1 00:00:17,920 --> 00:00:20,439 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:20,600 --> 00:00:23,120 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:23,520 --> 00:00:26,200 Speaker 1: This week, we're very pleased to welcome Simon Drake Brockman, 4 00:00:26,280 --> 00:00:29,200 Speaker 1: co founder and managing partner of Pemberton, a London based 5 00:00:29,200 --> 00:00:30,240 Speaker 1: private credit manager. 6 00:00:30,240 --> 00:00:32,160 Speaker 2: How are you, Simon, I'm great, Thanks, James. 7 00:00:32,400 --> 00:00:33,800 Speaker 1: Great to have you on the show. We're very excited 8 00:00:33,800 --> 00:00:36,479 Speaker 1: to hear your credit market views. Also delighted to welcome 9 00:00:36,479 --> 00:00:39,800 Speaker 1: back co host Juruon Julius from Bloomberg Intelligence. Hello are 10 00:00:39,800 --> 00:00:42,479 Speaker 1: you run? Hi James, and join us from Bloomberg News. 11 00:00:42,479 --> 00:00:44,920 Speaker 1: Silas Brown, our private debt expert in London. Great to 12 00:00:44,920 --> 00:00:46,280 Speaker 1: see you again, Silas. How's it going. 13 00:00:46,720 --> 00:00:48,200 Speaker 3: I'm doing very well, Thanks James. 14 00:00:48,320 --> 00:00:48,560 Speaker 2: Great. 15 00:00:48,720 --> 00:00:50,360 Speaker 1: Okay, So, just to set the scene at the top pier, 16 00:00:50,400 --> 00:00:53,480 Speaker 1: credit markets are hot. Borrows a globally art taking advantage. 17 00:00:53,600 --> 00:00:55,680 Speaker 1: This month could set a record for debt issuance by 18 00:00:55,760 --> 00:00:58,880 Speaker 1: US companies and banks. Most of it is for refinancing. 19 00:00:58,880 --> 00:01:01,400 Speaker 1: There's a lot of debt coming that means more cash 20 00:01:01,440 --> 00:01:03,720 Speaker 1: returning to investors who have already received a ton of 21 00:01:03,720 --> 00:01:06,280 Speaker 1: inflow over the past year and are very keen to 22 00:01:06,319 --> 00:01:08,680 Speaker 1: buy Given how high all in yields are. You can 23 00:01:08,720 --> 00:01:10,840 Speaker 1: get almost five and a half percent right now on 24 00:01:11,040 --> 00:01:14,280 Speaker 1: US high grade publicly traded corporate bonds with a very 25 00:01:14,319 --> 00:01:16,560 Speaker 1: low chance of default. That's the highest in six months, 26 00:01:16,600 --> 00:01:18,720 Speaker 1: and it makes you wonder why you need to venture 27 00:01:18,720 --> 00:01:21,160 Speaker 1: into private markets or leave the US at all to 28 00:01:21,160 --> 00:01:24,040 Speaker 1: get good returns in credit. But there's not enough supply, 29 00:01:24,160 --> 00:01:27,080 Speaker 1: so investors are having to look elsewhere. Structured finance and 30 00:01:27,120 --> 00:01:29,760 Speaker 1: private debt are very popular and spreads are higher outside 31 00:01:29,760 --> 00:01:33,119 Speaker 1: of the US. Some people fear that the demand supply 32 00:01:33,160 --> 00:01:35,960 Speaker 1: and balance is also leading to complacency and mispricing of 33 00:01:36,080 --> 00:01:38,600 Speaker 1: risk throughout credit markets, which is only expected to get 34 00:01:38,640 --> 00:01:42,320 Speaker 1: worse in twenty twenty five. Is more money piles in. Meanwhile, 35 00:01:42,319 --> 00:01:44,560 Speaker 1: everyone's loaded up on assets in the US, which is 36 00:01:44,600 --> 00:01:47,120 Speaker 1: growing faster than other parts of the world and expected 37 00:01:47,160 --> 00:01:50,639 Speaker 1: to get a boost from a new market friendly administration. Europe, 38 00:01:50,640 --> 00:01:54,400 Speaker 1: by contrast, faces multiple economic and political challenges which make 39 00:01:54,480 --> 00:01:59,720 Speaker 1: global debt investors very nervous. In some private debt is hot, Europe. 40 00:01:59,360 --> 00:02:00,000 Speaker 3: Not so much. 41 00:02:00,640 --> 00:02:02,760 Speaker 1: But what's your view, sigmon, Are we being too negative 42 00:02:02,800 --> 00:02:05,080 Speaker 1: on Europe? What's the opportunity as you see it? 43 00:02:05,280 --> 00:02:07,800 Speaker 2: Yeah, I think James. You know, most people look at 44 00:02:07,800 --> 00:02:11,400 Speaker 2: the headline numbers in Europe and question, you know, the 45 00:02:11,400 --> 00:02:14,800 Speaker 2: growth and sometimes the politics in that space. But I 46 00:02:14,840 --> 00:02:17,680 Speaker 2: think if you actually get down into the numbers of 47 00:02:17,680 --> 00:02:21,480 Speaker 2: what's going on inside of Europe, it's quite an exciting story. 48 00:02:22,120 --> 00:02:26,359 Speaker 2: Europe is going through sector consolidation in the mid market, 49 00:02:26,440 --> 00:02:30,120 Speaker 2: which is probably twenty maybe thirty years behind the United States, 50 00:02:30,720 --> 00:02:33,480 Speaker 2: and what it's doing is it's starting to bring together 51 00:02:33,840 --> 00:02:36,440 Speaker 2: a group of companies in different parts of the market 52 00:02:36,880 --> 00:02:41,200 Speaker 2: to build large pan European champions And if you look 53 00:02:41,200 --> 00:02:45,080 Speaker 2: at the opportunity set that creates, there's growth through both 54 00:02:45,240 --> 00:02:48,440 Speaker 2: synergies are bringing these companies together, and there's growth through 55 00:02:48,639 --> 00:02:53,000 Speaker 2: client acquisition. So these companies in five maybe ten years 56 00:02:53,080 --> 00:02:55,160 Speaker 2: time are going to look very very similar to the 57 00:02:55,320 --> 00:02:59,359 Speaker 2: US companies with billion to three billion turnover in that space. 58 00:03:00,080 --> 00:03:03,600 Speaker 2: Do that you need to bringing them together and building 59 00:03:03,760 --> 00:03:07,440 Speaker 2: an interesting Pan European platform, and I think that's where 60 00:03:07,480 --> 00:03:10,680 Speaker 2: private equity sees a great opportunity. They're bringing a lot 61 00:03:10,680 --> 00:03:12,680 Speaker 2: of money in and I think if you then look 62 00:03:12,720 --> 00:03:15,160 Speaker 2: at the returns that we can offer inside of Europe, 63 00:03:15,520 --> 00:03:18,280 Speaker 2: you're getting you know, as you touch on at the beginning, 64 00:03:18,560 --> 00:03:23,520 Speaker 2: wider margins, better documentation and covenance inside the deals, and 65 00:03:24,000 --> 00:03:27,760 Speaker 2: larger upfront fees. And that's driven by the fact that 66 00:03:27,800 --> 00:03:31,720 Speaker 2: the demand for financing is greater than the actual capital 67 00:03:31,760 --> 00:03:34,560 Speaker 2: available today because of the changes that are going on 68 00:03:34,639 --> 00:03:39,720 Speaker 2: in the banking industry. So I think super positive tailwinds 69 00:03:39,720 --> 00:03:42,080 Speaker 2: for the industry inside of Europe, and I think a 70 00:03:42,200 --> 00:03:46,119 Speaker 2: very very attractive investment environment for investors. 71 00:03:46,240 --> 00:03:52,240 Speaker 3: For direct lending, fund managers, people who haven't yet launched 72 00:03:52,400 --> 00:03:53,920 Speaker 3: private debt strategies in Europe. 73 00:03:54,000 --> 00:03:55,480 Speaker 2: Is it too late for them now? 74 00:03:56,840 --> 00:04:01,320 Speaker 3: Are the incumbents too far ahead, too scaled, two staffed 75 00:04:01,400 --> 00:04:06,280 Speaker 3: up already, those fledgling firms too far behind. 76 00:04:07,280 --> 00:04:09,800 Speaker 2: It's good questions, Elis. You know, certainly if you want 77 00:04:09,800 --> 00:04:12,360 Speaker 2: to be a very niche, niche player, you know, I 78 00:04:12,360 --> 00:04:16,599 Speaker 2: think the opportunity set still there. But I think Europe 79 00:04:16,640 --> 00:04:19,080 Speaker 2: has already got a number, you know, probably ten of 80 00:04:19,160 --> 00:04:21,960 Speaker 2: us who have large scale platforms. You know, we have 81 00:04:22,080 --> 00:04:26,400 Speaker 2: ten offices across Europe, two hundred people focused on originating 82 00:04:26,640 --> 00:04:30,520 Speaker 2: and investing in these opportunities. And I think that scale 83 00:04:30,920 --> 00:04:35,240 Speaker 2: servicing two hundred plus private equity firms really creates a 84 00:04:35,279 --> 00:04:38,839 Speaker 2: massive competitive advantage, and Europe is a different market to 85 00:04:38,839 --> 00:04:41,320 Speaker 2: the US. You know, it's important to be in Germany, 86 00:04:41,320 --> 00:04:44,360 Speaker 2: it's important to be in France, Italy, explain etc. Where 87 00:04:44,400 --> 00:04:47,919 Speaker 2: we are, and I think having local nationals on the 88 00:04:48,000 --> 00:04:52,320 Speaker 2: ground really is a competitive advantage to sourcing transactions and 89 00:04:52,360 --> 00:04:55,279 Speaker 2: building that deal flow and in credit, the most important 90 00:04:55,279 --> 00:04:56,960 Speaker 2: thing is you've got to have a big pipeline of 91 00:04:57,000 --> 00:04:59,520 Speaker 2: opportunities so you can pick the ones that you really 92 00:04:59,560 --> 00:05:03,440 Speaker 2: want to do. And I think most people starting from scratch, 93 00:05:03,880 --> 00:05:05,839 Speaker 2: that's an awful lot of infrastructure you've got to put 94 00:05:05,839 --> 00:05:07,720 Speaker 2: in place to try to catch up with a group 95 00:05:07,760 --> 00:05:08,160 Speaker 2: of us. 96 00:05:08,320 --> 00:05:10,000 Speaker 3: So if you were, if you were kind enough to 97 00:05:10,040 --> 00:05:14,000 Speaker 3: offer advice to appear, would you say it's too late 98 00:05:14,040 --> 00:05:14,919 Speaker 3: to join the party? 