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Speaker 1: Hello, and welcome to the Credit Edge of Wiki Monkeys podcast.

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Speaker 1: My name is James Crumbie. I'm a senior at its Bloomberg.

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Speaker 2: And I'm David Haven's, a senior analyst at Bloomberg Intelligence.

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Speaker 2: This week, we're very pleased to welcome Susan Casser, head

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Speaker 2: of Private Debt at Newburger Berman. Susan, how are you.

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Speaker 3: I'm very well. Thank you for having me.

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Speaker 2: Well excellent, We're delighted that you're here. Just a little

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Speaker 2: background on Susan. Susan is the is the head of

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Speaker 2: Newburger Berman's private debt business. Manages twenty five billion dollars

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Speaker 2: of investor capital dedicated to investing in first lean and

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Speaker 2: unit tronch loans to market leading companies owned by private

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Speaker 2: equity firms. Susan has a blue chip resume that include

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Speaker 2: stints at Carlisle Group and Golden Sachs, and she's received

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Speaker 2: accolades from Baron's Wall Street Journals and Pensions and Investments

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Speaker 2: as one of the most influential women on Wall Street.

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Speaker 2: So it's really great to have you here.

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Speaker 3: Thank you so much.

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Speaker 1: And of course we have loads of questions about private credit.

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Speaker 1: Let's start with this, so why all the negativity from

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Speaker 1: defaults to redemptions and Jamie Diamond's cock coaches. There's a

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Speaker 1: ton of fear out there. We have a lot of

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Speaker 1: people on this show from publicly traded debt markets saying

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Speaker 1: that junk bonds are actually safer now because all the

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Speaker 1: quote bad deals are being done by private lenders. But

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Speaker 1: what is really going on, Susan, is that just mud slinging.

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Speaker 1: You're getting paid a lot more as a lender in

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Speaker 1: private market, but aren't you taking them a lot more risk?

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Speaker 3: I think that the negative.

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Speaker 4: The negative headlines are motivated by so many things, and

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Speaker 4: you two, of course, are in the newspaper reporting press business.

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Speaker 4: So I'll leave some of the answers to you. I

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Speaker 4: think at the end of the day, the beauty, the

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Speaker 4: beautiful part about being a private investor is a few things.

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Speaker 4: The first one is you're actually not forced to deploy capital.

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Speaker 4: Your investors commit capital to you over the long term,

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Speaker 4: and you can choose when and if to make investments. Secondly,

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Speaker 4: you do know things about those investments that you couldn't

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Speaker 4: know in the public markets, and this opportunity to be patient,

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Speaker 4: to be selective, to take advantage of information advantages should

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Speaker 4: make you a better investor. That said, there is less

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Speaker 4: transparency about your portfolio to the outside world. And if

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Speaker 4: you're a manager like us at Newberger Berman, you're not

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Speaker 4: retail focused. You don't have a publicly traded BDC, and

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Speaker 4: so the only people that really know what you're doing

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Speaker 4: are your actual investors. So I can't speak to the

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Speaker 4: content of other people's portfolios, but I can speak to

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Speaker 4: the content of our portfolio. And since inception thirteen years ago,

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Speaker 4: we've invested well over ten billion dollars and our annualized

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Speaker 4: loss rates are one basis point. For people that have

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Speaker 4: a hard time with basis points, sometimes that's me. That's

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Speaker 4: zero point zero one percent, So at least from the

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Speaker 4: perspective of my portfolio, I think those headlines are a

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Speaker 4: bit misleading.

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Speaker 2: So that sounds too good to be true to some

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Speaker 2: people probably, So what is behind that one basis point loss? Like,

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Speaker 2: how do you achieve that? When you know like Areas

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Speaker 2: Capital or Areas Management, which also has a long term

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Speaker 2: track record which is one of the best in the industry,

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Speaker 2: they've got fourteen basis points of loss or so on

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Speaker 2: their first leane transaction since inception in two thousand and four.

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Speaker 2: Obviously that's fourteen times higher. Others are much higher. So

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Speaker 2: what are you doing that's different than others?

