty robust business cycle

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<v Speaker 1>expansion unfolding, although we get um other indicators like well,

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<v Speaker 1>housing starts is said to be a leading indicator, and

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<v Speaker 1>it was bad. The consumer um UH Confidence Index from

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<v Speaker 1>the University of Michigan was also quite rough. Um. Are

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<v Speaker 1>you starting to see things fray a little bit? Sure?

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<v Speaker 1>And and there are indicators of housing and consumer expectations

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<v Speaker 1>as part of the leading index as well. UM. And

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<v Speaker 1>that's one of the advantages of looking at the summary

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<v Speaker 1>measure like the leading index, because you're not really looking

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<v Speaker 1>at just one area, but overall how the economy of

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<v Speaker 1>the business cycle is doing. UM. So while the underlying

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<v Speaker 1>trend in the leading indicators is still positive and pointing

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<v Speaker 1>to you know, a good growth environment, there are some

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<v Speaker 1>areas of risk that might kind of raise their heads. UM.

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<v Speaker 1>So uh, you know, we're watching sort of how the

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<v Speaker 1>pandemic is evolving very closely. Uh. The economics or environment

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<v Speaker 1>is still you know, highly dependent on you know, how

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<v Speaker 1>what happens with the delta variant and whether people are

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<v Speaker 1>being you know, comfortable to uh go back to business

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<v Speaker 1>as usual in a way and go back to you know,

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<v Speaker 1>um using those in person services, especially as as we've

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<v Speaker 1>been predicting. Uh so UM, you know, if the pandemic

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<v Speaker 1>takes uh downturn negative turn affects confidence, UM, there there

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<v Speaker 1>would you some more negative impact. That's something to watch

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<v Speaker 1>out for as a as a risk in the economy.

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<v Speaker 1>And then the other area might be uh that um,

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<v Speaker 1>there is rising concern about inflation and whether that might

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<v Speaker 1>uh you know, uh leads central banks to become more

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<v Speaker 1>concerned and start to raise policy rates. And uh there

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<v Speaker 1>could be of course direct effects on the economy through

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<v Speaker 1>mortgage rates and other types of economic activity. Talk to

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<v Speaker 1>us about the labor market AUTUMNT we had another job's

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<v Speaker 1>claims number that came in, uh, you know, below foreigner thousand,

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<v Speaker 1>a little bit better than expected. How does that figure

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<v Speaker 1>into your index? Yeah, Again, the labor markets is an

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<v Speaker 1>important part of the leading indicators. UM. The UH initial

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<v Speaker 1>claims for unemployment is one of the components UM, and

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<v Speaker 1>in fact, it has been a very important component throughout

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<v Speaker 1>the pandemic recession then the recovery. UM. And you know,

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<v Speaker 1>now we're starting to see initial claims coming back to

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<v Speaker 1>more normal levels that we used to seeing during expansions. Uh.

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<v Speaker 1>And maybe you know, further gains uh from unemployment claims

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<v Speaker 1>is going to be limited. UM. So I don't know. UM.

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<v Speaker 1>You know, the the the levels in claims that we

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<v Speaker 1>were seeing before, we're unusually low. Um. And you know

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<v Speaker 1>during expansions they tend to be around that uh to

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<v Speaker 1>fifty two three fifty range. UM. And you know, I'm

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<v Speaker 1>not sure that I would expect uh, the claims to

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<v Speaker 1>you know, drive the leading indicators as much in the

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<v Speaker 1>future as it has uh throughout this recovery. All right, Otoman,

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<v Speaker 1>thank you so much for joining us. We must appreciate

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<v Speaker 1>getting your thoughts on these important economic data points. Automan

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<v Speaker 1>also Drum he is a director of Economic Research and

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<v Speaker 1>Global Research Chair at the conference board, joining us on

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<v Speaker 1>the phone, and we appreciate getting that. So again, the

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<v Speaker 1>leading economic indicator for the month of May came in

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<v Speaker 1>a little bit better than expected here and uh so

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<v Speaker 1>in the crucial variable will be this delta of virus

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<v Speaker 1>and when will it peak and when can we get

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<v Speaker 1>to the other side of that. So a lot of

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<v Speaker 1>folks are paying attention to that, as they should, as

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<v Speaker 1>well as to the vaccination rates which are doing a

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<v Speaker 1>little bit better. Well, we are twelve years into this

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<v Speaker 1>bull marketed investors are thinking about areas that may represent

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<v Speaker 1>some value in a market that has some stretched valuations.