99 00:05:16,480 --> 00:05:19,479 Speaker 2: You know, you can never say it's too late, but 100 00:05:19,760 --> 00:05:21,679 Speaker 2: you know, and you know, we've seen in the banking 101 00:05:21,680 --> 00:05:24,719 Speaker 2: industry people come in and build platforms. But what I 102 00:05:24,720 --> 00:05:27,000 Speaker 2: would say is, if you're going to do it, you 103 00:05:27,120 --> 00:05:31,440 Speaker 2: need to really have the investment capital to put boots 104 00:05:31,440 --> 00:05:35,000 Speaker 2: on the ground and have a scalable platform. I don't 105 00:05:35,000 --> 00:05:37,920 Speaker 2: think you can come into this industry today with half 106 00:05:37,920 --> 00:05:40,440 Speaker 2: a dozen people and say I'm going to build a 107 00:05:40,480 --> 00:05:44,280 Speaker 2: platform because I think you're competing with true scale with 108 00:05:44,520 --> 00:05:45,000 Speaker 2: the rest. 109 00:05:44,839 --> 00:05:48,240 Speaker 3: Of us, and you touch on the dispersion in terms 110 00:05:48,279 --> 00:05:51,800 Speaker 3: of scale. Are we also starting to see dispersion in 111 00:05:51,880 --> 00:05:52,839 Speaker 3: terms of performance? 112 00:05:53,640 --> 00:05:57,680 Speaker 4: We've been through COVID, We've been through are we're going through. 113 00:05:57,600 --> 00:06:01,479 Speaker 3: A prolonged period of high interest rates and people's portfolios 114 00:06:01,720 --> 00:06:04,760 Speaker 3: have been tested arguably for the first time in European 115 00:06:04,960 --> 00:06:08,040 Speaker 3: direct lending kind of writ large, are you going to 116 00:06:08,080 --> 00:06:12,240 Speaker 3: see a dispersion in performance? And also attached to that, 117 00:06:13,320 --> 00:06:16,680 Speaker 3: how flight are your investors? Do they move from fund 118 00:06:16,720 --> 00:06:19,520 Speaker 3: manager to fund manager depending on performance? 119 00:06:19,680 --> 00:06:21,680 Speaker 2: Yeah? I mean the industry has now been going for 120 00:06:22,000 --> 00:06:24,320 Speaker 2: ten plus years inside of Europe, so people have an 121 00:06:24,360 --> 00:06:27,080 Speaker 2: ability to really look back over a period of time 122 00:06:27,320 --> 00:06:30,760 Speaker 2: and look at the type of businesses, the performance of 123 00:06:30,800 --> 00:06:35,760 Speaker 2: those businesses, how the managers have managed with a fairly 124 00:06:35,839 --> 00:06:40,600 Speaker 2: volatile environment since twenty twenty with COVID and inflation and 125 00:06:40,800 --> 00:06:44,120 Speaker 2: price increases and all of that. So there is definitely, 126 00:06:44,560 --> 00:06:49,440 Speaker 2: you know, a reordering of in people's minds of who 127 00:06:49,440 --> 00:06:51,480 Speaker 2: are the ones the managers they want to work with. 128 00:06:51,960 --> 00:06:53,960 Speaker 2: And you know, I think there's been a number of 129 00:06:54,360 --> 00:06:57,480 Speaker 2: managers inside of Europe whose businesses haven't gone as well 130 00:06:57,480 --> 00:07:00,000 Speaker 2: as they would like over the last three or four years. 131 00:07:01,560 --> 00:07:04,000 Speaker 2: But I think if you look at it fundamentally as 132 00:07:04,040 --> 00:07:08,000 Speaker 2: an asset class, I think it's been incredibly robust. And 133 00:07:08,040 --> 00:07:10,440 Speaker 2: I think if you talk to LPs, even the managers 134 00:07:10,480 --> 00:07:14,640 Speaker 2: that they feel haven't done as well, the returns are 135 00:07:14,680 --> 00:07:17,920 Speaker 2: still positive, maybe not as positive as they want, but 136 00:07:18,120 --> 00:07:21,280 Speaker 2: still significant and certainly still probably better than fixed income. 137 00:07:21,920 --> 00:07:24,680 Speaker 2: So you know, I think we've gone through a fascinating 138 00:07:24,720 --> 00:07:28,640 Speaker 2: period of really validating an asset class. And people often 139 00:07:28,680 --> 00:07:31,360 Speaker 2: say to me, has it been tested? And you know, 140 00:07:32,320 --> 00:07:34,400 Speaker 2: if you go back, I mean, when was the last 141 00:07:34,400 --> 00:07:37,360 Speaker 2: time you had inflation at ten percent? Interest rates go 142 00:07:37,520 --> 00:07:42,680 Speaker 2: up four hundred basis points, and you know, salaries and 143 00:07:42,720 --> 00:07:46,040 Speaker 2: other inflationary products going through as well as a energy 144 00:07:46,080 --> 00:07:49,440 Speaker 2: crisis all hit at the same time. And you know 145 00:07:49,520 --> 00:07:52,280 Speaker 2: that happened a couple of years ago now and the 146 00:07:52,320 --> 00:07:55,040 Speaker 2: companies have got through that. So I think it's a 147 00:07:55,160 --> 00:07:58,080 Speaker 2: very different underwriting environment to what we saw in two 148 00:07:58,160 --> 00:08:02,040 Speaker 2: thousand and five six where Euphorio you know, got to 149 00:08:02,080 --> 00:08:04,000 Speaker 2: a point where we had a lot of problems in 150 00:08:04,240 --> 00:08:04,840 Speaker 2: eight nine. 151 00:08:05,440 --> 00:08:09,760 Speaker 3: So for the sort of super cynics he would speak 152 00:08:09,800 --> 00:08:14,160 Speaker 3: about private credit blowing up or some you know, big 153 00:08:14,240 --> 00:08:17,040 Speaker 3: catastrophic problem with private credit. I think what you were 154 00:08:17,080 --> 00:08:21,240 Speaker 3: saying is that, Yeah, why are there to be any 155 00:08:21,680 --> 00:08:25,280 Speaker 3: catastrophic stress or whatever. It should be isolated to a 156 00:08:25,320 --> 00:08:28,440 Speaker 3: fund that has done kind of odd underwriting or kind 157 00:08:28,440 --> 00:08:32,839 Speaker 3: of offbeat underwriting that actually the market as a whole. Yeah, 158 00:08:32,920 --> 00:08:36,120 Speaker 3: the mainstream of the market has performed basically quite robustly 159 00:08:36,120 --> 00:08:36,360 Speaker 3: through this. 160 00:08:36,800 --> 00:08:40,000 Speaker 2: Absolutely, you know, is going to be selective funds and 161 00:08:40,040 --> 00:08:44,160 Speaker 2: selective managers who have underperformed. It's not an asset class 162 00:08:44,200 --> 00:08:47,200 Speaker 2: issue like we saw in US mortgages in you know, 163 00:08:47,280 --> 00:08:50,200 Speaker 2: two thousand and seven in that space. And I think 164 00:08:50,280 --> 00:08:53,160 Speaker 2: if you want to just characterize why it's different, if 165 00:08:53,240 --> 00:08:55,040 Speaker 2: I put it that way. You know, if you look 166 00:08:55,080 --> 00:08:58,839 Speaker 2: at what happened in the US residential mortgage market, it 167 00:08:58,960 --> 00:09:01,640 Speaker 2: was an original warehouse and then hand it over to 168 00:09:01,640 --> 00:09:05,720 Speaker 2: Wall Street to distribute, so the actual underwriter didn't really 169 00:09:05,720 --> 00:09:08,000 Speaker 2: hold on to it very long. If you look at 170 00:09:08,080 --> 00:09:11,400 Speaker 2: us today, we own these assets for seven years, and 171 00:09:11,480 --> 00:09:14,520 Speaker 2: we're fully accountable and monitoring these companies on a day 172 00:09:14,520 --> 00:09:19,680 Speaker 2: to day basis. So our business is reliant on the 173 00:09:19,720 --> 00:09:21,960 Speaker 2: performance of those businesses as well. So you have massive 174 00:09:22,000 --> 00:09:26,079 Speaker 2: alignment between the manager and the LP because we need 175 00:09:26,120 --> 00:09:29,280 Speaker 2: to be selecting good companies for our businesses to flourish 176 00:09:29,360 --> 00:09:29,640 Speaker 2: and grow. 177 00:09:30,080 --> 00:09:34,240 Speaker 4: Can I then perhaps ask assignment about risk management? And 178 00:09:34,280 --> 00:09:38,079 Speaker 4: then I suppose credit risk is the biggest risk that 179 00:09:38,360 --> 00:09:42,640 Speaker 4: we focus on. If you compare the risk management function 180 00:09:43,040 --> 00:09:48,200 Speaker 4: within the typical private credit company or Palmton, if you 181 00:09:48,200 --> 00:09:54,040 Speaker 4: compare it to the traditional banking model, do they are 182 00:09:54,040 --> 00:09:56,439 Speaker 4: they broadly similar? Are the key differences? 183 00:09:57,280 --> 00:10:00,720 Speaker 2: It varies quite a bit between managers. We we've followed 184 00:10:00,760 --> 00:10:04,319 Speaker 2: a slightly different model to our peer group. So you know, 185 00:10:04,400 --> 00:10:08,880 Speaker 2: we have dedicated originators talking to the private equity firm, 186 00:10:09,000 --> 00:10:11,480 Speaker 2: so we get to make sure that we know everything 187 00:10:11,480 --> 00:10:14,120 Speaker 2: that they're up to on a day to day basis, 188 00:10:14,240 --> 00:10:18,320 Speaker 2: so that we have a pretty good sign side of 189 00:10:18,400 --> 00:10:20,920 Speaker 2: light of where the deal flow is going to come from. 190 00:10:21,600 --> 00:10:24,480 Speaker 2: We then have a large analytics team credit team inside 191 00:10:24,520 --> 00:10:27,960 Speaker 2: the firm, and you know, we have twenty two analysts 192 00:10:28,000 --> 00:10:31,720 Speaker 2: in that process. Nicole Gates, who runs that, used to 193 00:10:31,720 --> 00:10:35,480 Speaker 2: be the senior credit officer at Dressner responsible for their 194 00:10:35,520 --> 00:10:40,520 Speaker 2: alternatives area, particularly levit finance. She then actually spent nearly 195 00:10:40,559 --> 00:10:44,480 Speaker 2: ten years at GE running their restructuring international Restructuring unit, 196 00:10:45,000 --> 00:10:48,120 Speaker 2: so she's got tremendous depth of experience and looking at 197 00:10:48,280 --> 00:10:51,800 Speaker 2: from a credit underwriting point of view the transactions, both 198 00:10:51,880 --> 00:10:54,080 Speaker 2: primary new ones as well as dealing with some of 199 00:10:54,120 --> 00:10:56,960 Speaker 2: the old problem ones at GE and I think that 200 00:10:57,080 --> 00:11:00,520 Speaker 2: skill set inside the firm gives us a independent function, 201 00:11:01,240 --> 00:11:04,679 Speaker 2: so the portfolio managers work with that credit function to 202 00:11:04,760 --> 00:11:08,680 Speaker 2: really understand the companies, to analyze the cash flows, analyze 203 00:11:08,679 --> 00:11:11,600 Speaker 2: the sector position, look at the growth trajectory, look at 204 00:11:11,600 --> 00:11:14,880 Speaker 2: the business plans that they have inside of that. And 205 00:11:14,920 --> 00:11:17,600 Speaker 2: we've done it that way because I think it's very 206 00:11:17,600 --> 00:11:21,600 Speaker 2: difficult for originator to be out scouring the market for deals, 207 00:11:22,200 --> 00:11:25,040 Speaker 2: to be reading thousands of pages of due diligence on 208 00:11:25,080 --> 00:11:28,480 Speaker 2: a deal that they've got, and to do that ongoing origination, 209 00:11:28,880 --> 00:11:31,920 Speaker 2: and we wanted to create a partnership across the business, 210 00:11:31,920 --> 00:11:34,640 Speaker 2: the originators working with their analytics team, working with our 211 00:11:34,679 --> 00:11:39,120 Speaker 2: portfolio management team so that we could really go quite 212 00:11:39,240 --> 00:11:42,000 Speaker 2: in depth into the companies and understand what they're doing. 