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Speaker 4: Yeah, so I'd love to say that we are so

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Speaker 4: much smarter, or that we did keep a crystal ball

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Speaker 4: in the office that we could show to people, But

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Speaker 4: it's really the conclusion of a decision that we made

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Speaker 4: a long time ago, thirteen plus years ago when we

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Speaker 4: founded this business. So, when Newberger decided to get into

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Speaker 4: the direct lending business, they did something that other people

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Speaker 4: had not done. They built a direct lending business next

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Speaker 4: to their private equity fund of funds business. Most people

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Speaker 4: do not build a direct lending business next to a

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Speaker 4: private equity fund of funds business. They build it as

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Speaker 4: a standalone investment or as part of other credit investing strategies,

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Speaker 4: or very commonly, next to a direct private equity business.

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Speaker 4: So why is this choice so important? Well, first of all,

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Speaker 4: Newberger is very well known in the private equity ecosystem

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Speaker 4: as a limited partner investor, and that means that we

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Speaker 4: can source from pretty much any private equity fund out there,

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Speaker 4: because sooner or later they would like to talk to

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Speaker 4: Nuberger about an investment in their fund. But Perhaps the

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Speaker 4: part that's most important is because the private equity funds

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Speaker 4: see you as both a potential LP limited partner investor

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Speaker 4: and a potential direct lender to a company. If you

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Speaker 4: say no thank you to any particular opportunity that they

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Speaker 4: show you, they'll show you the next one because they

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Speaker 4: want that relationship to persist beyond are we lending to

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Speaker 4: this investment?

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Speaker 3: Yes or no?

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Speaker 4: And that simple factor of being able to say no

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Speaker 4: thank you without interrupting future deal flow is a crucial

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Speaker 4: difference between us and our competitors. If you can say

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Speaker 4: no thank you with impunity, you'll probably say it more often.

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Speaker 4: And if you can say it more often and more easily,

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Speaker 4: it does translate to fewer mistakes.

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Speaker 2: Now, I know that James is going to want to

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Speaker 2: ask about when you say no, but you're sort of

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Speaker 2: coming in It sounds like you're sort of coming in

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Speaker 2: with a white hat, you know, into these potential transactions.

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Speaker 2: But still you've only had you've had such limited bosses.

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Speaker 2: Is your portfolio, if we're to be rated, would it

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Speaker 2: be rated notably higher than sort of private equity or

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Speaker 2: private credit writ large or is it? Does it really

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Speaker 2: just come down to what you're just talking about about

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Speaker 2: that that sort of pe fund of fun, you know,

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Speaker 2: sort of not necessarily unique business angle, but specific business angled.

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Speaker 4: You know, that's actually an excellent question because in some

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Speaker 4: respects our statistics probably do look better, and in some

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Speaker 4: respects our statistics probably don't. So I like to describe

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Speaker 4: the direct lending market as both competitive, highly competitive, and inefficient.

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Speaker 4: So by highly competitive, the pricing that we offer to

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Speaker 4: win an opportunity to lend can't be a higher price

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Speaker 4: than market clearing. Right, if we're willing to lend it

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Speaker 4: five hundred over and somebody else is willing to lend

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Speaker 4: it for seventy five over, the fact that my colleagues

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Speaker 4: are LP investors in the firm.

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Speaker 3: Is not going to take the day.

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Speaker 4: If the private equitisponsor wants six times leverage and we're

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Speaker 4: willing to lend at five and a half and somebody

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Speaker 4: else is willing to lend it six times, the fact

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Speaker 4: that we're a limited partner is not going to carry

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Speaker 4: the day. So our leverage statistics and are spreads quality

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Speaker 4: adjusted might look very much like other high quality portfolios.

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Speaker 4: What will look different is the companies that we like

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Speaker 4: are a combination and again this is not proprietary. Other

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Speaker 4: people like these companies too. They are a combination of

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Speaker 4: we believe recession resilient. I say that only because I

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Speaker 4: don't believe in recession proof. I think we just haven't

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Speaker 4: found the right recession to test that industry yet. But

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Speaker 4: recession resilient.

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Speaker 2: And the last couple have been kind of weird exactly.