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<v Speaker 1>That is a challenge increasingly for investors. Brian macaulay joins

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<v Speaker 1>US now. He's a portfolio manager at Hennessey Focus Funds

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<v Speaker 1>based in Arlington, Virginia. Has some thoughts here. So Brian, again,

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<v Speaker 1>twelve years into this bull market, the markets doubled off

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<v Speaker 1>of those March lows. What's an investor to do here

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<v Speaker 1>with fresh money? Great? Yeah, I think that's really the

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<v Speaker 1>question of the day. And um, you know, we we

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<v Speaker 1>always approach investing with a long term mindset, so we're

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<v Speaker 1>trying to buy businesses for the next five and ten years,

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<v Speaker 1>and so in today's environment, it is difficult to find

0:13:16.960 --> 0:13:20.160
<v Speaker 1>attractive investments with that type of time horizon. You know,

0:13:20.200 --> 0:13:24.840
<v Speaker 1>we've seen really tremendous price performance out of the technology

0:13:24.880 --> 0:13:28.560
<v Speaker 1>sector over the last several years, understandably so to some

0:13:28.640 --> 0:13:31.640
<v Speaker 1>extent um, but in our view, a lot of those

0:13:31.679 --> 0:13:37.800
<v Speaker 1>companies require really aggressive growth assumptions to justify their current valuations,

0:13:37.840 --> 0:13:40.840
<v Speaker 1>and so we scan across the market and look for

0:13:40.880 --> 0:13:45.040
<v Speaker 1>other opportunities. You know, we're finding opportunities and i'd say

0:13:45.160 --> 0:13:50.160
<v Speaker 1>more mundane businesses that are not technology companies but do

0:13:50.320 --> 0:13:53.920
<v Speaker 1>have an important element of innovation to what they're doing.

0:13:54.160 --> 0:13:57.599
<v Speaker 1>And so for us, we're finding opportunities and companies like

0:13:57.679 --> 0:14:03.760
<v Speaker 1>CarMax and Allegiance Travel and r H that hasnique stories

0:14:04.800 --> 0:14:08.760
<v Speaker 1>restoration formally known as restoration hardware. Let me uh, let

0:14:08.760 --> 0:14:11.719
<v Speaker 1>me start with car Max because I think it's fascinating

0:14:11.920 --> 0:14:15.560
<v Speaker 1>love the car business industry, and I wonder why would

0:14:15.600 --> 0:14:18.720
<v Speaker 1>you go with the retailer and not with a manufacturer.

0:14:18.720 --> 0:14:22.480
<v Speaker 1>I look at you know, um price earnings ratios on

0:14:22.800 --> 0:14:25.680
<v Speaker 1>companies like Ford and Volkswagen, and we're only talking about

0:14:25.680 --> 0:14:28.080
<v Speaker 1>five or six, not that it's ever been you know,

0:14:28.200 --> 0:14:31.120
<v Speaker 1>not that they've ever had really high valuations. But if

0:14:31.120 --> 0:14:33.680
<v Speaker 1>you believe in the auto industry, why not the manufacturers?

0:14:35.440 --> 0:14:38.880
<v Speaker 1>Well it's a it's a reasonable question, you know, our

0:14:39.920 --> 0:14:42.240
<v Speaker 1>our approaches, what do we think this business is going

0:14:42.320 --> 0:14:44.240
<v Speaker 1>to be worth in five years? What do we think

0:14:44.240 --> 0:14:47.240
<v Speaker 1>it's gonna be worth in ten years. And that's a

0:14:47.360 --> 0:14:50.800
<v Speaker 1>very difficult question for us. For the automakers, you know,

0:14:50.880 --> 0:14:54.800
<v Speaker 1>they generally have relatively low returns on capital and returns

0:14:54.840 --> 0:14:59.120
<v Speaker 1>on equity, so not naturally great businesses. In contrast, the

0:14:59.160 --> 0:15:04.560
<v Speaker 1>company like car actually does have a unique value proposition

0:15:04.840 --> 0:15:08.560
<v Speaker 1>and it does have very strong returns on capital and equity,

0:15:08.560 --> 0:15:11.880
<v Speaker 1>and so that means to us it's a good business

0:15:11.920 --> 0:15:14.720
<v Speaker 1>that should create a lot of value over the long term.