213 00:11:43,679 --> 00:11:47,080 Speaker 4: But perhaps to follow up on that point, one of 214 00:11:47,080 --> 00:11:51,440 Speaker 4: the key attractions for a borrower to go with a 215 00:11:51,440 --> 00:11:55,480 Speaker 4: private credit provider as opposed to a bank is sometimes 216 00:11:55,600 --> 00:11:58,640 Speaker 4: that's the speed of the loan decision, if you go 217 00:11:59,120 --> 00:12:01,920 Speaker 4: through the banking process, can be more more of an 218 00:12:01,920 --> 00:12:08,000 Speaker 4: administrative nightmare, whereas a credit provider could perhaps act more quickly. 219 00:12:08,240 --> 00:12:09,160 Speaker 4: Would would you agree with that? 220 00:12:09,440 --> 00:12:09,600 Speaker 3: Yeah? 221 00:12:09,800 --> 00:12:13,240 Speaker 2: I think there's two key differences. I think, you know, 222 00:12:13,360 --> 00:12:17,040 Speaker 2: one is we can tailor a transaction much more to 223 00:12:17,720 --> 00:12:21,080 Speaker 2: the client's demands. So sometimes cash flow is a bit 224 00:12:21,120 --> 00:12:23,000 Speaker 2: tighter in the first year or so, we can give 225 00:12:23,000 --> 00:12:26,480 Speaker 2: them flexibility on you know, picking income in the first 226 00:12:26,520 --> 00:12:29,199 Speaker 2: twelve months. You know why they're executing the integration, etc. 227 00:12:30,080 --> 00:12:32,520 Speaker 2: So I think that's a much more difficult thing to 228 00:12:32,559 --> 00:12:36,079 Speaker 2: go out and explain in a syndication transaction. But if 229 00:12:36,080 --> 00:12:40,080 Speaker 2: you're doing a bilateral between us and the borrower, we 230 00:12:40,160 --> 00:12:42,760 Speaker 2: can put it into a structure that really really suits 231 00:12:42,760 --> 00:12:46,240 Speaker 2: the cash flow and the growth of the company. The 232 00:12:46,280 --> 00:12:49,160 Speaker 2: second part is, you know, we ran a huge syndication 233 00:12:49,240 --> 00:12:53,160 Speaker 2: business when I was at the bank. You know, when 234 00:12:53,200 --> 00:12:55,480 Speaker 2: you're underwriting deals on the concept I'm going to sell 235 00:12:55,520 --> 00:12:58,319 Speaker 2: it to sixty different institutions, Lots of people have different 236 00:12:58,400 --> 00:13:00,600 Speaker 2: views about is it sellable? Is it not sallable? As 237 00:13:00,600 --> 00:13:03,760 Speaker 2: the market rights it's not right. So banks obviously decision 238 00:13:03,760 --> 00:13:07,240 Speaker 2: making process can be quite slow at times because you've 239 00:13:07,240 --> 00:13:08,880 Speaker 2: got to get the sales desk view, you've got to 240 00:13:08,920 --> 00:13:11,520 Speaker 2: get the credits view, you've got to get other people's views, 241 00:13:11,520 --> 00:13:14,680 Speaker 2: and you've got to bring that together. That model works, 242 00:13:14,720 --> 00:13:17,840 Speaker 2: it's been successful for decades, but it can be time 243 00:13:18,559 --> 00:13:21,800 Speaker 2: time consuming. And I think that we have an advantage 244 00:13:21,800 --> 00:13:24,800 Speaker 2: because we have accumulated the capital, we know how much 245 00:13:24,800 --> 00:13:28,400 Speaker 2: we're willing to lend, and we can do it relatively 246 00:13:28,440 --> 00:13:30,559 Speaker 2: straightforward with the borrower. 247 00:13:31,480 --> 00:13:35,640 Speaker 3: Simon, you are one of a collection of beautique lenders 248 00:13:35,800 --> 00:13:39,440 Speaker 3: who got in early in European dirret lending. But if 249 00:13:39,440 --> 00:13:41,920 Speaker 3: you look across the landscape of your fears, you see 250 00:13:41,960 --> 00:13:43,920 Speaker 3: quite a lot of them have actually changed hands now 251 00:13:44,160 --> 00:13:46,240 Speaker 3: and a lot of them have attached themselves to broader 252 00:13:46,320 --> 00:13:49,360 Speaker 3: kind of I guess global asset managers, and you do 253 00:13:49,440 --> 00:13:52,600 Speaker 3: have a steak minority stake from L and G. But 254 00:13:52,960 --> 00:13:56,520 Speaker 3: what would be the criteria or the preconditions for a sale? 255 00:13:57,000 --> 00:13:59,440 Speaker 3: Is it tempting to kind of jump on the bandwagon 256 00:13:59,520 --> 00:14:03,440 Speaker 3: and and sell the business? Do you? What are your 257 00:14:03,480 --> 00:14:05,559 Speaker 3: general thoughts about about setting sale? 258 00:14:05,800 --> 00:14:08,400 Speaker 2: I think if I put it correctly, you know, silas 259 00:14:08,400 --> 00:14:10,680 Speaker 2: the world has been going off talking to insurance companies 260 00:14:10,679 --> 00:14:14,440 Speaker 2: and other people to partner with private credit managers, and 261 00:14:14,640 --> 00:14:16,160 Speaker 2: you know, that seems to be a theme at the 262 00:14:16,200 --> 00:14:19,440 Speaker 2: moment inside the industry. I think we made the decision 263 00:14:19,560 --> 00:14:21,240 Speaker 2: very early on when we set up the firm, we 264 00:14:21,280 --> 00:14:25,400 Speaker 2: wanted to be truly European by being in you know, 265 00:14:25,800 --> 00:14:28,680 Speaker 2: every country with our ten officers. We wanted to have 266 00:14:28,720 --> 00:14:32,480 Speaker 2: a significant European partner inside the business who was well 267 00:14:32,520 --> 00:14:36,080 Speaker 2: known and well regarded. So Ellen g became a partner 268 00:14:36,080 --> 00:14:39,240 Speaker 2: inside the firm. They've been a fantastic partner as we've 269 00:14:39,240 --> 00:14:42,880 Speaker 2: built the business, and you know, we wanted to be 270 00:14:43,360 --> 00:14:47,040 Speaker 2: a truly third party manager. So over ninety percent of 271 00:14:47,040 --> 00:14:51,200 Speaker 2: our capital comes from other institutions. And you know, I 272 00:14:51,240 --> 00:14:54,240 Speaker 2: think we've kind of front loaded I can say that way. 273 00:14:54,600 --> 00:14:56,520 Speaker 2: You know, we made all those decisions up front and 274 00:14:56,520 --> 00:14:59,120 Speaker 2: then focused on building the platform. I think a number 275 00:14:59,120 --> 00:15:01,520 Speaker 2: of our piers went out and kind of started to 276 00:15:01,520 --> 00:15:03,960 Speaker 2: build platforms and then decided they needed to go and 277 00:15:04,040 --> 00:15:07,640 Speaker 2: find a partner in that space. So we're very happy 278 00:15:07,720 --> 00:15:09,560 Speaker 2: the way we are. We think we're on a very 279 00:15:09,640 --> 00:15:13,080 Speaker 2: very strong trajectory. More recently, we've opened up the NAB 280 00:15:13,160 --> 00:15:15,520 Speaker 2: lending businesses, which is going very very well with the 281 00:15:15,520 --> 00:15:19,200 Speaker 2: partnership we announced with Addia coming into work with that, 282 00:15:20,640 --> 00:15:23,880 Speaker 2: We've been growing our working capital solutions business. We just 283 00:15:23,920 --> 00:15:27,480 Speaker 2: announced the partnership in December with Santander where we're setting 284 00:15:27,560 --> 00:15:30,360 Speaker 2: up a joint venture company. So we've really feeled that 285 00:15:30,800 --> 00:15:34,120 Speaker 2: across the platform. With the products we've got RSS, our 286 00:15:34,240 --> 00:15:38,480 Speaker 2: risk sharing SRT business, our COLO business, we have a 287 00:15:38,560 --> 00:15:42,480 Speaker 2: pretty broad based platform. We can bring together those products 288 00:15:42,480 --> 00:15:47,600 Speaker 2: into multi strap SMAs for clients. We can build large 289 00:15:47,680 --> 00:15:50,960 Speaker 2: verticals in each one of those strategies. And we have 290 00:15:51,000 --> 00:15:54,360 Speaker 2: a very supportive shareholder inside the firm who's been very 291 00:15:54,360 --> 00:15:57,320 Speaker 2: helpful as we've grown the business. So we think it's exciting. 292 00:15:58,240 --> 00:16:02,520 Speaker 2: Europe's going to be a great opportunity and we're out 293 00:16:02,760 --> 00:16:04,520 Speaker 2: telling people about that opportunity. 