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Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: If I do want to get to our guest, because
Speaker 2: eighteen months ago our next guest held our Bloomberg team
Speaker 2: that it was the golden age of private credit. Dun
Speaker 2: Dun Dunn with us as Mark at NASIO. He's managing
Speaker 2: partner at the Global Alternative Credit Investment from Crescent Capital
Speaker 2: Managing Partners. They had some forty billion in assets under
Speaker 2: management as the end of twenty twenty two. Mark also
Speaker 2: chairman and owner of the Milwaukee Brewers baseball club.
Speaker 3: Hello, very nice to see you again.
Speaker 2: It's great to see you again. You know, I had
Speaker 2: a question and we were talking over here. What's easier
Speaker 2: owning an MLB team, investing in today's environment or growing
Speaker 2: up in New Jersey and telling people that you're from
Speaker 2: New Jersey. I can say that because I'm from New Jersey.
Speaker 2: No playing with you.
Speaker 3: It's always nice to connect with the fellow Jersey its.
Speaker 2: I love New Jersey. Tell us about today's environment versus
Speaker 2: a year ago.
Speaker 3: So I actually bothered to go back and listen to
Speaker 3: my broadcast and both on television and radio. You have
Speaker 3: to see how badly I screwed up. You did not.
Speaker 3: And I think the golden age of credit was almost
Speaker 3: eighteen months ago I talked about and last year I
Speaker 3: was worried about stagflation, and fortunately we didn't get that.
Speaker 3: And so the environment for which we will discuss, the
Speaker 3: environment for private credit is still is still quite good.
Speaker 2: Actually for all levels, for all types. Because it's interesting.
Speaker 2: I just gave up a real estate panel and they're saying,
Speaker 2: you know, for valued properties, trophy properties, Class A properties,
Speaker 2: you know, you're still seeing interest when you go down
Speaker 2: the scale. It's not so much private credit, no distinctions
Speaker 2: or yeah.
Speaker 3: So real estate credit and including real estate private credits
Speaker 3: a whole different animal than corporate credit, which is what
Speaker 3: we focus on, right And there's a number of structural
Speaker 3: challenges in real estate. There's a maturity wall in CMBs
Speaker 3: that's coming up very fast with funds that will be
Speaker 3: you know, needing to have liquidating and even have buyers,
Speaker 3: which we don't have. Celos for the most part have
Speaker 3: extended maturities now, and you know, I think also, and
Speaker 3: it's easy for me to say and they'll say the
Speaker 3: same about us, but I'm not sure. And I participated
Speaker 3: in a lot of conferences like this and managed to
Speaker 3: oversee a couple of endowments on charitable side. I'm not
Speaker 3: sure the real estate marks are in the right place
Speaker 3: just yet, not yet, So that needs to sort of
Speaker 3: work its way through. And so it's challenging to find,
Speaker 3: you know, the right part in the capstack to invest
Speaker 3: in real estate now, Whereas you could argue the same
Speaker 3: thing with corporate credit, and it's easier to go senior
Speaker 3: because right now senior loans you yield over ten percent,
Speaker 3: which isn't you know, it isn't bad right with with
Speaker 3: the new you know for you know, so for you know,
Speaker 3: close to five now.
Speaker 2: Well, so it's interesting, so does that does this environment continue?
Speaker 2: I'm like, I'm just curious. I think we're at this
Speaker 2: juncture mark where we're trying to figure out, you know, recession,
Speaker 2: no recession. We'll see what that we get from the
Speaker 2: Fed this week. I mean, like, first of all, with
Speaker 2: the Fed, how closely do you watch in terms of
Speaker 2: what they're doing interest rates. We always does it matter
Speaker 2: to you?
Speaker 3: So moment to moment it doesn't. Now, once you've had
Speaker 3: you know, four and a half, you know, four hundred
Speaker 3: and fifty bases point, you know, increase in in the
Speaker 3: you're right in the last year, you have to start watching.
Speaker 3: And so but now everybody's on the edge of their
Speaker 3: seat about whether the Fed's gonna hike and pause or not.
Speaker 3: And you know, one of the things we talked about.
Speaker 3: There's a private panel here yesterday for uh they called
Speaker 3: them finance leaders, but so I I crashed that party,
Speaker 3: no part of it. But but you know, Mike Milkin
Speaker 3: came in and yeah, the tone for the conferences and
Speaker 3: the theme is somewhat optimism. Yeah, but he came in
Speaker 3: and talked to us about how we need to have
Speaker 3: realism and so it really we all know the first
Speaker 3: priority for the FED is to fight inflation, and they're
Speaker 3: going to have to beat inflation almost at any cost.
Speaker 3: So that if that's a when we're rate hike or
Speaker 3: even two in a pause, that's great. If it has
Speaker 3: to keep going, that starts to get into creating real
Speaker 3: credit issues, not only in you know, corporate credit obviously,
Speaker 3: but also in obviously in.
Speaker 2: Real estate, Well, how problematic could it be?
Speaker 3: Well, it's it's very problematic, depending on So I was
Speaker 3: at a gathering JPM morganhead that Jamie Diamond spoke at,
Speaker 3: and he was optimistic too, and very bullish on America,
Speaker 3: which we all you know, I think everyone here is,
Speaker 3: which is great, and we have a global audience here.
Speaker 3: You can feel it, you can feel it, right And
Speaker 3: obviously the fact I think you know that the takeover
Speaker 3: today by JP Morgan on ufr C definitely it's okay.
Speaker 3: Now we're over that hump, you know. However, he left
Speaker 3: us with the thought everybody should go back to their
Speaker 3: offices and budget for you know what happens if short
Speaker 3: rates go to seven percent? Well that is that would
Speaker 3: put you know, right now, in our credit portfolios, for example,
Speaker 3: we have a handful of credits that are not you know,
Speaker 3: within are not covering the cash flow. Yeah, you'll hear
Speaker 3: a lot of managers like us say, like our portfolio is,
Speaker 3: for example, the average credit quality of free cash flow
Speaker 3: is one point six times plenty of cushion. But the
Speaker 3: question is how many credits are at when times or below?