0:15:14.760 --> 0:15:16.240
<v Speaker 1>So we think they're going to be able to compound

0:15:16.240 --> 0:15:18.680
<v Speaker 1>their earnings that a mid teens ready for the next five,

0:15:19.360 --> 0:15:23.840
<v Speaker 1>maybe even ten years, and from today's starting price evaluation

0:15:23.920 --> 0:15:26.960
<v Speaker 1>of about twenty times earnings, um, you know, we think

0:15:26.960 --> 0:15:29.000
<v Speaker 1>we're gonna end up with a you know, a mid

0:15:29.040 --> 0:15:32.200
<v Speaker 1>teens type rate of return for annum in the stock

0:15:32.480 --> 0:15:35.240
<v Speaker 1>over those long time horizons as well. Yeah, brilliant. You know,

0:15:35.240 --> 0:15:38.040
<v Speaker 1>it's interesting, CarMax. We had news today that Toyota is

0:15:38.080 --> 0:15:41.640
<v Speaker 1>going to cut its production in September pretty significantly by here,

0:15:41.680 --> 0:15:44.960
<v Speaker 1>so some supply issues. There's just no cars out there

0:15:45.000 --> 0:15:48.120
<v Speaker 1>for the retailers to sell. My guess is you think

0:15:48.200 --> 0:15:50.640
<v Speaker 1>that's just a short term blip into what is a

0:15:50.720 --> 0:15:56.240
<v Speaker 1>better longer term story. Yes, it's certainly been a wild

0:15:56.440 --> 0:16:00.680
<v Speaker 1>ride for the auto industry and you know, used car

0:16:01.480 --> 0:16:04.400
<v Speaker 1>UH sellers such as CarMax over the last year plus,

0:16:05.200 --> 0:16:07.720
<v Speaker 1>you know, the shortage of new vehicles, driven to some

0:16:07.800 --> 0:16:12.440
<v Speaker 1>large extent by supply chain issues and semiconductor shortages, has

0:16:12.520 --> 0:16:15.040
<v Speaker 1>meant that the used car market has become the release valve.

0:16:15.160 --> 0:16:18.320
<v Speaker 1>And what we've seen more recently is that used car

0:16:18.360 --> 0:16:24.440
<v Speaker 1>pricing is up nearly according to most recent Mannheim measures.

0:16:24.600 --> 0:16:29.280
<v Speaker 1>And UH, you know, we've got supply shortages and in

0:16:29.600 --> 0:16:33.520
<v Speaker 1>use cars because there's just so much demand for vehicles

0:16:33.560 --> 0:16:36.800
<v Speaker 1>today and so um. You know, Fortunately for a company

0:16:36.840 --> 0:16:41.880
<v Speaker 1>like CarMax that's able to source vehicles directly from UH

0:16:42.080 --> 0:16:45.320
<v Speaker 1>customers through trade ins and you know, they'll buy their

0:16:45.400 --> 0:16:46.880
<v Speaker 1>your car from you, even if you don't buy a

0:16:46.880 --> 0:16:50.640
<v Speaker 1>car from them. They they've had a proprietary source of

0:16:50.720 --> 0:16:54.240
<v Speaker 1>supply for these used vehicles and safe to some large extent,

0:16:54.320 --> 0:16:58.520
<v Speaker 1>been able to better match their supply with the demand

0:16:58.520 --> 0:17:01.240
<v Speaker 1>they're seeing. And that's translated in really good results for them.

0:17:01.680 --> 0:17:04.199
<v Speaker 1>But yes, this is a transitory issue that should check

0:17:04.240 --> 0:17:08.280
<v Speaker 1>out over the next several quarters. I have a two

0:17:08.280 --> 0:17:11.679
<v Speaker 1>thousand and two thou twenty cars sitting downstairs in the garage.