294 00:16:04,720 --> 00:16:07,200 Speaker 3: And what do you make generally of the consolidation in 295 00:16:07,520 --> 00:16:11,680 Speaker 3: in among private credit firms Now? I mean, obviously there's 296 00:16:11,800 --> 00:16:17,560 Speaker 3: kind of high profile ones ala Blackrock buying HPS. There's 297 00:16:17,640 --> 00:16:21,000 Speaker 3: kind of more regional ones going on, you know, probably 298 00:16:21,040 --> 00:16:24,360 Speaker 3: as we speak, and yeah, what do you make of it? 299 00:16:24,560 --> 00:16:26,440 Speaker 2: Yeah? But I think it all goes back to the 300 00:16:26,440 --> 00:16:29,640 Speaker 2: same point, you know, if I mean, HBS is a 301 00:16:29,640 --> 00:16:33,160 Speaker 2: different situation. I mean, HBS is a very successful firm. 302 00:16:33,360 --> 00:16:35,320 Speaker 2: You know, it had one hundred and forty billion of 303 00:16:35,400 --> 00:16:39,960 Speaker 2: capital in that space, and you know, it was considering 304 00:16:40,000 --> 00:16:42,720 Speaker 2: going down the IPO route, and black Rock came in 305 00:16:42,760 --> 00:16:46,240 Speaker 2: and made a very very attractive offer in that space. 306 00:16:46,280 --> 00:16:49,280 Speaker 2: And I think, you know, that's much more a very 307 00:16:49,360 --> 00:16:51,480 Speaker 2: very mature business, you know, like you see in the 308 00:16:51,600 --> 00:16:54,520 Speaker 2: M and A market. I think the vast majority of 309 00:16:54,560 --> 00:16:56,520 Speaker 2: deals that have been done in the market today if 310 00:16:56,560 --> 00:16:59,400 Speaker 2: I look at it, so you know, have been much 311 00:16:59,400 --> 00:17:03,120 Speaker 2: smaller man probably more around the ten billion mark or 312 00:17:03,240 --> 00:17:07,800 Speaker 2: you know, who are being acquired by insurance groups or 313 00:17:07,840 --> 00:17:11,199 Speaker 2: other investors as a platform for them to bring a 314 00:17:11,200 --> 00:17:13,440 Speaker 2: lot of capital in to try to grow those businesses 315 00:17:13,480 --> 00:17:17,080 Speaker 2: into much bigger businesses. And I think that trend's going 316 00:17:17,119 --> 00:17:18,719 Speaker 2: to happen because I think there is a lot of 317 00:17:18,760 --> 00:17:22,160 Speaker 2: if I can say, subscale managers in the market who 318 00:17:22,680 --> 00:17:26,399 Speaker 2: you know, it's a significant cost to build your institutional 319 00:17:26,400 --> 00:17:31,840 Speaker 2: coverage platform. And so you know, we are now you know, 320 00:17:31,880 --> 00:17:34,639 Speaker 2: twenty six billion. We think we'll grow to probably you know, 321 00:17:35,840 --> 00:17:38,800 Speaker 2: mid thirties over the next twelve months and in that space, 322 00:17:39,160 --> 00:17:40,600 Speaker 2: and I think once you start to get to that 323 00:17:40,680 --> 00:17:42,600 Speaker 2: size and you've got that scale and you've got the 324 00:17:42,640 --> 00:17:45,920 Speaker 2: breadth of products. What we're seeing is people saying, that's 325 00:17:45,960 --> 00:17:47,879 Speaker 2: really interesting. Can I do this with you? And can 326 00:17:47,920 --> 00:17:50,479 Speaker 2: I do that with you? In that space? If you're 327 00:17:50,520 --> 00:17:54,560 Speaker 2: a single product manager just doing you know, unitranch loans, 328 00:17:55,840 --> 00:17:57,680 Speaker 2: I think you need a big brother to really grow 329 00:17:57,720 --> 00:17:59,680 Speaker 2: the business to the next level. And I think that's 330 00:17:59,720 --> 00:18:01,680 Speaker 2: what's driving the M and A activity. 331 00:18:01,400 --> 00:18:03,920 Speaker 1: And the scale numbers you're giving us some simon that's 332 00:18:03,920 --> 00:18:06,080 Speaker 1: in euros, Is it because you were talking a couple 333 00:18:06,119 --> 00:18:08,080 Speaker 1: of years ago about getting to fifty billion by I 334 00:18:08,080 --> 00:18:11,520 Speaker 1: think twenty twenty seven around there in terms of dollars 335 00:18:11,200 --> 00:18:12,080 Speaker 1: dollar amount. 336 00:18:12,320 --> 00:18:14,680 Speaker 2: Yeah, No, that's correct, and you know, I think we're 337 00:18:14,840 --> 00:18:17,479 Speaker 2: still on track for that, James, and working hard with 338 00:18:17,520 --> 00:18:20,879 Speaker 2: our new partnerships that we've announced over the last six months. 339 00:18:21,160 --> 00:18:23,520 Speaker 1: And that's the kind of scale you need to be standalone, 340 00:18:23,560 --> 00:18:24,360 Speaker 1: is it in this business? 341 00:18:25,160 --> 00:18:29,439 Speaker 2: So I know, yeah, I think it's an important piece, 342 00:18:29,640 --> 00:18:33,840 Speaker 2: and I think to me, scale is less of the issue. 343 00:18:34,200 --> 00:18:36,560 Speaker 2: I think you've got to have a range of products 344 00:18:36,560 --> 00:18:39,920 Speaker 2: that people think are relevant and attractive, and I think 345 00:18:39,960 --> 00:18:42,640 Speaker 2: you have to have you know, high performance or high 346 00:18:42,720 --> 00:18:46,000 Speaker 2: quality offerings in those products. I think if you do that, 347 00:18:46,119 --> 00:18:49,520 Speaker 2: then scale comes, you know, naturally, because people are attracted 348 00:18:49,560 --> 00:18:52,280 Speaker 2: to come with you, and you know, I think people, 349 00:18:52,840 --> 00:18:54,760 Speaker 2: you know, if you're a big institution and you want 350 00:18:54,800 --> 00:18:57,560 Speaker 2: to allocate five hundred million, it's hard to go and 351 00:18:57,600 --> 00:19:00,760 Speaker 2: give that to a five billion manager. You know, if 352 00:19:00,800 --> 00:19:02,800 Speaker 2: you're a big institution and you want to allocate five 353 00:19:02,880 --> 00:19:04,840 Speaker 2: hundred million, it's much easier to give that to an 354 00:19:04,840 --> 00:19:08,239 Speaker 2: institution which has got fifty billion. It's got you know, 355 00:19:08,320 --> 00:19:11,840 Speaker 2: three hundred people, it's got the infrastructure, the institutional parts 356 00:19:11,840 --> 00:19:15,720 Speaker 2: of compliance, risk, legal and all of that around it. 357 00:19:15,800 --> 00:19:17,560 Speaker 2: So they kind of go hand in hand. 358 00:19:18,840 --> 00:19:24,960 Speaker 4: Simon. Earlier this week, Donald Trump was inaugurated as the 359 00:19:25,000 --> 00:19:28,280 Speaker 4: forty seventh i think, president of the US. The expectation 360 00:19:28,400 --> 00:19:31,240 Speaker 4: is that the new administration is going to postpone the 361 00:19:31,720 --> 00:19:34,679 Speaker 4: bars of three end game, as it's called for US banks, 362 00:19:35,480 --> 00:19:40,479 Speaker 4: possibly indefinitely. We've already seen a reaction over here in Europe. 363 00:19:40,680 --> 00:19:44,760 Speaker 4: In the UK, the PRA has effectively postponed the introduction 364 00:19:44,840 --> 00:19:47,840 Speaker 4: of BARSA three point one or BARSA four, whichever UK's 365 00:19:47,880 --> 00:19:50,840 Speaker 4: call it, by another year to January twenty twenty seven. 366 00:19:51,400 --> 00:19:56,800 Speaker 4: Is there possibility that the pendulums perhaps swinging back a 367 00:19:56,840 --> 00:20:01,200 Speaker 4: little to bank deregulation, and as a result of that 368 00:20:02,200 --> 00:20:04,520 Speaker 4: is a possibility that banks are going to be able 369 00:20:04,520 --> 00:20:06,679 Speaker 4: to compete more effectively with pride credit. 370 00:20:07,480 --> 00:20:10,800 Speaker 2: I think if you go back, I mean the you know, 371 00:20:10,840 --> 00:20:14,760 Speaker 2: certainly the pendulum of you know, being kinder to banks 372 00:20:14,800 --> 00:20:17,920 Speaker 2: in the United States is definitely happening under the Trump administration. 373 00:20:18,080 --> 00:20:20,920 Speaker 2: But Trump will only be here for four years, and 374 00:20:21,000 --> 00:20:23,280 Speaker 2: if you're a chief executive of bank, you've got to 375 00:20:23,320 --> 00:20:25,520 Speaker 2: make sure the pensulum doesn't swing back the other way, 376 00:20:26,560 --> 00:20:28,840 Speaker 2: you know, in four years time. So it's very difficult 377 00:20:28,960 --> 00:20:31,840 Speaker 2: I think to run your business model by just looking 378 00:20:31,880 --> 00:20:34,720 Speaker 2: at politics. You have to look at the long term trends. 379 00:20:34,760 --> 00:20:37,600 Speaker 2: And I think the long term trends inside of banking is, 380 00:20:38,320 --> 00:20:41,080 Speaker 2: you know, I would say, a movement out of non 381 00:20:41,119 --> 00:20:47,359 Speaker 2: investment grade and asset heavy lending into much more investment 382 00:20:47,400 --> 00:20:51,920 Speaker 2: grade and service providing and distribution and rather than being 383 00:20:52,359 --> 00:20:56,640 Speaker 2: large scale principles. And they'll still have large lending books, 384 00:20:57,960 --> 00:21:01,680 Speaker 2: but you know, I think it's a big shift, and 385 00:21:01,800 --> 00:21:04,919 Speaker 2: that shift isn't going to change in this process. I 386 00:21:04,920 --> 00:21:06,920 Speaker 2: think if you look at Europe and if your ECB. 387 00:21:07,160 --> 00:21:09,200 Speaker 2: ECB has been very vocal that they'd like to see 388 00:21:09,280 --> 00:21:14,080 Speaker 2: much more consolidation in the European marketplace. That seems to 389 00:21:14,080 --> 00:21:17,640 Speaker 2: be taking a long time, and therefore, I think regulation 390 00:21:17,680 --> 00:21:20,399 Speaker 2: will continue to be relatively tight on the European banking 391 00:21:20,440 --> 00:21:25,520 Speaker 2: system around single name, concentration, non investment grade, you know, 392 00:21:25,600 --> 00:21:29,359 Speaker 2: and these type of things. So fundamentally, in a growing 393 00:21:29,400 --> 00:21:32,760 Speaker 2: market where you know, companies need to borrow two hundred 394 00:21:32,760 --> 00:21:35,880 Speaker 2: million first time round, four hundred five hundred million, next 395 00:21:35,880 --> 00:21:39,119 Speaker 2: time round a billion the time round, institutions that can 396 00:21:39,160 --> 00:21:41,920 Speaker 2: bring together large pools of capital are going to be 397 00:21:42,000 --> 00:21:45,879 Speaker 2: very very relevant, very very meaningful for those So you know, 