Speaker 3: Right now, we have just a handful and those are
Speaker 3: the ones we focus on. If you get another two
Speaker 3: hundred basis points built into the system, there's gonna be
Speaker 3: a lot more than a handful of credits.
Speaker 2: That have com lismore.
Speaker 3: I think it depends on Uh, you know, we've always
Speaker 3: lent to six times cash flow, so I think you
Speaker 3: know or under so I think we'll be okay. But
Speaker 3: the broader market has already stretched out to seven and
Speaker 3: recent transactions you've seen seven times and maybe a pick
Speaker 3: component which right, pick toggle, which you'll pick toggle go
Speaker 3: back to?
Speaker 2: It all comes around.
Speaker 3: It's like the usc UF. You know, student body left,
Speaker 3: student body right off tackle play.
Speaker 2: How likely is it we get another two hundred basis points?
Speaker 2: Does that even make sense? I mean, the FED certainly
Speaker 2: seems like they're on this mission, but you you you
Speaker 2: have to ask at what cost?
Speaker 3: Here's where you get worried. Right, everybody is lined up
Speaker 3: on the side of the trade that that's not going
Speaker 3: to have everybody. You talk to everybody the in fact,
Speaker 3: the only person I have said you heard raise that
Speaker 3: is in this private session that Jamie Diamond had and
Speaker 3: and so you know, I okay. It creates all kinds
Speaker 3: of prompts for the deficity. There's the whole domino effect,
Speaker 3: well beyond what you know I do in my day job,
Speaker 3: right and and so uh, but they've got to be
Speaker 3: they can't.
Speaker 2: They've got to beat inflation, all right, they have to
Speaker 2: beat inflation. It's interesting, all right. So so if they
Speaker 2: continue on the course, which they seem to do, I mean,
Speaker 2: are you anticipate a recession? I mean, it's interesting this
Speaker 2: panel I just came off of, and you know, I
Speaker 2: said a year ago, what's surprised you about what happened
Speaker 2: over the past year. And one of the individuals, David
Speaker 2: who is over at hind So Global Corporate real Estate,
Speaker 2: are global real estate of all kinds, and just said,
Speaker 2: I really thought we'd be through the recession at this point.
Speaker 2: So I'm just curious how you see it.
Speaker 3: That's real estate realist colored classes. So it keeps getting
Speaker 3: pushed out, right, And look, we can manage through a recession.
Speaker 3: That's not an issue. And I think there are a
Speaker 3: lot of other things now that are much greater fears
Speaker 3: that seem to be surmounted. Every banking executive here we
Speaker 3: had a dinner last night. Did Jane Frazer spoke at Yeah,
Speaker 3: you know, the US banking system globally is considered the
Speaker 3: strongest in the world. She pointed out this forty seven
Speaker 3: hundred banks in our country, and there's three that have
Speaker 3: had issues, and so we don't have you know, the
Speaker 3: financial system is strong. And so the question is whether
Speaker 3: either rates get so high that they and we still
Speaker 3: have growth, right and pretty much everywhere, right, Labor costs
Speaker 3: are high in certain sectors by chains actually sort of
Speaker 3: figured out. So if it just ends up being a
Speaker 3: slow down, that would be okay. And that's surmountable for
Speaker 3: I think for everything, for not only for corporate credit,
Speaker 3: but for real estate as well.
Speaker 2: So when you look at investments, most attractive is it
Speaker 2: high yield? Is it bank loans, direct lending?
Speaker 3: So we you know, we're the high yel market is
Speaker 3: finally high yield. Interestingly, you know, the generic high yeal
Speaker 3: bond market is yielding only quote only eight percent. We're
Speaker 3: delighted with that. Yeah, anything we have floating rates ten
Speaker 3: percent plus. So for investors, you know, we now have
Speaker 3: concerns about credit, so we can't call it the golden
Speaker 3: age anymore. Yeah, but for our embedded portfolios, which are
Speaker 3: in really good shape, and investors are getting hundreds of
Speaker 3: basis points more in yield now than they did eighteen
Speaker 3: months ago. Our investors are.
Speaker 2: Happy, not too shabby, Brewers. What can we expect this year?
Speaker 2: Is that easier?
Speaker 4: No?
Speaker 3: And I'll tell you that I got involved in English
Speaker 3: football in the last six months. I know you, and
Speaker 3: I was going to tell you. If you say, well,
Speaker 3: what's harder investing? I love that one, Brewers or growing
Speaker 3: up in New Jersey, the answer would have been English football,
Speaker 3: it's harder. And Todd Bowley may have a perspective, and
Speaker 3: then I'm clearly a Chelsea I'm sure it doesn't. But
Speaker 3: so look we're off to a good start. We're eighteen
Speaker 3: and ten. It beats ten and eighteen like like with credit,
Speaker 3: you just worry about everything. We've had a number of injuries. Yeah,
Speaker 3: but the team looks you know that. You take a
Speaker 3: lot in sports from the feel of the clubhouse. Yeah,
Speaker 3: and our clubhouse feels great.
Speaker 2: Well. I have to say it was great to catch
Speaker 2: up with you again. Thank you for giving us all
Speaker 2: so much time, Mark, ad Andasio again. Wow, good to
Speaker 2: see you all.
Speaker 3: Right.
Speaker 2: You are listening and watching Bloomberg Business Week. We're live
Speaker 2: at Milkin.
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Speaker 2: We're at the Milkon Institute Global Conference. It's an incredible
Speaker 2: gathering of so many different individuals, and I'm delighted to
Speaker 2: have with us Sheila Patels, she's Vice Chairman to be Capital,
Speaker 2: former chairman of Goldman Sachs Asset Management. Because I feel like,
Speaker 2: first of all, great to have you here again and
Speaker 2: tell us to be here. I always feel like a
Speaker 2: great indicator of the economy is what's going on in
Speaker 2: the startup world, So tell us what you're seeing. Let's
Speaker 2: go macro.