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Speaker 4: Very high growth competitive modes, real barriers to entry, value

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Speaker 4: to the customer, high cash flow generation. I mean, I

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Speaker 4: could go on and on. We all know what those

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Speaker 4: characteristics are. So I think what is interesting is that

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Speaker 4: when we look across our entire portfolio, the average purchase

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Speaker 4: price is seventeen times. That's considerably higher than the USLBO

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Speaker 4: purchase price average. Private responsors are smart, and so I

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Speaker 4: don't think they're overpaying for those companies. I think that

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Speaker 4: they're paying a fair market price for the companies that

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Speaker 4: show those same characteristics. And one of the things that

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Speaker 4: I've always thought is interesting about the lending market is

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Speaker 4: there's a much tighter spread on leverage multiples than there

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Speaker 4: is on purchase price multiples. So a company that we

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Speaker 4: could describe is not that attractive. The opposite of everything

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Speaker 4: I just said cyclical customer concentration, low margin, capital intensive,

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Speaker 4: it probably trades for seven eight times, and a company

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Speaker 4: that is really wonderful with those other characteristics that I described,

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Speaker 4: it might trade for twenty two times. The leverage on

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Speaker 4: the non attractive company will probably still be over four,

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Speaker 4: and the leverage on the pristine company probably taps out

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Speaker 4: at seven. And so it's interesting how you can craft

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Speaker 4: your portfolio overall to higher quality. Your leverage multiples might

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Speaker 4: not look all that different, but your loan to value

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Speaker 4: is going to be a lot lower.

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Speaker 2: And are you employing leverage in the funds themselves or

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Speaker 2: is it just one to one?

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Speaker 3: Yeah, So we offer.

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Speaker 4: Investors the choice they can have anywhere from zero to

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Speaker 4: one to one. They cannot have more.

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Speaker 2: He's right.

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Speaker 1: I do want to talk about the deal as you

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Speaker 1: pass on, but before we get there, I do want

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Speaker 1: to zoom out as well for a sort of broad

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Speaker 1: listener base that we're getting very deep in the weeds,

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Speaker 1: very very quickly. When we talk about private credit, what

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Speaker 1: do you mean by that?

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Speaker 4: Oh, excellent question, because Nuberger is a large manager in

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Speaker 4: private credit. But what my team specifically does is what

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Speaker 4: is often referred to as US direct lending, and we

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Speaker 4: are only lending to companies that are owned by private

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Speaker 4: equity for that are primarily based in the United States.

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Speaker 4: Their EBITDA or earnings are mostly generated in the United States,

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Speaker 4: although they may be global, and they are offering debt

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Speaker 4: in US dollars. And then on top of that we

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Speaker 4: put a quality bias. We are lending only in senior

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Speaker 4: secured so first lean debt that is variable rate, so

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Speaker 4: there's a spread on top of the base rate, which

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Speaker 4: today's so fur And then many people organize themselves by size,

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Speaker 4: we actually don't, so as David said, we're quite large.

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Speaker 4: We're managing twenty five billion dollars. Even with the diversification

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Speaker 4: that we employ, which is to put over one hundred

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Speaker 4: distinct loans in any investor portfolio, we can still comfortably

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Speaker 4: hold ourselves. We do not sell down positions, so what

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Speaker 4: we underrate, we hold. We can comfortably hold six hundred

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Speaker 4: million dollar plus positions. That would make you think that

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Speaker 4: we're operating exclusively on the large end of the market,

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Speaker 4: but we don't. Actually, because Newberg are Berman is a

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Speaker 4: private equity fund investor and they're invested in about one

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Speaker 4: thousand private equity funds, we're looking at private equity funds

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Speaker 4: that are characterized as small middle market to very large,

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Speaker 4: and so the companies that we lend you could have

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Speaker 4: as little as twenty million of vibada and they could

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Speaker 4: have as much as two hundred and fifty million.

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Speaker 3: Of viba da.

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Speaker 1: And you're lending on a bilateral basis or is there

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Speaker 1: any group or club that you've formed.