398 00:21:46,600 --> 00:21:49,280 Speaker 2: the banks, as we have with Santander, you know, can 399 00:21:49,320 --> 00:21:51,280 Speaker 2: be great partners and they've you know, there's been other 400 00:21:51,320 --> 00:21:55,119 Speaker 2: bank partnerships announced because I think they see it that 401 00:21:55,200 --> 00:21:58,679 Speaker 2: they have a big origination platform, we have a large 402 00:21:58,720 --> 00:22:01,960 Speaker 2: ability to scale capital together, and they can be a 403 00:22:02,040 --> 00:22:05,520 Speaker 2: very harmonious partnership in working together to serve as clients 404 00:22:05,560 --> 00:22:09,399 Speaker 2: in that space. And our job for the OLPs is 405 00:22:09,440 --> 00:22:11,760 Speaker 2: to make sure we're putting in first class risk management 406 00:22:12,440 --> 00:22:12,800 Speaker 2: around that. 407 00:22:13,560 --> 00:22:16,840 Speaker 4: Can I perhaps follow up on that you're talking about 408 00:22:17,480 --> 00:22:21,680 Speaker 4: regulation or deregulation, whichever way you kind of look at it. 409 00:22:21,880 --> 00:22:25,280 Speaker 4: The ECB has been quite that They've completed a review 410 00:22:25,400 --> 00:22:31,440 Speaker 4: looking at private credits last year and they've highlighted the 411 00:22:31,480 --> 00:22:37,280 Speaker 4: prevalence of leverage which can be upstream, midstream, or downstream 412 00:22:37,760 --> 00:22:42,119 Speaker 4: in the pridate creditor industry. Do you are you concerned 413 00:22:42,240 --> 00:22:48,120 Speaker 4: or do you expect regulators to follow up with with 414 00:22:48,119 --> 00:22:51,320 Speaker 4: with introducing regulations for the proud creditor industry? 415 00:22:51,760 --> 00:22:55,840 Speaker 2: I think, I mean we are already regulated by for example, 416 00:22:55,920 --> 00:22:58,120 Speaker 2: you know, we're most of our funds are based in Luxembourg. 417 00:22:58,200 --> 00:23:01,120 Speaker 2: The CSSF is a very very you know, I think, 418 00:23:01,840 --> 00:23:07,359 Speaker 2: thoughtful and focused regulator and in that space, and so 419 00:23:07,840 --> 00:23:11,600 Speaker 2: you know today there is already regulations and different you around. 420 00:23:11,800 --> 00:23:15,840 Speaker 2: You leverage into funds, it's into you know, where we 421 00:23:15,840 --> 00:23:19,280 Speaker 2: can distribute and things like that. I think the part 422 00:23:19,320 --> 00:23:22,760 Speaker 2: that most people, you know, possibly miss at times is 423 00:23:23,640 --> 00:23:27,600 Speaker 2: if we look at where significant credit losses have happened 424 00:23:27,680 --> 00:23:32,760 Speaker 2: in the banking industry, it is because of concentration issues 425 00:23:33,840 --> 00:23:37,640 Speaker 2: inside you know, the balance sheet, whether that is back 426 00:23:37,680 --> 00:23:40,239 Speaker 2: in the early nineties with real estate, whether that is 427 00:23:40,280 --> 00:23:44,639 Speaker 2: in two thousand and eight with US mortgages, and you know, 428 00:23:45,320 --> 00:23:48,600 Speaker 2: if you actually look at a fund like ours, we'll 429 00:23:48,600 --> 00:23:51,840 Speaker 2: have fifty or sixty LPs in there. You know, if 430 00:23:51,840 --> 00:23:54,760 Speaker 2: we do a loan for four hundred million or two 431 00:23:54,800 --> 00:23:57,760 Speaker 2: hundred million, you know, any LP is going to be 432 00:23:57,960 --> 00:24:02,000 Speaker 2: you know, one million to five million ex exposure inside 433 00:24:02,000 --> 00:24:04,679 Speaker 2: of that. And if you look at the underlying her 434 00:24:04,720 --> 00:24:07,439 Speaker 2: person who's given us the money, they're an insurance company 435 00:24:07,480 --> 00:24:11,000 Speaker 2: for example, or a pension fund which has tens of billions, 436 00:24:11,880 --> 00:24:15,080 Speaker 2: and so the actual exposure in a single name that 437 00:24:15,119 --> 00:24:18,800 Speaker 2: they have coming through us is tiny, and there's no 438 00:24:18,960 --> 00:24:21,639 Speaker 2: risk with us because the money is locked up with 439 00:24:21,720 --> 00:24:25,520 Speaker 2: us for seven years in our actually ten years in 440 00:24:25,560 --> 00:24:28,879 Speaker 2: our fun in that space. So you don't have the 441 00:24:29,320 --> 00:24:32,120 Speaker 2: capital flight risk that the banking system saw in two 442 00:24:32,119 --> 00:24:34,760 Speaker 2: thousand and eight where deposits got withdrawal and banks were 443 00:24:34,800 --> 00:24:39,119 Speaker 2: really under liquidity pressures. And you don't have the concentration 444 00:24:39,240 --> 00:24:41,240 Speaker 2: risk that we saw in the banking market in two 445 00:24:41,280 --> 00:24:45,000 Speaker 2: thousand and eight as well, because it's diversified through fifty 446 00:24:45,080 --> 00:24:48,359 Speaker 2: or sixty institutions. So I think when regulators actually start 447 00:24:48,359 --> 00:24:52,800 Speaker 2: to look at that, we're an incredibly powerful and positive 448 00:24:53,440 --> 00:24:56,000 Speaker 2: source of capital to come in to grow the European economy, 449 00:24:56,520 --> 00:24:59,880 Speaker 2: and that's why you've seen countries like Germany, like Italy 450 00:25:00,240 --> 00:25:03,840 Speaker 2: change regulation to give direct lenders like ourselves direct access 451 00:25:03,840 --> 00:25:06,280 Speaker 2: to clients. Because you know, when I started the business 452 00:25:06,280 --> 00:25:09,120 Speaker 2: ten years ago, I couldn't lend to a German company directly. 453 00:25:09,160 --> 00:25:11,280 Speaker 2: I had to ask a bank to intermediate for a 454 00:25:11,400 --> 00:25:13,640 Speaker 2: day or two and then I bought the loan off them. 455 00:25:13,840 --> 00:25:18,600 Speaker 3: That's interesting if you regulators seem to be interested in 456 00:25:20,200 --> 00:25:24,040 Speaker 3: I guess, different forms of leverage across private markets. They're 457 00:25:24,080 --> 00:25:28,280 Speaker 3: interested in valuations on both the equity and the credit side. 458 00:25:28,920 --> 00:25:34,160 Speaker 3: And if you look at potential risks for private credits specifically, 459 00:25:34,720 --> 00:25:38,560 Speaker 3: I mean, what do you think is the key risk 460 00:25:40,320 --> 00:25:41,600 Speaker 3: that is still for latent? 461 00:25:42,320 --> 00:25:45,680 Speaker 2: I don't mean, you know, so if I go back 462 00:25:45,720 --> 00:25:48,800 Speaker 2: to it, it is really if you look at the 463 00:25:49,000 --> 00:25:52,359 Speaker 2: asset management industry and some of the you know, the 464 00:25:52,400 --> 00:25:55,960 Speaker 2: blowups we've had in hedge funds or anything like that, 465 00:25:56,160 --> 00:25:59,720 Speaker 2: it's primarily being, if I can say, much more, a 466 00:25:59,720 --> 00:26:04,520 Speaker 2: mini match of liquidity or an operational misunderstanding of the 467 00:26:04,600 --> 00:26:07,280 Speaker 2: risks that are actually holding in their balance sheet. And 468 00:26:07,320 --> 00:26:09,960 Speaker 2: I think if you look at it today, the scrutiny 469 00:26:10,000 --> 00:26:12,560 Speaker 2: that we are all put under by our LPs on 470 00:26:12,840 --> 00:26:15,760 Speaker 2: line by line explanation of what we have in our 471 00:26:15,800 --> 00:26:18,840 Speaker 2: balance sheets. You know, the solevency two reporting that we 472 00:26:18,960 --> 00:26:21,440 Speaker 2: do to all of our insurance clients inside of Europe 473 00:26:21,480 --> 00:26:24,119 Speaker 2: and now around the world means that they have a 474 00:26:24,280 --> 00:26:27,199 Speaker 2: very very granular analysis. If you look at what we 475 00:26:27,280 --> 00:26:31,280 Speaker 2: have to do with our regulator independent pricing, using third 476 00:26:31,320 --> 00:26:34,000 Speaker 2: parties to value our assets to make sure that we 477 00:26:34,080 --> 00:26:38,479 Speaker 2: are being factual around what we think the underlying values 478 00:26:38,520 --> 00:26:42,160 Speaker 2: are in that space. I think the industry has come 479 00:26:42,320 --> 00:26:45,560 Speaker 2: a tremendously long way, and I think that scrutiny will 480 00:26:45,560 --> 00:26:48,359 Speaker 2: only continue to grow as we become a bigger part 481 00:26:48,400 --> 00:26:52,840 Speaker 2: of the asset allocation for institutions. So you know, I 482 00:26:52,880 --> 00:26:56,520 Speaker 2: think the establishment of the industry is here. The improvement 483 00:26:56,800 --> 00:26:59,640 Speaker 2: in as you say, risk reporting or pricing and all 484 00:26:59,640 --> 00:27:03,399 Speaker 2: of that will continue to grow. And I think the 485 00:27:03,440 --> 00:27:07,880 Speaker 2: regulators are, if I can say, silas encouraging us by 486 00:27:08,000 --> 00:27:11,080 Speaker 2: talking about this on an active basis that we keep 487 00:27:11,119 --> 00:27:13,639 Speaker 2: making those movements forward, and I think that will happen 488 00:27:13,840 --> 00:27:17,480 Speaker 2: and people, you know, our regulators across Europe will continue 489 00:27:17,520 --> 00:27:19,800 Speaker 2: to make sure that we're moving in the right direction. 490 00:27:21,359 --> 00:27:23,240 Speaker 2: And I think that's why you haven't seen anyone turn 491 00:27:23,280 --> 00:27:26,600 Speaker 2: around and say stop doing this, but they just want 492 00:27:26,640 --> 00:27:28,000 Speaker 2: to make sure it's best practices. 493 00:27:28,400 --> 00:27:30,720 Speaker 1: What about the default rate those time? Is it increasing? 