Speaker 5: First of all, Well, look, I think the macro environment
Speaker 5: was already difficult for venture given what had gone on
Speaker 5: in tech, and then you layer on what's going on
Speaker 5: in banking, and it's a bit of a perfect storm
Speaker 5: when you think about what founders have to go through
Speaker 5: in normal times to start a company, much less today.
Speaker 2: So has it stopped?
Speaker 5: It hasn't stopped.
Speaker 2: Okay, it hasn't stopped.
Speaker 5: I think the good news is when you hear about
Speaker 5: dry powder, that's not a fake thing, that's real.
Speaker 2: Yeah.
Speaker 5: You know, we were fortunate enough with the capital to
Speaker 5: raise a large fund last year. We still have plenty
Speaker 5: of that to deploy with our existing companies and to
Speaker 5: look for new opportunities. I think that one of the
Speaker 5: things you see experienced investors say to us right now,
Speaker 5: people that have been LPs over many vintages, is they
Speaker 5: remember what happened after the global financial crisis. They remember
Speaker 5: what happened in the dot com bubble. The next four
Speaker 5: to five years after those were some of the best vintages.
Speaker 5: And once again we're in one of those periods, and
Speaker 5: we have a new series of technologies, one of them
Speaker 5: being generated of AI that could be so impactful to
Speaker 5: the good.
Speaker 2: I want to talk about that, Tilla, but I want
Speaker 2: to ask you. I am curious that Silicon Valley Bank,
Speaker 2: the collapse of that bank, which was so crucial to
Speaker 2: the startup community and out there in San Francisco, Silicon Valley.
Speaker 2: What impact did you see as a result of that specifically?
Speaker 5: Well, I think you know, one good thing saw was
Speaker 5: the community came together quite strongly, right behind their companies,
Speaker 5: together to try to work things out, to try to
Speaker 5: make sure people were making payroll and all the mundane
Speaker 5: things that you need to keep an ecosystem going when
Speaker 5: it's taken a big hit. I also think you saw recognition,
Speaker 5: and maybe the UK was a little faster to this
Speaker 5: than the US that the innovation economy has a huge
Speaker 5: number of jobs associated with it, so letting it flounder
Speaker 5: because of an issue like this is not about letting
Speaker 5: some tech bros suffer in particular zip.
Speaker 2: Code in California.
Speaker 5: It's about real companies that have been founded anywhere from
Speaker 5: Ohio to Jakarta, having a funding plan, having a business plan,
Speaker 5: having hired people, and not being able to fulfill their
Speaker 5: promises to their clients and their employees.
Speaker 2: Did you have any direct impact from the collapse any
Speaker 2: of your companies, your portfolio companies.
Speaker 5: You know, we've been very lucky we had We did
Speaker 5: not have anything particularly notable for ourselves or our portfolio companies.
Speaker 5: We've always encouraged and maybe it's because Howard Morgan has
Speaker 5: chair with his storied history and venture and me with
Speaker 5: my Goldmen background and that associated risk obsession, always felt
Speaker 5: that diversification was important and cash management was important, and
Speaker 5: so had given that advice, had taken that advice, and
Speaker 5: you know we're able to manage through it quite quite effectively.
Speaker 2: All right, So talk to me about opportunities that you
Speaker 2: guys are seeing of interest right now? What's coming your way?
Speaker 2: You mentioned AI, right, we're all just talking generative AI,
Speaker 2: and it's interesting. It's coming up. I'm sure a lot
Speaker 2: here in terms of panels. We're all trying to figure
Speaker 2: out how many opportunities are coming your way? Is it
Speaker 2: a lot of them? In terms of deals that you're
Speaker 2: looking at?
Speaker 5: Look, I think there's a number of things coming, but
Speaker 5: I think there's a number of companies we already invested in. Yeah,
Speaker 5: that people and appreciate that this is AI. You know,
Speaker 5: it's like, what is that? What is it?
Speaker 3: No?
Speaker 2: You have it already.
Speaker 5: It's why Google knows what you're gonna ask it before
Speaker 5: you've asked, right.
Speaker 2: You're type, it's right when it fills in a letter.
Speaker 5: They know your dress size when you're you know, have
Speaker 5: bought something a certain number of times. It's embedded slowly
Speaker 5: but surely in so many places. And so what we've
Speaker 5: seen that we're excited about is there are so many
Speaker 5: mundane ways AI can make businesses do better, can achieve
Speaker 5: cost reductions, which in this environment is probably one of
Speaker 5: the primary things people are looking for. It a way
Speaker 5: for your business to thrive. At the same time, everybody's
Speaker 5: worried about a recession. If you have a business that
Speaker 5: shows up that can save money, right, you're welcome with
Speaker 5: open arms, come in, help us, help us save money,
Speaker 5: or help us find places that are new revenue sources.
Speaker 2: So when you think of AI or what you're seeing
Speaker 2: in terms of you know, possible companies to invest in
Speaker 2: or you are investing, it is a lot more It's
Speaker 2: not kind of out there, right, it's much more simplistic.
Speaker 2: As you say, maybe it makes you more productive. This
Speaker 2: is what we're talking about.
Speaker 5: A great example is a company we invested in a
Speaker 5: while ago, not recently, but that does document analysis and management,
Speaker 5: basically information management for the contracts that a company might have.
Speaker 5: And you think about a huge multinational if thousands and
Speaker 5: thousands of contracts, right, who knows what's in them, who's
Speaker 5: managing them like supply chain, who's checking them?
Speaker 6: Right?
Speaker 5: And that became important during COVID because of disruption clauses.
Speaker 5: What's important now, well, we've done some projects with that
Speaker 5: company and our good friends at BCG with whom we
Speaker 5: have a special relationship, work with them as well, and
Speaker 5: we realized, you know, for one of the special projects
Speaker 5: they did, a company they were pitching had CPI clauses
Speaker 5: embedded all over the place in their deals that they
Speaker 5: hadn't executed on. So they were owed higher fees for
Speaker 5: their services and they had never claimed those fees. They
Speaker 5: had never asked their clients to act on the CPI
Speaker 5: clauses that had been embedded because they they forgot what's
Speaker 5: in the thousands?