0:17:11.760 --> 0:17:14.920
<v Speaker 1>Both are going for used more than I paid for them.

0:17:15.600 --> 0:17:18.720
<v Speaker 1>So it's pretty crazy to look at these prices. What

0:17:18.800 --> 0:17:22.960
<v Speaker 1>about our Age Restoration Hardware Why the furniture High end

0:17:23.000 --> 0:17:28.000
<v Speaker 1>furniture retailer, Well r H is again a little bit

0:17:28.080 --> 0:17:31.280
<v Speaker 1>like CarMax. It's it's got a very different business model

0:17:31.520 --> 0:17:38.560
<v Speaker 1>and a fairly state industry. Um. They are opening design

0:17:38.600 --> 0:17:46.560
<v Speaker 1>galleries which are really large, impressive showcases for there assortment

0:17:46.680 --> 0:17:51.800
<v Speaker 1>of products, and it is um both the direct economic

0:17:51.840 --> 0:17:54.200
<v Speaker 1>opportunity for them. They could double their sales and nearly

0:17:54.200 --> 0:17:58.439
<v Speaker 1>triple their profits when they close an old, small, small

0:17:58.440 --> 0:18:02.399
<v Speaker 1>based store and open a large design gallery. Um. But

0:18:02.480 --> 0:18:07.040
<v Speaker 1>it's also elevating the brand, and our H is striving

0:18:07.040 --> 0:18:12.720
<v Speaker 1>to become kind of unprecedented luxury brand in the home

0:18:12.760 --> 0:18:16.560
<v Speaker 1>furnishing space and here to four that's not been something

0:18:16.920 --> 0:18:20.720
<v Speaker 1>that has been done. And so our H is trying

0:18:20.760 --> 0:18:24.639
<v Speaker 1>to elevate themselves to luxury status, which would come with

0:18:24.960 --> 0:18:29.640
<v Speaker 1>luxury margins and luxury turns on equity and capital. And

0:18:29.840 --> 0:18:34.399
<v Speaker 1>they've done very well so far on that path, highest

0:18:34.400 --> 0:18:37.680
<v Speaker 1>margins in the industry by nearly two times and They've

0:18:37.720 --> 0:18:40.040
<v Speaker 1>got a lot more room to go opening up these

0:18:40.080 --> 0:18:43.240
<v Speaker 1>design droleries across the country. We think they can more

0:18:43.280 --> 0:18:45.720
<v Speaker 1>than double their U S stores through this process, and

0:18:45.720 --> 0:18:48.879
<v Speaker 1>then they've got a global opportunity beyond. Brian McAuley from

0:18:48.880 --> 0:18:52.520
<v Speaker 1>Hennessy Focus Fun thanks for joining us. This is Bloomberg.

0:18:56.200 --> 0:19:00.000
<v Speaker 1>I promised you a story on private equity offering high

0:19:00.000 --> 0:19:04.919
<v Speaker 1>net worth individuals riskier loans obviously, UM, you know, with

0:19:04.960 --> 0:19:08.080
<v Speaker 1>more risk you expect more reward. Olivia, i'man wrote the

0:19:08.119 --> 0:19:11.440
<v Speaker 1>story with Heather Pearlberg and Olivia what are we talking

0:19:11.480 --> 0:19:15.960
<v Speaker 1>about here? How risky and what kind of returns? Yeah?

0:19:16.080 --> 0:19:18.200
<v Speaker 1>For sure, you know, thank you for having me on

0:19:18.880 --> 0:19:22.120
<v Speaker 1>the thing. With private credit UM, and that's where these

0:19:22.160 --> 0:19:25.919
<v Speaker 1>investments are in there within the private credit market, loans

0:19:25.960 --> 0:19:30.239
<v Speaker 1>to middle market companies. UM. It's extremely opaque market. A

0:19:30.240 --> 0:19:32.960
<v Speaker 1>lot of the loans are not subject to ratings by

0:19:32.960 --> 0:19:36.240
<v Speaker 1>credit graders, and before the pandemic, there was a lot

0:19:36.240 --> 0:19:39.199
<v Speaker 1>of concern about how the asset class would hold up