494 00:27:30,720 --> 00:27:32,879 Speaker 1: Are you seeing more payment and kind more amendments that 495 00:27:32,960 --> 00:27:33,240 Speaker 1: kind of. 496 00:27:33,240 --> 00:27:36,119 Speaker 2: Thing you certainly you certainly saw, you know, kind of 497 00:27:36,160 --> 00:27:39,040 Speaker 2: coming out of COVID and then getting hit by this 498 00:27:39,240 --> 00:27:43,840 Speaker 2: massive inflation hit and all of that. Companies having certain 499 00:27:43,920 --> 00:27:47,600 Speaker 2: challenges at times on cash flow. I mean, many companies 500 00:27:47,880 --> 00:27:51,760 Speaker 2: couldn't pass on the input pricing inflation as quickly as 501 00:27:51,800 --> 00:27:55,680 Speaker 2: they needed to, and so therefore Ibadah came down quite 502 00:27:55,680 --> 00:27:58,960 Speaker 2: sharply and then has recovered back up in that process. 503 00:27:59,280 --> 00:28:01,000 Speaker 2: But I think if you look at where we are 504 00:28:01,000 --> 00:28:03,720 Speaker 2: in the cycle, you know, you're now a couple of 505 00:28:03,840 --> 00:28:07,680 Speaker 2: years into this process, the companies have held up most 506 00:28:07,720 --> 00:28:11,760 Speaker 2: of the input pricing has moved through to the consumer 507 00:28:12,000 --> 00:28:15,320 Speaker 2: of the goods in that space. So default rates, I 508 00:28:15,320 --> 00:28:18,960 Speaker 2: think most people would say, is much lower than people expected. 509 00:28:20,280 --> 00:28:23,520 Speaker 2: And I think the you know, in cases where you 510 00:28:23,960 --> 00:28:27,399 Speaker 2: recoveries will be done, they're much much higher than people 511 00:28:27,400 --> 00:28:32,440 Speaker 2: have expected. So but it doesn't you know, you will 512 00:28:32,480 --> 00:28:36,080 Speaker 2: have people who have you know, portfolios that don't perform 513 00:28:36,119 --> 00:28:38,400 Speaker 2: that way. So it's a bell curve, but I think 514 00:28:38,440 --> 00:28:40,040 Speaker 2: fundamentally it's come out of it. 515 00:28:40,040 --> 00:28:43,280 Speaker 3: Much better internally institutionally, do you do you look at 516 00:28:43,280 --> 00:28:45,200 Speaker 3: default rates? I mean, do you think there are good 517 00:28:45,240 --> 00:28:49,160 Speaker 3: spell weather for overall risk in the market, Because it 518 00:28:49,200 --> 00:28:51,400 Speaker 3: feels as if the one of the strengths of private 519 00:28:51,400 --> 00:28:55,120 Speaker 3: credit is that it can avoid defaults, and so actually 520 00:28:55,120 --> 00:29:01,000 Speaker 3: the default rate may be less relevant to understanding I 521 00:29:01,000 --> 00:29:04,440 Speaker 3: can know the gyrations of the of the market. 522 00:29:05,360 --> 00:29:07,320 Speaker 2: If I think one of the great strengths of private 523 00:29:07,320 --> 00:29:11,640 Speaker 2: credit is the fundamental alignment between the borrower, the lender 524 00:29:12,320 --> 00:29:16,560 Speaker 2: and the LP has funded it. And you know, I 525 00:29:16,600 --> 00:29:19,720 Speaker 2: think if you start off default rates, you know, it's 526 00:29:19,760 --> 00:29:23,360 Speaker 2: a statistical analysis, but it doesn't tell you who to 527 00:29:23,480 --> 00:29:25,120 Speaker 2: lend to and who not to lend to. It just 528 00:29:25,160 --> 00:29:26,760 Speaker 2: tells you, you know, the trends that are going on 529 00:29:26,800 --> 00:29:30,240 Speaker 2: in the industry. Fundamentally, you have to be very, very 530 00:29:30,240 --> 00:29:32,840 Speaker 2: focused on the industry sector. You've got to look at 531 00:29:32,840 --> 00:29:36,200 Speaker 2: the company's position in that industry sector and the viability 532 00:29:36,200 --> 00:29:39,040 Speaker 2: of their business model in that sector. So you know, 533 00:29:39,120 --> 00:29:41,960 Speaker 2: if I go back to the early two thousands, everyone 534 00:29:42,040 --> 00:29:46,920 Speaker 2: gave you leverage to autoparts, manufacturers today with Tesla and 535 00:29:47,040 --> 00:29:50,240 Speaker 2: you know by d you wouldn't even consider thinking about 536 00:29:50,280 --> 00:29:54,120 Speaker 2: it in that space because technology has completely changed that sector. 537 00:29:54,320 --> 00:29:57,360 Speaker 2: So you know, for me, what keeps us awake at 538 00:29:57,480 --> 00:30:01,880 Speaker 2: night is, you know, product redundancy and the life cycle 539 00:30:01,960 --> 00:30:05,000 Speaker 2: of products. You know, you all may remember we used 540 00:30:05,000 --> 00:30:08,080 Speaker 2: to have a thing called a walkman. You know, today 541 00:30:08,160 --> 00:30:10,640 Speaker 2: it's your iPhone. You would you know, my children probably 542 00:30:10,640 --> 00:30:13,480 Speaker 2: don't even know what a walkman is in that space. 543 00:30:13,840 --> 00:30:18,360 Speaker 2: And I think that change is incredibly fast today. And 544 00:30:18,400 --> 00:30:21,520 Speaker 2: you've got to go into industries and go into sectors 545 00:30:21,560 --> 00:30:27,080 Speaker 2: where you can reliably predict the next seven, eight, ten years. 546 00:30:27,440 --> 00:30:29,440 Speaker 2: And that's why if you look at private equity in today, 547 00:30:29,560 --> 00:30:32,760 Speaker 2: it's you know, outsourced business services. You know, I have 548 00:30:32,840 --> 00:30:36,000 Speaker 2: firewalls in my business today, it's done by third parties. 549 00:30:36,440 --> 00:30:40,120 Speaker 2: I have thirty different programs managing into my company and 550 00:30:40,240 --> 00:30:44,000 Speaker 2: that's done by three different providers in that space. Am 551 00:30:44,000 --> 00:30:45,600 Speaker 2: I ever going to turn that business off? 552 00:30:45,760 --> 00:30:45,840 Speaker 3: No. 553 00:30:46,520 --> 00:30:48,720 Speaker 2: As a percentage of my cost for running the firm, 554 00:30:48,800 --> 00:30:53,120 Speaker 2: it's tiny, and so it's an incredibly stable revenue stream 555 00:30:53,160 --> 00:30:58,120 Speaker 2: for the provider. You know, my big cost is labor 556 00:30:58,760 --> 00:31:02,360 Speaker 2: people in that space. So if you're a private equity 557 00:31:02,400 --> 00:31:05,240 Speaker 2: firm buying a whole series of these companies and rolling 558 00:31:05,280 --> 00:31:07,840 Speaker 2: them up to which will end up looking like some 559 00:31:07,880 --> 00:31:11,080 Speaker 2: of the big data providers in the United States in 560 00:31:11,120 --> 00:31:14,600 Speaker 2: five or ten years time. And these are fascinating industries 561 00:31:14,920 --> 00:31:20,560 Speaker 2: with great growth potential and longevity because cloud computing has 562 00:31:20,600 --> 00:31:23,200 Speaker 2: completely changed how we store data and what we're going 563 00:31:23,240 --> 00:31:27,920 Speaker 2: to do. So you know, to me, as I said, 564 00:31:28,480 --> 00:31:31,720 Speaker 2: life cycle of the product, and you know, and is 565 00:31:31,720 --> 00:31:33,760 Speaker 2: it going to be there in ten years time or 566 00:31:34,040 --> 00:31:37,080 Speaker 2: my inter sector which is going to be completely become 567 00:31:37,640 --> 00:31:42,600 Speaker 2: a dinosaur because of technology change, you know, medical genealogy 568 00:31:42,680 --> 00:31:45,800 Speaker 2: changes and other things like that. That's really where we're heavily, 569 00:31:45,800 --> 00:31:48,360 Speaker 2: heavily focused, and that's where the capital goes. 570 00:31:48,600 --> 00:31:50,560 Speaker 1: Watch out for those dinosaurs making a comeback though time. 571 00:31:50,600 --> 00:31:52,960 Speaker 1: And I'm still listening to my vinyl records. So that's 572 00:31:52,960 --> 00:31:56,040 Speaker 1: another conversation. But I wanted to go back to what 573 00:31:56,080 --> 00:31:59,880 Speaker 1: you said earlier about the relative advantages in the US, sorry, 574 00:32:00,200 --> 00:32:03,120 Speaker 1: in Europe against the US. I'm interested in that concept 575 00:32:03,120 --> 00:32:05,040 Speaker 1: of relative value between the regions because we are so 576 00:32:05,160 --> 00:32:07,720 Speaker 1: loaded up. You know, I'm sitting in New York and 577 00:32:07,760 --> 00:32:11,040 Speaker 1: it's all just everybody wants US assets the dollar and 578 00:32:11,080 --> 00:32:13,120 Speaker 1: they've been paid for it. They've done really really well 579 00:32:13,120 --> 00:32:15,080 Speaker 1: by just sitting here and doing that over and over again. 580 00:32:15,640 --> 00:32:19,120 Speaker 1: But when you talk to someone that's outside of Europe 581 00:32:19,200 --> 00:32:22,560 Speaker 1: about the opportunity, you mentioned better fees, better margins, upfront 582 00:32:22,560 --> 00:32:25,120 Speaker 1: fees as well, I assume better covenants. Well, can you 583 00:32:25,320 --> 00:32:27,480 Speaker 1: put that into some kind of context, maybe give us 584 00:32:27,480 --> 00:32:28,320 Speaker 1: some numbers around that. 585 00:32:28,680 --> 00:32:32,320 Speaker 2: Yeah, And so you know, if you look at Europe today, 586 00:32:32,960 --> 00:32:36,920 Speaker 2: upfront fees for underwriting transactions sit in the two and 587 00:32:36,960 --> 00:32:40,719 Speaker 2: a half to you know, maybe three percent type region, 588 00:32:40,760 --> 00:32:42,760 Speaker 2: where if you look at the United States they're probably 589 00:32:42,840 --> 00:32:47,840 Speaker 2: half that in that space. If you look at margins, 590 00:32:47,920 --> 00:32:50,400 Speaker 2: you know in there there's you know, twenty five to 591 00:32:50,440 --> 00:32:54,600 Speaker 2: fifty basis points I think still premium. And if you 592 00:32:54,640 --> 00:33:00,240 Speaker 2: swap euro assets back into US dollars, you're getting, you know, 593 00:33:00,360 --> 00:33:04,200 Speaker 2: a significant pick up just because of the interest rate differential, 594 00:33:04,360 --> 00:33:06,800 Speaker 2: which has varied between one hundred and fifty and two 595 00:33:06,880 --> 00:33:11,760 Speaker 2: hundred basis points depending on markets. And so you know, 596 00:33:11,800 --> 00:33:14,920 Speaker 2: if you put that whole package together in that space, 597 00:33:15,080 --> 00:33:20,760 Speaker 2: you know, wider spreads, greater upfront fees, the yal curve differential. 