Speaker 2: Do you think about something like filtering through right?
Speaker 5: AI can find things like that in a systematic way,
Speaker 5: as opposed to you're just relying on who's the person
Speaker 5: that's most on top of their clients to figure that out.
Speaker 2: So in this environment, are is there a valuation reset
Speaker 2: that you're seeing in terms of some of the deals
Speaker 2: and when it comes to funding.
Speaker 5: Yeah, Look, I think everybody bandies are about different percentages.
Speaker 5: Probably the most common I think that people are seeing
Speaker 5: across his face is down forty to fifty percent. Right
Speaker 5: In terms of valuation significant, it's significant. I think it
Speaker 5: very much depends on the stage. I think you've seen
Speaker 5: a lot more weakness in late stage. Within the first quarter,
Speaker 5: only about eight percent of funding going to late stage,
Speaker 5: sixty seven percent went to early stage, and funding there
Speaker 5: and valuations there are much less challenged. I also think
Speaker 5: that a lot of people were reliant and hoping that
Speaker 5: M and A would come back quickly, and I think
Speaker 5: it's much slower go because even corporate M and A,
Speaker 5: even companies that were looking to maybe acquire as their
Speaker 5: source of innovation, because it's still hard for companies to
Speaker 5: innovate from within. They can afford to wait a bit,
Speaker 5: and they can afford to push on valuations or push
Speaker 5: some unique terms.
Speaker 2: Is it still like, you know, the goal is it IPO?
Speaker 2: I mean, we've talked about for years. I feel like
Speaker 2: that there was so much funding out there and abled
Speaker 2: startup companies to stick around for a little bit longer,
Speaker 2: which and some would argue was a good thing that
Speaker 2: they could really kind of develop themselves. But I'm just curious,
Speaker 2: what are your expectations in terms of IPO markets and
Speaker 2: what we might say.
Speaker 5: Look, I think inevitably they'll come back, they always do.
Speaker 5: But I do think it does serve as a wake
Speaker 5: up call as to is that the best route for
Speaker 5: every company. And so when you think about growth and
Speaker 5: you think about most founders' ambitions for their companies, I
Speaker 5: think IPO is the easy one that seems like, Oh,
Speaker 5: I'm gonna build this and I'm going to turn it
Speaker 5: into its standalone success. But for some companies it might
Speaker 5: make sense to stay private a lot longer and figure
Speaker 5: out your funding from that perspective. For some, you know,
Speaker 5: corporate M and A was something that was rejected two
Speaker 5: or three years ago that today they look at and say,
Speaker 5: maybe that makes sense. Maybe I'd have an installed client
Speaker 5: base of the ten thousand best customers around the world
Speaker 5: I need to ride away if I would just allow
Speaker 5: myself to become part of a bigger enterprise, right And
Speaker 5: I think more people have opened their eyes to those
Speaker 5: different types of exit opportunities or future steps for their companies.
Speaker 2: One thing I wanted to ask you guys, are playing
Speaker 2: an enterprise fintech, healthcare, bio. We talked there's a category
Speaker 2: opportunistic sort of an infrastructure tech for commerce and emerging
Speaker 2: markets and more. What's the most active area right now
Speaker 2: when it comes to investing for you guys.
Speaker 5: Well, it's interesting, I'd say it's much more about what
Speaker 5: are the most driven interesting founders. I wouldn't say a
Speaker 5: sector stands out the most. I do think, you know,
Speaker 5: enterprise and healthcare still have a fair bit of resilience,
Speaker 5: and that's been great to see. I mean, healthcare needs
Speaker 5: so much done and there's so much value there. I
Speaker 5: feel like there's a lot of activity right now, a
Speaker 5: lot of activity. Now you have to make sure it's
Speaker 5: at the right valuation. Enterprise and software as a service
Speaker 5: has been more resilient than we expected, and that's I
Speaker 5: think that's a positive as well. And then you know,
Speaker 5: one area that we've been spending quite a bit more
Speaker 5: time on that we already have embedded in some portfolios
Speaker 5: and we'll probably dedicate ourselves to in a standalone way
Speaker 5: sometime in the future.
Speaker 2: Is climate tech. Climate tech huge interesting.
Speaker 5: An AI plus climate we see what we learned there twenty.
Speaker 2: Seconds climate tech because of the money we're seeing from
Speaker 2: governments or what's changed because I feel like.
Speaker 5: A carrot and a stick. Do you have the governments
Speaker 5: that are demanding new rules, new regulations, companies that have
Speaker 5: to comply standards that are starting you unify from a
Speaker 5: global perspective, and then you have the flip side, which
Speaker 5: is the stick. The stick is the risk. The stick
Speaker 5: is what you'll face by not doing something and finding
Speaker 5: that you've built a plant in a place that's subject
Speaker 5: to floods, or you've you know, enshored a risk that's
Speaker 5: truly unensurable.
Speaker 2: So glad we ended on that note. It meant there
Speaker 2: free to check.
Speaker 5: In with you and thank you so much, Thanks so much,
Speaker 5: a great look and conference.
Speaker 2: Thanks for going on. Chili Betel, vice chairman at Being Capital.
Speaker 1: Here at Milkin, you're listening to the Bloomberg Business Week podcast.
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Speaker 2: Our next guest, I want to get right to him,
Speaker 2: Steve Klinsky. He's founder and CEO of the private equity
Speaker 2: and credit from New Mountain Capital and together with its affiliates,
Speaker 2: manages PE Credit in Netley's Capital. Some assets under management
Speaker 2: about thirty seven billion dollars. It's a lot.
Speaker 6: How are you very well? Thanks for having meh.
Speaker 2: It's great to have you back here this year versus
Speaker 2: last year. What's top of mind?