0:19:39.200 --> 0:19:43.080
<v Speaker 1>in a downturn. At the same time, these the market

0:19:43.240 --> 0:19:46.600
<v Speaker 1>is really a liquid Lenders typically hold these loans for

0:19:46.680 --> 0:19:50.159
<v Speaker 1>the maturity of the loan, and they don't really trade

0:19:50.160 --> 0:19:52.960
<v Speaker 1>on the secondary market, so you can't an investor can't

0:19:52.960 --> 0:19:54.760
<v Speaker 1>pull their money out in a pinch like with the

0:19:54.840 --> 0:19:59.280
<v Speaker 1>soccer bond um. But that being said, some of these

0:19:59.280 --> 0:20:02.400
<v Speaker 1>annualized or turns are surpassing eight per cent, so that

0:20:02.440 --> 0:20:05.680
<v Speaker 1>looks pretty attractive. When um, you're looking at what deals

0:20:05.680 --> 0:20:09.879
<v Speaker 1>are globally right now Olivia, how much how far do

0:20:09.920 --> 0:20:11.640
<v Speaker 1>you think these pe firms are looking to go out

0:20:11.640 --> 0:20:13.440
<v Speaker 1>on the risk curve? I mean when you're talking about

0:20:13.440 --> 0:20:15.320
<v Speaker 1>some of these leverage loans, you can get some leverage

0:20:15.680 --> 0:20:17.800
<v Speaker 1>on a net that the IBATA of four or five

0:20:18.040 --> 0:20:22.280
<v Speaker 1>six times, which you know can be really challenging if

0:20:22.359 --> 0:20:24.680
<v Speaker 1>you if you go into an economic downturn like we experienced,

0:20:25.560 --> 0:20:28.920
<v Speaker 1>how much risk do you think they will take? It's

0:20:28.960 --> 0:20:31.359
<v Speaker 1>a very good point. There's actually a recent report that

0:20:31.440 --> 0:20:34.359
<v Speaker 1>just came out that leverage levels within the private credit

0:20:34.440 --> 0:20:38.879
<v Speaker 1>market have remained relatively stable through the pandemic. But you

0:20:38.960 --> 0:20:42.000
<v Speaker 1>are still talking, like you said, around four to five times.

0:20:42.359 --> 0:20:44.920
<v Speaker 1>And when you're looking at the upper middle market, UM,

0:20:44.960 --> 0:20:49.120
<v Speaker 1>where the loans are surpassing one billion dollars, we've heard

0:20:49.119 --> 0:20:52.360
<v Speaker 1>of deals that are getting done with eight times of leverage,

0:20:52.480 --> 0:20:56.879
<v Speaker 1>So there there is risk there right now, the default

0:20:57.040 --> 0:20:59.960
<v Speaker 1>level in middle market companies has dropped to a three

0:21:00.080 --> 0:21:04.640
<v Speaker 1>year low. That's data from advisory firm Lincoln International and

0:21:06.200 --> 0:21:09.119
<v Speaker 1>so so, so the risk has abated right now, but

0:21:09.200 --> 0:21:12.359
<v Speaker 1>that's also been bolstered by all the ciscal and monetary

0:21:12.440 --> 0:21:15.720
<v Speaker 1>policy that's been flooded into the economy right now. So

0:21:17.200 --> 0:21:19.840
<v Speaker 1>there's always going to be risk with these loans. And

0:21:19.880 --> 0:21:22.119
<v Speaker 1>obviously the more debt that you tap on and and

0:21:22.240 --> 0:21:25.440
<v Speaker 1>the more leverage, the riskier they're going to be. And

0:21:25.880 --> 0:21:28.800
<v Speaker 1>it would, I mean, it would strike me that you know,

0:21:28.840 --> 0:21:32.159
<v Speaker 1>if it was a more risk free scenario or a

0:21:32.280 --> 0:21:35.800
<v Speaker 1>better return scenario, institutions would be getting this. If they're

0:21:35.840 --> 0:21:40.240
<v Speaker 1>shopping it around to you know, individuals, as sophisticated as

0:21:40.280 --> 0:21:43.840
<v Speaker 1>they may be, that's got to be a concern. Well,

0:21:43.880 --> 0:21:49.760
<v Speaker 1>so it's interesting. So actually these are products that traditionally

0:21:49.760 --> 0:21:53.640
<v Speaker 1>have only gone to institutions, So institutional investors have been

0:21:54.080 --> 0:21:59.240
<v Speaker 1>the primary investor within private credit endowment funds, pension funds.