598 00:33:20,840 --> 00:33:23,600 Speaker 2: Swapping back into dollars. You know, you can be picking 599 00:33:23,640 --> 00:33:25,880 Speaker 2: up one hundred and fifty two hundred basis points more 600 00:33:25,920 --> 00:33:28,560 Speaker 2: sitting in Europe than you are in the United States. 601 00:33:29,000 --> 00:33:31,920 Speaker 2: And you know, we've seen some of the most significant 602 00:33:31,960 --> 00:33:36,120 Speaker 2: bell Weather institutions very focused on Europe over the last 603 00:33:36,480 --> 00:33:39,480 Speaker 2: twelve months because I think they feel that they are 604 00:33:39,760 --> 00:33:42,600 Speaker 2: heavily exposed to the direct lending market inside of the 605 00:33:42,720 --> 00:33:45,840 Speaker 2: United States and they want diversification. You know, I met 606 00:33:45,960 --> 00:33:49,400 Speaker 2: today with one of the largest asset managers and I 607 00:33:49,400 --> 00:33:52,479 Speaker 2: thought they encapsulated it very, very well. They said, you know, 608 00:33:52,800 --> 00:33:55,280 Speaker 2: everyone looks at Europe through the eyes of equity, and 609 00:33:55,760 --> 00:33:59,080 Speaker 2: US equities are exciting and europe p in equities are terrible. 610 00:33:59,640 --> 00:34:02,840 Speaker 2: But if you look at credit, credit actually looks really attractive. 611 00:34:03,400 --> 00:34:06,200 Speaker 1: And within that are there sectors that are a focus 612 00:34:06,320 --> 00:34:08,960 Speaker 1: right now for non European investments coming in. 613 00:34:09,239 --> 00:34:12,680 Speaker 2: Yeah. And as I touch on through this, it is 614 00:34:12,760 --> 00:34:15,400 Speaker 2: in the new economy. Yeah, I think Europe today is 615 00:34:15,400 --> 00:34:18,360 Speaker 2: a two speed economy. You have its old industrial base. 616 00:34:18,719 --> 00:34:21,360 Speaker 2: You know, if you look at the industrial base of Germany, 617 00:34:21,400 --> 00:34:24,719 Speaker 2: the manufacturers, the car manufacturers and people like that, where 618 00:34:24,719 --> 00:34:28,680 Speaker 2: they're really struggling under Chinese and other markets, pressures of 619 00:34:28,840 --> 00:34:32,480 Speaker 2: imports coming into Europe, and then you have this new 620 00:34:32,560 --> 00:34:37,719 Speaker 2: sector heavily related to technology, heavy rated to healthcare and 621 00:34:38,400 --> 00:34:43,000 Speaker 2: services where you know, there is a very large population 622 00:34:44,040 --> 00:34:50,080 Speaker 2: that needs servicing with you a very unconsolidated suppliers of 623 00:34:50,120 --> 00:34:53,040 Speaker 2: those services, where private equity is coming in and rolling 624 00:34:53,080 --> 00:34:55,640 Speaker 2: those companies up and doing it. And it's all parts 625 00:34:55,680 --> 00:34:58,280 Speaker 2: of the healthcare sector, all parts of the service sector 626 00:34:59,200 --> 00:35:03,200 Speaker 2: in that space. And you know, and still some growth 627 00:35:03,239 --> 00:35:07,759 Speaker 2: areas in industrials, but I think in the US you 628 00:35:07,800 --> 00:35:12,800 Speaker 2: see a lot of core industrials, hospitality, you know, retail 629 00:35:12,920 --> 00:35:16,879 Speaker 2: driven activity. You won't see much of that in most 630 00:35:16,880 --> 00:35:19,640 Speaker 2: of the European portfolios. I think they're very much in 631 00:35:19,800 --> 00:35:21,960 Speaker 2: the new economy and not in the old economy. 632 00:35:22,200 --> 00:35:25,440 Speaker 4: Simon, could I come back to something you mentioned earlier, 633 00:35:25,440 --> 00:35:29,560 Speaker 4: your partnership with the Santander and throughout the private credit industry, 634 00:35:29,600 --> 00:35:31,360 Speaker 4: there are a little for those partnerships that have been 635 00:35:31,400 --> 00:35:35,080 Speaker 4: announced between banks on the one side and private private 636 00:35:35,080 --> 00:35:38,319 Speaker 4: credits firms on the other side. In those instances, who 637 00:35:38,400 --> 00:35:42,400 Speaker 4: actually owns the customer relationship if I can call it that, 638 00:35:42,560 --> 00:35:47,800 Speaker 4: And how do you approach dividing up the economics of 639 00:35:48,440 --> 00:35:49,080 Speaker 4: a partnership. 640 00:35:49,320 --> 00:35:51,680 Speaker 2: Yeah, and I think that's been if I can say, 641 00:35:51,680 --> 00:35:54,440 Speaker 2: some of the stumbling blocks to the partnerships, because you know, 642 00:35:54,600 --> 00:35:57,480 Speaker 2: the traditional way that it used to get done is 643 00:35:57,680 --> 00:36:00,319 Speaker 2: you know, you bring the all the deals and you know, 644 00:36:00,440 --> 00:36:03,200 Speaker 2: I'll give you your customers some money and all of that. 645 00:36:04,560 --> 00:36:06,839 Speaker 2: You know, we recognized when we went into this deal 646 00:36:07,160 --> 00:36:10,600 Speaker 2: with Santander in a very specific area, it needed to 647 00:36:10,640 --> 00:36:12,920 Speaker 2: be a real partnership, and so we set up a 648 00:36:12,920 --> 00:36:16,120 Speaker 2: company together and we're both are shareholders in that company 649 00:36:16,400 --> 00:36:18,880 Speaker 2: that we are working together to serve as that client. 650 00:36:19,160 --> 00:36:22,040 Speaker 2: Santander has a huge product range and so it's got 651 00:36:22,040 --> 00:36:24,960 Speaker 2: lots of other products they're servicing those particular clients, but 652 00:36:25,040 --> 00:36:30,240 Speaker 2: we're a specialist provider in their portfolio in a specific area. 653 00:36:30,719 --> 00:36:34,040 Speaker 2: And because we're both partners and shareholders inside the company, 654 00:36:34,360 --> 00:36:36,440 Speaker 2: we're working together in that process. And I think that 655 00:36:37,040 --> 00:36:39,680 Speaker 2: if I says, you know, dilutes or isn't my customer 656 00:36:39,760 --> 00:36:42,080 Speaker 2: or your customer, it's our customer and we're trying to 657 00:36:42,120 --> 00:36:45,320 Speaker 2: deliver the best service because we're actually partners in a business. 658 00:36:45,600 --> 00:36:50,920 Speaker 3: Fair enough, You've had a remarkable career, Simon in that 659 00:36:50,960 --> 00:36:56,719 Speaker 3: you've been adjacent to Nick Lison in bearings. You've been 660 00:36:56,760 --> 00:37:00,879 Speaker 3: in RBS in America, you've been in private credit, You've 661 00:37:00,880 --> 00:37:03,279 Speaker 3: seen all of these kind of announcements. Didn't just name 662 00:37:03,280 --> 00:37:07,319 Speaker 3: a few, and there's others, but you know, you've been 663 00:37:07,920 --> 00:37:10,120 Speaker 3: I guess at the epicenter of a series of quite 664 00:37:10,600 --> 00:37:15,479 Speaker 3: significant moments in financial I guess, like modern history, what's 665 00:37:15,520 --> 00:37:18,279 Speaker 3: been the most chaotic? Is the most chaotic period still 666 00:37:18,320 --> 00:37:18,680 Speaker 3: to come? 667 00:37:19,440 --> 00:37:23,200 Speaker 2: Yeah, well I can answer that one, you know, quite quickly, 668 00:37:23,239 --> 00:37:25,239 Speaker 2: so you know, touch you on your point. You know, 669 00:37:25,280 --> 00:37:26,920 Speaker 2: I was in the US in nineteen ninety when we 670 00:37:26,920 --> 00:37:29,600 Speaker 2: went through the crisis, and you know, City Group nearly 671 00:37:29,640 --> 00:37:32,799 Speaker 2: went bankrupt and a number of other US banks. That 672 00:37:32,920 --> 00:37:34,920 Speaker 2: was a huge crisis. But you know, I think if 673 00:37:34,960 --> 00:37:37,120 Speaker 2: we look back, two thousand and eight was by far, 674 00:37:37,800 --> 00:37:39,799 Speaker 2: you know, it was something that none of us had 675 00:37:39,800 --> 00:37:43,880 Speaker 2: seen since the Great Depression, and I think still today. 676 00:37:44,080 --> 00:37:45,319 Speaker 2: You know, if you talk to the people who were 677 00:37:45,360 --> 00:37:47,640 Speaker 2: at the epicenter of that, the world came incredibly close 678 00:37:47,680 --> 00:37:51,520 Speaker 2: to a major meltdown of the financial services industry. You know, 679 00:37:51,560 --> 00:37:55,600 Speaker 2: if you look at banks in Holland and Switzerland, UK, Ireland, 680 00:37:55,960 --> 00:37:59,280 Speaker 2: US and all that, the entire global banking system apart 681 00:37:59,280 --> 00:38:02,880 Speaker 2: from probably you know, China and Japan, and you know, 682 00:38:03,239 --> 00:38:06,040 Speaker 2: Australia and Canada had to be bailed out in some 683 00:38:06,080 --> 00:38:08,960 Speaker 2: format in the major banking site. But I think, you know, 684 00:38:10,360 --> 00:38:12,279 Speaker 2: that was you know, kind of set up in my 685 00:38:12,400 --> 00:38:15,480 Speaker 2: mind in two ways. You know, I think if you 686 00:38:15,520 --> 00:38:19,400 Speaker 2: look at the kind of equity market expectation of banks 687 00:38:19,480 --> 00:38:22,680 Speaker 2: in the late nineties going into early two thousands, if 688 00:38:22,719 --> 00:38:25,560 Speaker 2: you're a chief executive that wasn't making a twenty percent 689 00:38:25,640 --> 00:38:29,160 Speaker 2: return on your equity, then you know, people felt you 690 00:38:29,160 --> 00:38:32,600 Speaker 2: weren't really performing at the highest level. And the only 691 00:38:32,640 --> 00:38:34,480 Speaker 2: way a bank can get to twenty percent return on 692 00:38:34,520 --> 00:38:36,440 