Speaker 6: Well, you know, obviously the economy is still kind of
Speaker 6: limping along. Yeah, I think inflations getting more under control.
Speaker 6: You know, the deal volume is low, but I think
Speaker 6: likely to be picking up and things are quite good
Speaker 6: for my firm, So you know, it's kind of more
Speaker 6: of the same from last year.
Speaker 2: Well, one thing I wanted to ask you. You your
Speaker 2: firm was founded back in nineteen ninety nine, so you've
Speaker 2: gone through the dot com bubble, right, You've gone through
Speaker 2: the financial care is the pandemic, and then where we
Speaker 2: are today in terms of bank collapses. We've had a
Speaker 2: crypto collapse, and I'm just curious, how do those times
Speaker 2: do you compare to where we are today?
Speaker 6: Yeah. I actually started in October eighty one.
Speaker 2: So forgive me. Yeah, well, right, that was twenty.
Speaker 6: Years of from from an interest rates for tenure troices
Speaker 6: for fifteen point eight percent, So I lived through eighty
Speaker 6: seven and all those things. I would say, this is
Speaker 6: not a crisis like seven or eight. It's not a
Speaker 6: crisis like when COVID shut the whole world down. I view,
Speaker 6: in general for the economy overall it's kind of a muddy,
Speaker 6: rainy economy. Our companies are actually doing quite well. The
Speaker 6: thing that is different and new was the collapse of SVB,
Speaker 6: And if you really lose confidence in the regional banking system,
Speaker 6: that is a new type of threat. That was a
Speaker 6: worrisome weekend. It seems like that's quieting down. Yeah, and
Speaker 6: real estate is under a lot of strain because COVID
Speaker 6: may have just changed the way people use their offices.
Speaker 6: But in the regular world, you know, we owned forty
Speaker 6: companies and all sorts of industries, and we did well
Speaker 6: last year and have good budgets for this year. So
Speaker 6: the actual economy I think is doing, you know, is
Speaker 6: muddling along.
Speaker 2: Any stress points that you're seeing among your portfolio.
Speaker 6: Our portfolio, Lockwood is doing quite well, So we don't
Speaker 6: you know, there's always industries that are growing faster than others.
Speaker 6: But if you're not over levered, if you can pass
Speaker 6: through price and you have good market position, I think,
Speaker 6: you know, defaults been almost zero in private equity. I
Speaker 6: think there's still going to be quite low relative for
Speaker 6: the return is generated. Yeah, and feeling good about our
Speaker 6: own firm, So.
Speaker 2: What about putting new money to work. You know, where's
Speaker 2: the areas of interest.
Speaker 6: My firm, a particular, is state active. So in the
Speaker 6: last month, we sold a company called Signify for eight billion.
Speaker 6: We bought a big piece of Perkin Elmer in the
Speaker 6: last sixty days for two billions, so we're both buying
Speaker 6: and selling. Right, you have to be much more proactive.
Speaker 6: There's a long list of companies that would like to
Speaker 6: sell that are not announcing there for sale until they
Speaker 6: know where prices are in the market settles. But that
Speaker 6: leaves the opportunity to approach them proactively and make a
Speaker 6: one off negotiations. And you are and we've been doing
Speaker 6: that because we know what industries we like. We track
Speaker 6: these businesses. We only use about four times debt to
Speaker 6: EBITDANA average, so we can fully finance what we want
Speaker 6: to do. So we're just being more proactive. We have
Speaker 6: another company we haven't announced that we just signed a
Speaker 6: contract on and so we're quite busy. But we're a
Speaker 6: little bit different than the average front.
Speaker 2: How much of a price reset is there going on
Speaker 2: in terms of valuations.
Speaker 6: You know, it comes in gradually and it's you know,
Speaker 6: if I had a guess and I've had some investment
Speaker 6: banker friends kind of confirmed this. If something was ten,
Speaker 6: it's probably going to be eight. If something was twelve,
Speaker 6: it's probably going to be ten.
Speaker 2: It's not a huge ten.
Speaker 6: It's not a you know, I'm not talking about the
Speaker 6: unicorn stocks that had no revenue, no earnings and were
Speaker 6: worth eighty billion. Those are that's a totally different market.
Speaker 6: Companies that were being sold off of their earnings power,
Speaker 6: I think will be a couple multiple points less than
Speaker 6: they were. So it is a good buyer's market. It's
Speaker 6: more expensive to borrow, but you're getting a lower price,
Speaker 6: so net that's a positive for the buyer. But it's
Speaker 6: not again a cataclysm like oh seven or eight was
Speaker 6: much scarier for the economy.
Speaker 2: We're all right, right, it's interesting. Well, so when you
Speaker 2: I'm thinking about the bank situation, you know, and you
Speaker 2: know here we are, it does feel like we keep going,
Speaker 2: it's not a bank crisis, crisis of a few banks.
Speaker 2: You agree with that or is it hard to tell?
Speaker 6: I hope that's the case. Yeah, everything, I see, that's
Speaker 6: the case. You know, And when I talked to various
Speaker 6: parties or either politicians on the financial committees or you
Speaker 6: just talk to people in general. I think there's a
Speaker 6: natural friction that's slowed down. It could have been a
Speaker 6: whole run on the banking system following the SVB weekend.
Speaker 6: It feels like it's slowed down. You know, obviously there
Speaker 6: was the big news over the weekend, but it doesn't
Speaker 6: feel like it's the beginning of a giant blossom of panic.
Speaker 6: It feels like it's kind of slowed down. Now. The
Speaker 6: whole regional banking industry may be less profitable, could be
Speaker 6: a long term constraint on the availability to debt for
Speaker 6: smaller companies. So I'm not saying it's over, but it
Speaker 6: doesn't feel like it's a it's a panic about to start.
Speaker 2: Are you finding on the predit crisis? Credit a private
Speaker 2: credit side of things? This is what happens when you
Speaker 2: get four hours to sleep, the private credit side of things.
Speaker 2: What are the differences following the collapse of Silicon Valley
Speaker 2: and the two other regionals.