0:21:59.480 --> 0:22:01.880
<v Speaker 1>Now private equity is trying to do as they're trying

0:22:01.880 --> 0:22:05.960
<v Speaker 1>to tack this new pool of investors. Previously, retail wasn't

0:22:05.960 --> 0:22:09.560
<v Speaker 1>allowed into these funds, partly because of the risk and

0:22:09.600 --> 0:22:12.800
<v Speaker 1>now they're lowering the bar and offering it for high

0:22:12.920 --> 0:22:16.120
<v Speaker 1>net worth individuals. I guess you could say. The one

0:22:16.240 --> 0:22:21.000
<v Speaker 1>concern or critique is is that some firms allocate the

0:22:21.040 --> 0:22:25.320
<v Speaker 1>retail investors money to the same funds that the institutions

0:22:25.320 --> 0:22:28.440
<v Speaker 1>that access to, so they're they're receiving investments and returns

0:22:28.440 --> 0:22:32.520
<v Speaker 1>from the same portfolios, whereas others have wrapped up the

0:22:32.600 --> 0:22:37.240
<v Speaker 1>funds specifically charging retail only UM and the portfolio portfolio

0:22:37.359 --> 0:22:40.399
<v Speaker 1>excuse me, obviously looks different. So the concern there is,

0:22:40.440 --> 0:22:44.359
<v Speaker 1>you know, why, why is the retail client getting a

0:22:44.400 --> 0:22:47.840
<v Speaker 1>portfolio that the institutions aren't UM. But that's not for

0:22:47.920 --> 0:22:51.639
<v Speaker 1>every fund and they and they really do vary instructure. Hey, Olivia,

0:22:51.720 --> 0:22:53.800
<v Speaker 1>thank you so much for joining us. We really appreciate

0:22:53.840 --> 0:22:57.520
<v Speaker 1>getting your thoughts on this story. Oliver Raymond, private credit

0:22:57.600 --> 0:23:00.600
<v Speaker 1>reporter for Bloomberg News and a pay in State rad

0:23:00.640 --> 0:23:02.199
<v Speaker 1>There's a lot of Penn State people we've had on

0:23:02.200 --> 0:23:04.320
<v Speaker 1>the show the past a couple of days all over

0:23:04.359 --> 0:23:07.600
<v Speaker 1>the place. Uh, So we appreciate getting Olivia's report. Again.

0:23:07.600 --> 0:23:10.840
<v Speaker 1>Private equity firms want rich investors to embrace Penn State

0:23:10.880 --> 0:23:13.760
<v Speaker 1>grad We've had in this program by the way. Yeah,

0:23:13.800 --> 0:23:17.399
<v Speaker 1>I mean they're Adam ont Drum. Also, I think it's

0:23:17.400 --> 0:23:19.640
<v Speaker 1>a pen You've got his PhD at the Penn State.

0:23:19.640 --> 0:23:22.280
<v Speaker 1>I wrote a lot of twitch and checks to Penn State,

0:23:22.320 --> 0:23:26.359
<v Speaker 1>so I have invested interest, not for him or Olivia. Yeah, no, exactly.

0:23:26.600 --> 0:23:28.960
<v Speaker 1>So we're all set. Thanks for listening to the Bloomberg

0:23:29.000 --> 0:23:32.399
<v Speaker 1>Markets podcast. You can subscribe and listen to interviews with

0:23:32.480 --> 0:23:37.240
<v Speaker 1>Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller.

0:23:37.560 --> 0:23:41.159
<v Speaker 1>I'm on Twitter at Matt Miller V three pen on

0:23:41.240 --> 0:23:44.320
<v Speaker 1>Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast.

0:23:44.359 --> 0:23:46.840
<v Speaker 1>You can always catch us worldwide at Bloomberg Radio