Speaker 2: equity is you've got to give your balance sheet up 693 00:38:36,520 --> 00:38:42,319 Speaker 2: substantially in that space. And then unfortunately, we got hit 694 00:38:42,440 --> 00:38:47,360 Speaker 2: by you know, a very very major asset class. Where 695 00:38:47,840 --> 00:38:50,360 Speaker 2: as I said at the beginning of this podcast, the 696 00:38:50,800 --> 00:38:54,479 Speaker 2: underwriter of the risk just passed it on to someone 697 00:38:54,560 --> 00:38:57,440 Speaker 2: else and just moved. You know, they weren't around for 698 00:38:57,520 --> 00:38:59,600 Speaker 2: all of the problems that came out of that, and 699 00:38:59,640 --> 00:39:01,880 Speaker 2: that got distributed to everyone in the world. You know, 700 00:39:01,920 --> 00:39:04,359 Speaker 2: we had a very large book at RBS, probably you know, 701 00:39:04,400 --> 00:39:07,440 Speaker 2: sixty to seventy billion, and you know, most other banks 702 00:39:07,480 --> 00:39:10,840 Speaker 2: had pretty similar numbers Barclays, et cetera. And that was 703 00:39:10,840 --> 00:39:14,640 Speaker 2: a painful experience. I think the great thing today is 704 00:39:15,120 --> 00:39:17,480 Speaker 2: the lesson has been pretty much learned. I would say 705 00:39:17,520 --> 00:39:20,279 Speaker 2: in every asset class, if you're going to underwrite that risk, 706 00:39:20,320 --> 00:39:22,239 Speaker 2: you need to own it and your business needs to 707 00:39:22,280 --> 00:39:26,560 Speaker 2: rely on it performing, you know. And so if you're 708 00:39:26,600 --> 00:39:29,239 Speaker 2: looking at the banking industry, they're focused now on distribution 709 00:39:29,360 --> 00:39:32,160 Speaker 2: of primarily investment grade risk, and so the risk of 710 00:39:32,160 --> 00:39:34,680 Speaker 2: that underperforming is much much lower. You know. The people 711 00:39:34,719 --> 00:39:36,960 Speaker 2: who are taking over a larger and larger part of 712 00:39:37,000 --> 00:39:39,839 Speaker 2: the non investment grade risk are ourselves who are acting 713 00:39:39,840 --> 00:39:43,480 Speaker 2: as principles in that business, and we're managing that on 714 00:39:43,520 --> 00:39:47,040 Speaker 2: behalf of our clients in that space. And I feel 715 00:39:47,320 --> 00:39:49,840 Speaker 2: that's kind of the old banking world if we go 716 00:39:49,880 --> 00:39:52,200 Speaker 2: back to the seventies and eighties, Yeah, I give you 717 00:39:52,280 --> 00:39:55,239 Speaker 2: fifty million. You know, you and I are now partners 718 00:39:55,880 --> 00:39:58,319 Speaker 2: in that space, and that's what we're doing every day 719 00:39:58,560 --> 00:40:01,480 Speaker 2: across Europe with these business and working with their management 720 00:40:01,480 --> 00:40:03,280 Speaker 2: teams as they grow those firms. 721 00:40:03,560 --> 00:40:05,239 Speaker 1: I think, to follow on from Silus question, I think 722 00:40:05,280 --> 00:40:06,560 Speaker 1: what he's kind of getting at is, you know, you've 723 00:40:06,600 --> 00:40:09,799 Speaker 1: you've really seen inside some really turbulent times in our 724 00:40:09,840 --> 00:40:13,080 Speaker 1: financial history, and you know, you've seen what can happen, 725 00:40:13,800 --> 00:40:16,520 Speaker 1: particularly at times when everyone is most excited and most 726 00:40:16,560 --> 00:40:19,320 Speaker 1: positive and most bullish. And you know, the golden age 727 00:40:19,600 --> 00:40:21,520 Speaker 1: seems to go on forever when you when you're in it, 728 00:40:21,600 --> 00:40:24,919 Speaker 1: and then suddenly it suddenly it's over. Do you think 729 00:40:24,920 --> 00:40:28,440 Speaker 1: that we are getting complacent about credit and that you know, 730 00:40:28,440 --> 00:40:31,120 Speaker 1: people are just too positive and you know that it 731 00:40:31,200 --> 00:40:33,680 Speaker 1: will end up in a reckoning at some point soon. 732 00:40:34,000 --> 00:40:38,000 Speaker 2: I think everyone uses a parallel to US mortgages, you know, 733 00:40:38,120 --> 00:40:40,400 Speaker 2: and if you go and lend billions and billions and 734 00:40:40,400 --> 00:40:43,040 Speaker 2: billions to people who actually can't afford to repay the 735 00:40:43,080 --> 00:40:45,759 Speaker 2: mortgage and then you know you end up with a 736 00:40:46,480 --> 00:40:50,520 Speaker 2: car crash. Will you have underperforming sectors? Of course? You know, 737 00:40:50,719 --> 00:40:52,439 Speaker 2: we saw the oil and gas sector in the US, 738 00:40:52,480 --> 00:40:54,480 Speaker 2: We looked at shale in the US, We looked at 739 00:40:54,760 --> 00:40:58,600 Speaker 2: different things and those are very much, in my mind, 740 00:40:58,680 --> 00:41:04,600 Speaker 2: sectorially driven and demand driven. And in a credit world, 741 00:41:04,760 --> 00:41:07,640 Speaker 2: you're going to have strong sectors and you're going to 742 00:41:07,640 --> 00:41:11,560 Speaker 2: have weak sectors. And you know it's the manager's decision 743 00:41:11,600 --> 00:41:14,000 Speaker 2: and whether they want to go for outsize return in 744 00:41:14,040 --> 00:41:16,719 Speaker 2: the weak sector or whether they want to focus on 745 00:41:16,760 --> 00:41:21,200 Speaker 2: the strongest sectors and be benchmark returns for what they're doing. 746 00:41:21,560 --> 00:41:24,200 Speaker 2: And there will be managers who specialize on the weak 747 00:41:24,239 --> 00:41:26,880 Speaker 2: sectors because they want to be much more closer to 748 00:41:26,960 --> 00:41:29,560 Speaker 2: a kind of equity investor in those areas. And then 749 00:41:29,600 --> 00:41:32,879 Speaker 2: there's managers like ourselves who are looking to be large 750 00:41:32,880 --> 00:41:36,239 Speaker 2: scale fundamental providers of capital in the core sectors and 751 00:41:36,280 --> 00:41:39,120 Speaker 2: the growth sectors in the market. And so I say 752 00:41:39,160 --> 00:41:41,560 Speaker 2: to every LP, you know, you've got to be focused 753 00:41:41,640 --> 00:41:45,480 Speaker 2: on where your manager is putting the capital, both in 754 00:41:45,520 --> 00:41:49,239 Speaker 2: the capital structure but also sectorially to understand the risk 755 00:41:49,239 --> 00:41:52,439 Speaker 2: profile of the manager. And if you do that, then 756 00:41:52,640 --> 00:41:54,759 Speaker 2: you'll work out, you know, do I want to go 757 00:41:54,840 --> 00:41:56,880 Speaker 2: for high octane returns or I want to go for 758 00:41:56,960 --> 00:41:59,799 Speaker 2: core returns. And you know, we have a range of 759 00:41:59,800 --> 00:42:02,160 Speaker 2: fun and our firm, you know where we go all 760 00:42:02,160 --> 00:42:06,240 Speaker 2: the way down to know mezzanine inequity, and that's doing 761 00:42:06,600 --> 00:42:09,640 Speaker 2: mid teens returns, but we're very clear around you know, 762 00:42:09,719 --> 00:42:11,759 Speaker 2: the type of risk we're taking. And then we have 763 00:42:11,800 --> 00:42:15,680 Speaker 2: a variety of funds which are just core generating European 764 00:42:16,239 --> 00:42:19,680 Speaker 2: yield to probably eight to ten percent net us returns 765 00:42:19,719 --> 00:42:24,960 Speaker 2: of ten to twelve percent net and that is just 766 00:42:25,280 --> 00:42:29,319 Speaker 2: core income. And you'll all come back to me and say, 767 00:42:29,400 --> 00:42:31,440 Speaker 2: you know, how do you manage that risk? And you know, 768 00:42:31,520 --> 00:42:35,120 Speaker 2: it's trying to make sure we're in highly resilient industries 769 00:42:35,160 --> 00:42:37,880 Speaker 2: and sectors of the market in that space. 770 00:42:38,480 --> 00:42:40,719 Speaker 1: Great stuff, Simon Drake Bruckman from Pemington. It's been a 771 00:42:40,760 --> 00:42:42,160 Speaker 1: pleasure having you on the Credit Edge money. 772 00:42:42,160 --> 00:42:44,799 Speaker 2: Thanks, thanks so much, Thanks gentlemen, and. 773 00:42:44,719 --> 00:42:47,880 Speaker 1: Of course I'm very grateful to Ruin Unitus from Bloomberg Intelligence. 774 00:42:47,920 --> 00:42:50,000 Speaker 1: Thank you for joining us today. Thank you, James and 775 00:42:50,120 --> 00:42:52,520 Speaker 1: Silas Brown with Bloomberg News. Great to see you, Thanks 776 00:42:52,560 --> 00:42:55,080 Speaker 1: so much, James. Check out all of Silence's great scoops 777 00:42:55,120 --> 00:42:57,719 Speaker 1: on Bloomberg dot com and the Bloomberg Terminal for more 778 00:42:57,719 --> 00:43:01,080 Speaker 1: credit market analysis and insight. Follow your ulysses work on 779 00:43:01,080 --> 00:43:04,680 Speaker 1: the Bloomberg Terminal. Bloomberg Intelligence is part of our research department, 780 00:43:04,719 --> 00:43:07,800 Speaker 1: with five hundred analysts and strategists working across all markets. 781 00:43:08,080 --> 00:43:11,400 Speaker 1: Coverage includes over two thousand equities and credits and outlooks 782 00:43:11,440 --> 00:43:14,320 Speaker 1: on more than ninety industries and one hundred market indices, 783 00:43:14,680 --> 00:43:18,319 Speaker 1: currencies and commodities. Please do subscribe to The Credit Edge 784 00:43:18,320 --> 00:43:20,920 Speaker 1: wherever you get your podcasts. We're on Apple, Spotify, and 785 00:43:20,960 --> 00:43:24,319 Speaker 1: all other good podcast providers, including the Bloomberg Terminal at 786 00:43:24,440 --> 00:43:27,719 Speaker 1: bpod Go. Give us a review, tell your friends, or 787 00:43:27,760 --> 00:43:31,399 Speaker 1: email me directly at Jcrombie eight at Bloomberg dot net. 788 00:43:32,040 --> 00:43:34,399 Speaker 1: I'm James Crombie. It's been a pleasure having you join 789 00:43:34,480 --> 00:43:52,480 Speaker 1: us again next week on the Credit Edge.