Speaker 6: Well, it's not just so that the whole non bank
Speaker 6: lending market, of which we're a part of we have
Speaker 6: a ten billion dollar credit arm has been a It's
Speaker 6: a great place to be because we were always lending
Speaker 6: floating rate, so as rates went up, we actually make
Speaker 6: more on the loans, you know, we're more. I think
Speaker 6: it's one of the things that has kept the economy going.
Speaker 6: It's this whole non bank lending market and it's and
Speaker 6: the default rates have been very low. The thing also
Speaker 6: people don't realize is how much equity is in these
Speaker 6: deals now. So like in our companies, we're usually under
Speaker 6: forty percent loan to value. Okay, a normal buyout these
Speaker 6: days maybe half equity half debt. It's not like nine
Speaker 6: parts debt one part equity the way it was thirty five.
Speaker 2: Is that where the default rates are lower in your
Speaker 2: because because you know some of the criticisms about the
Speaker 2: shadow bank. Yeah, yeah, well you know that there's not transparency,
Speaker 2: a little concerned about you know, what is actually going
Speaker 2: on there. The flip side is that when funding is tight,
Speaker 2: this is another alternative.
Speaker 6: Yeah. I think there's a lot more transparency than people say.
Speaker 6: For example, we have a publicly traded aren't called New
Speaker 6: Mountain Finance Company. It's sec reported. We do our earnings calls.
Speaker 6: We actually kind of go position by position, how what's
Speaker 6: the multiple to EBITD and how has it changed. So
Speaker 6: and other people are transparent as well. So I don't
Speaker 6: think it's that lack of transparent. Yeah, if you remember,
Speaker 6: the non bank lenders like we are are much less
Speaker 6: leverate than banks are. A bank with ten percent equity
Speaker 6: means it's nine parts debt to one part equity. BDC's
Speaker 6: like we have are more one to one, are one
Speaker 6: point two to one. And the people we're lending to
Speaker 6: have much more equity than they used to in years ago.
Speaker 6: And let's say you lend to a software company with
Speaker 6: seven hundred million of equity and three hundred to debt
Speaker 6: and interest rates go up by twenty million. They're not
Speaker 6: going to throw away their seven hundred million because you know,
Speaker 6: they'll put an extra money or bringing some equity. So
Speaker 6: it's very different than the nineteen eighty one deals when
Speaker 6: I started, or you know, it's not Gibson greeting cards,
Speaker 6: you know, revelunt or stuff. It's a very different world now.
Speaker 2: You know, eighteen months ago Bloomberg was writing stories about
Speaker 2: record deals, direct deals, and the private credit market. What's
Speaker 2: the headline from your perspective when it comes to private
Speaker 2: credit in six months or twelve months, are you get
Speaker 2: back back to record deals?
Speaker 6: I don't think it's going to be record deals. Yeah,
Speaker 6: but I think I think you'll see deal flow has
Speaker 6: picked up. The non bank lenders are are are active
Speaker 6: and engaged. And you know what's interesting is again there
Speaker 6: was just a software deal done by a big private
Speaker 6: equity firm. It's a thirteen billion dollar deal. Twelve billion
Speaker 6: of equity, one billion of debt.
Speaker 2: Wow, so no debt almost.
Speaker 6: Almost no debt. So it's pretty attractive I think to
Speaker 6: be in the debt. I mean, even if the twelve
Speaker 6: even if they make a big mistake on their twelve billion,
Speaker 6: you're pretty safe at the debt level. And so that's
Speaker 6: an extreme version of but that's that's kind of symbolica
Speaker 6: what's been happening.
Speaker 2: What do you think could be the big surprise on
Speaker 2: the downside in this environment?
Speaker 6: Well, so the two things I worry the most about.
Speaker 6: I feel good about private equity as a feel I
Speaker 6: feel good about non back lending. You know, the big
Speaker 6: things that would be to the negative would be real
Speaker 6: estate hurting the regional banks which goes through Main Street America.
Speaker 6: And I am worried about the interest rates on federal debt.
Speaker 6: I mean, you know this, I think the government overstimulated.
Speaker 6: The FED had to respond, and we have thirty trillion
Speaker 6: of debts, So if it goes up by two percent
Speaker 6: on the interest rate, that's six hundred billion, and that's
Speaker 6: almost our defense budget. So I worry about you know,
Speaker 6: government errors, government borrowing, and and I don't know. I
Speaker 6: don't know how bad the real estate's going to be.
Speaker 6: It doesn't feel like it's going to be cosmically bad,
Speaker 6: but that's a big watch.
Speaker 2: Up when it comes to real estate. Do you think
Speaker 2: it's in more like the middle market and not the
Speaker 2: big guys.
Speaker 6: I think it's in the office building space. And I
Speaker 6: guess retail has been bad in the malls for a
Speaker 6: long time. We have a net lease arm where we're lending.
Speaker 6: You know, the a company has a must have facility
Speaker 6: they would keep even if they went bankrupt, and it's
Speaker 6: worth you know, it has value itself. I'm not worried
Speaker 6: about that part of the market. But I mean, I
Speaker 6: don't know. With office buildings in New York, yeah, what
Speaker 6: the vacancies are going to be. And they're more highly
Speaker 6: levered than a lot of things. But still it has
Speaker 6: been outputing every other asset class for a long time.
Speaker 6: I feel good about my own firm. I think what
Speaker 6: I hear with in general is the beta is about
Speaker 6: half as much as the stock market. So yeah, I
Speaker 6: don't think there's some crisis about to happen in private equity.
Speaker 2: Just have about twenty seconds left here. So environment better
Speaker 2: than a year ago.
Speaker 6: Similar than a York I think, I think kind of
Speaker 6: similar but getting better as inflation gets under. I think
Speaker 6: the FED has to stop at some point and then
Speaker 6: it will get better.
Speaker 2: All right, I'm going to think the FED stops after
Speaker 2: this meeting.
Speaker 6: Or who knows who.
Speaker 2: I feel like it's the great debate, depending on go
Speaker 2: find out. Thank you so much. But optimism because you
Speaker 2: guys are doing well.
Speaker 6: Yeah, I feel good. Thank you very much.
Speaker 2: All right, Steve. Always appreciate Steve Klinsky. He's founder and
Speaker 2: CEO of the Private Equity and Credit for a New
Speaker 2: Mountain Capital. Joining us here at Milkin. You are listening
Speaker 2: and watching Bloomberg Business Week. We are live on YouTube,
Speaker 2: Bloomberg Originals and of course on Bloomberg Radio.
Speaker 3: Bloommarc A Journal.
Speaker 2: How about you let me drive?
Speaker 3: No, no, no, no, who's going to drug honey? Please? How
Speaker 3: do the riding gravel?
Speaker 5: Let's mate, I want to drive.
Speaker 2: It's a good question.
Speaker 6: Good this is the drive to the clothes.
Speaker 3: Dot com for me.
Speaker 2: I think we'll buy around.
Speaker 6: On Bloomberg Radio blue radios.
Speaker 4: On those you never really get a picture yourself.
Speaker 2: On the radio, you can hear our next guest. Let's
Speaker 2: get to it. It's time for the drive for the clothes.
Speaker 2: You've got a bet seventeen and a half minutes left
Speaker 2: in the trading session, and we are definitely off our
Speaker 2: best levels of the session. It's kind of a myth day,
Speaker 2: and it does feel like we've moved from the bank crisis,
Speaker 2: if you will, and then moved to maybe focus on
Speaker 2: the FED. Sarah Malick is with us, back with us,
Speaker 2: chief investment Officer of New Bean UH and here at Milkin.
Speaker 2: How are you great? I love being here. Oh thanks
Speaker 2: for having me, Well, we love having you here. How
Speaker 2: would you describe this environment right now?
Speaker 4: I think the market's concerned about two things right now.
Speaker 4: Number one is coming up this week it's the FOMC meeting,
Speaker 4: and number two is coming up soon, which is the
Speaker 4: debt sealing issue. So starting with the one coming up,
Speaker 4: the FOMC meeting, I.
Speaker 2: Think the FED is one and done. But then I
Speaker 2: think we're going to have a really long pause.
Speaker 4: So we disagree with some of the market views that
Speaker 4: the FED may soon cut because inflation is going to
Speaker 4: remain sticky and so not this year. I don't see
Speaker 4: it this year, even if we do hit a recession,
Speaker 4: I don't see rate cuts on the table for this
Speaker 4: year because I think inflation is still very far from
Speaker 4: the FED stated two percent target and it's going to
Speaker 4: take quite a while for inflation to get to that level.
Speaker 2: What's the problems with that? And I just think about,
Speaker 2: you know, valuation resets. It's the constant debate that we
Speaker 2: have here at Bloomberg at you know, if this is
Speaker 2: the environment we're going to be in, you need to
Speaker 2: rethink maybe the valuations that are out there. Do you agree?
Speaker 4: I think valuations are pricing at a pretty optimistic scenario
Speaker 4: for the S Andp's trading at a premium, and I
Speaker 4: think that's optimistic given the downside you could see the
Speaker 4: earnings going forward, because so take a.
Speaker 2: Look at earnings.
Speaker 4: Even though first quarter earning earnings have come in fine,
Speaker 4: we were coming into that fairly negatively with higher than
Speaker 4: usual cuts to consensus margins are an issue for companies
Speaker 4: are being compressed.
Speaker 2: Revenue growth has been positive, but.
Speaker 4: It's it's basically significantly has pricing power in it rather
Speaker 4: than volume growth.
Speaker 2: And if inflation, inflation.
Speaker 4: Is rolling over, so I think it's going to be
Speaker 4: hard for companies to hold onto that pricing power. That's
Speaker 4: another leg that will take earnings down and that I
Speaker 4: think then at the S and P looks expensive.
Speaker 2: You sound not optimistic, you sound pessimistic.
Speaker 4: Well, I think there's still ways for realistic, there's still
Speaker 4: ways for people to stay invested.
Speaker 2: In the markets. Though, what's going to be the debt ceiling?
Speaker 2: How do you see that scenario? I feel like here
Speaker 2: we go again, like we've seen this movie several times before.
Speaker 2: What are the how do you see it maybe playing out?
Speaker 2: And the problems for investors in the markets.
Speaker 4: So for the debt ceiling, you know, we're not seeing
Speaker 4: the equities price in issues around the debt ceiling yet.
Speaker 4: The timing of it depends on when axor seats may
Speaker 4: come through, so they're coming in a little lower than usual,
Speaker 4: So probably a June July debt ceiling deadline will run
Speaker 4: into Credit spreads are starting starting to widen, so that's
Speaker 4: credit spreads are starting to see an issue. Their equities
Speaker 4: are not. You know, the issue would be if we
Speaker 4: were to go past the debt ceiling deadline, you could
Speaker 4: see downside equities of about ten to fifteen percent, which
Speaker 4: is what we saw in twenty eleven when we got
Speaker 4: to that point. So there is issues with the debt
Speaker 4: ceiling out there if we can't come to a resolution,
Speaker 4: and we're not getting close to one right now.
Speaker 2: Haven't heard you talk about the bank sector. Are you
Speaker 2: nervous that there's still another shoe to drop? Are we done?
Speaker 2: How do you see it after what we got from
Speaker 2: JP Morgan and First Republic over the weekend or this morning.
Speaker 4: The banking sector is all about confidence, But the world
Speaker 4: is different today than the bank runs that we saw,
Speaker 4: you know, a decade plus ago. It's very digital, so
Speaker 4: that kind of issue can happen at any time. It's
Speaker 4: not where we all have to line up at the bank.
Speaker 4: You know, we'reer to pull our money out, but bigger.
Speaker 4: But I think, you know, the confidence was put back
Speaker 4: in the sector today with JP Morgan buying First Republic,
Speaker 4: so I think that gives us some stability. But generally
Speaker 4: the banking system sector we see issues going forward, ranging
Speaker 4: from net interest margin pressure, tighter regulations, tighter capital requirements,
Speaker 4: and more competition for deposits. You know, we all have
Speaker 4: our checking accounts and safest accounts that are really paying
Speaker 4: low interest rates. Right now, I think that's going to
Speaker 4: come to an end. Banks have to become more competitive.
Speaker 4: That's not great for their profitability.
Speaker 2: All right, So what's your advice to investors in this environment?
Speaker 2: Because it does still feel like there's a lot of
Speaker 2: things coming at us.
Speaker 4: So when then equities are focusing on quality companies with
Speaker 4: strong free cash flow, companies that tend to raise their
Speaker 4: dividends over time. That's companies with strong fundamentals. Outside of
Speaker 4: the US, emerging markets get a little bit more bang
Speaker 4: for your buck. As we go into a recession, the
Speaker 4: dollar likely weekends. That's good for emerging markets. China is
Speaker 4: continuing to reopen. And then we outside of equity fixed income,
Speaker 4: a lot of the pain is priced into fixed income.
Speaker 4: With one more FED rate hike on the table, Areas
Speaker 4: such as high quality, high yield double B rated corporates
Speaker 4: are paying high single digit total return.
Speaker 3: That's almost that's.
Speaker 4: Equity like return in fixed income. And then look outside
Speaker 4: of public markets, to real assets. Private credit tends to
Speaker 4: be more resilient in an economic downturn, and infrastructure tends
Speaker 4: to be recession resilience.
Speaker 2: This is another two areas that we do, Like, what's
Speaker 2: the biggest thing that's a risk to kind of the
Speaker 2: thinking today?
Speaker 4: Is it?
Speaker 2: I don't know what is it?
Speaker 3: Is it?
Speaker 2: I feel like we we've kind of figured out what
Speaker 2: the Fed's going to do, but what is it when
Speaker 2: you look at the possible things that could kind of
Speaker 2: change your perspective right now?
Speaker 4: I think partly it's people tend to rely on recency bias, so.
Speaker 2: We think back Ashton Kutcher tour right, I'm hearing. I'm
Speaker 2: just going to tell everybody because that's what we do
Speaker 2: at Milkin. Sorry anyway, so you go ahead, go ahead,
Speaker 2: But I digress. You can't invest in Ashton, although he
Speaker 2: does invest So anyway, go ahead.
Speaker 1: Sorry.
Speaker 4: So recency bias does exist. So I think a lot
Speaker 4: of people look at the world they think of the
Speaker 4: POSTGFC of our interest rates were on average FED month
Speaker 4: funds rate under one percent. But if you look at
Speaker 4: the about fifty year period pre the Global Financial Crisis,
Speaker 4: FED funds rates were on average almost six percent.
Speaker 2: Right, I think, why why is it so bored? Why
Speaker 2: is it difficult? Is it just people can't understand it.
Speaker 2: There's a generation that doesn't understand that that's the way
Speaker 2: it usually is.
Speaker 4: I think a lot of people spent most of their
Speaker 4: careers in this kind of environment. A lot of people
Speaker 4: even most of their lives in this kind of environment.
Speaker 4: And that's kind of like, you know, the psychology of
Speaker 4: recency bias, where you rely on what you know and
Speaker 4: you don't maybe don't think about the fact that the
Speaker 4: normal world was what was free GFC. I think that's
Speaker 4: what we're going to and that's kind of implications for
Speaker 4: more than just the banking sector.
Speaker 2: All right, this was in my notes for you, and
Speaker 2: so I want to go there. But the semiconductor space,
Speaker 2: I love watching it. I feel like it's such a
Speaker 2: great indicator of the economy. Mind you, it's a cyclical space,
Speaker 2: and we have to understand that what is it that
Speaker 2: you're watching specifically.
Speaker 4: So we came into this year with our outlook that
Speaker 4: we do for Barons and said technology was our top
Speaker 4: pick for the year, Software and semiconductors. Now, we like
Speaker 4: semiconductors for the long term. However, they're of almost twenty
Speaker 4: percent year to date. A typical semiconductor downturn last six
Speaker 4: to nine months, this one has taken ten. I think
Speaker 4: the stocks got a little bit ahead of themselves, thinking
Speaker 4: we were going to hit the inflection point at the bottom,
Speaker 4: but we are going to hit it. Auto semiconductors like NXP,
Speaker 4: which reports after the close today, is an area with
Speaker 4: tailwinds like electric vehicles and self driving cars. I think
Speaker 4: that the demand for semi's is going to come back.
Speaker 4: Stocks take a bit of a breather, but then it's
Speaker 4: off to the races that they hit as they hit
Speaker 4: that inflection point on the bottom of the cycle.
Speaker 2: Just have Sarah, about thirty seconds left here, twenty five seconds.
Speaker 2: When you look out with confidence, what do you feel
Speaker 2: comfortable talking about six months from now, twelve months from now,
Speaker 2: two months from now.
Speaker 4: I think I'm more worried about the next few months
Speaker 4: because of the decks ceiling. Very hard to predict that.
Speaker 4: I do think in the next six to twelve months
Speaker 4: we're going to likely see some kind of mild recession
Speaker 4: and that will clear the decks, clear the decks on earnings.
Speaker 4: When you look at first quarter twenty twenty four, earnings
Speaker 4: comps are fairly easy, so I think that's where everything
Speaker 4: starts becoming easier in terms of what companies are reporting.
Speaker 2: All right, well, this was so much fun you and
Speaker 2: Ashton Kutscher. Who could have thought? Who would have thought?
Speaker 2: Thank you so much, Thanks for having me really appreciate it.
Speaker 2: Sarah Mallick of course, the CIO, Chief Investment Officer of
Speaker 2: New Being joining us here at Milkin. You are listening
Speaker 2: and watching Bloomberg Business Week. We are live in Beverly
Speaker 2: Hills on radio, on YouTube, on Bloomberg Originals. This is Bloomberg.
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