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Speaker 4: We would love to lend exclusively on a bilateral basis

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Speaker 4: every single time. We'd love to be the only lender

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Speaker 4: every single time. We are the lead lender ninety eight

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Speaker 4: percent of the time, but the private equity funds prefer

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Speaker 4: to have some diversification in their lending group, so we

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Speaker 4: are not the sole lender as often as I would like.

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Speaker 1: Okay, And the pricing, we've talked a lot about that

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Speaker 1: on the show. When it comes to public against private.

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Speaker 1: You know, we've gone from there being a two hundred

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Speaker 1: basis point roughly differential between what you would see on

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Speaker 1: a broadly syndicated lean and the private although obviously it's

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Speaker 1: not apples to apples because these things are very different

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Speaker 1: and the structure is different and all that. We went

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Speaker 1: from that at the beginning, let's say one year ago

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Speaker 1: to I think zero by midyear according to one of

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Speaker 1: our guests, and now we've gone baby back to one

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Speaker 1: hundred according to a different guest. So I'm interested in

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Speaker 1: what your view is, because everyone's got a view of

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Speaker 1: where the pricing is.

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Speaker 4: I think that when you're comparing the kind of direct

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Speaker 4: lending we're doing, you probably have to compare it to

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Speaker 4: a single, be broadly syndicated loans, and we pretty consistently

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Speaker 4: see a two hundred basis point differential. Now, like many

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Speaker 4: private managers, especially private managers that manage closed end funds

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Speaker 4: and work for a private firm, I do think very

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Speaker 4: much in the long term, so I confess I'm not

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Speaker 4: looking at spreads and spread differentials on a daily, weekly,

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Speaker 4: or monthly basis. I tend to think more of a

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Speaker 4: quarterly basis. But the two hundred basis points seems to

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Speaker 4: be pretty sticky over time.

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Speaker 1: Okay, So that's enough to compensate you for the lack

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Speaker 1: of equidity.

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Speaker 4: So that's really a question for the investors. So what

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Speaker 4: I would say the investors are buying when they are

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Speaker 4: giving up liquidity is a couple of things. The premium

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Speaker 4: is certainly one of them, and that's a spread premium.

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Speaker 4: The other thing that the investors are getting is the

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Speaker 4: original issue discount. So if you're buying in the broadly

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Speaker 4: syndicated loan market, that part of the economics is captured

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Speaker 4: by the underwriting and syndicating investment bank, and of course

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Speaker 4: does not go to the investors. In the case of

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Speaker 4: US direct lending, it depends on the manager, but we

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Speaker 4: pass one hundred percent of that onto the investors, So

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Speaker 4: that's additional economics. Another factor that I think people underappreciate

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Speaker 4: is in the broadly syndicated loan market, it's easier to

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Speaker 4: have your loans repriced down because there's the simple threat

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Speaker 4: of a refinance that the investment bank can make. The

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Speaker 4: investment bank loses nothing by making that threat, and in

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Speaker 4: a syndicated loan right it's the marginal owner that sets

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Speaker 4: the price. And so if it's syndicated to one hundred lenders,

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Speaker 4: maybe somebody wants to keep the debt invested and are

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Speaker 4: willing to take a reprice. So you just see a

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Speaker 4: lot of repricings just because it's structurally easier in the

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Speaker 4: broadly syndicated law market. You can have repricings in the

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Speaker 4: direct lending market. But you're talking to a small group

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Speaker 4: of existing lenders. It is harder to threaten them. You

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Speaker 4: would actually have to find somebody else to come in

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Speaker 4: and redo the deal, and you would have to pay

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Speaker 4: them the original issue discount all over again.

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Speaker 2: Yeah, that repricing would generally require a fundamental change.

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Speaker 4: Right, Yeah, Or you're not going to do it for

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Speaker 4: twenty five basis points or fifty basis points.

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Speaker 3: It's probably not worth.

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Speaker 2: That, not because market liquidity or something happened, you know,

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Speaker 2: in a different part of the financial markets.

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Speaker 3: And that's exactly right.

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Speaker 4: There's transmission, but it's slow, and so I think investors

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Speaker 4: also understand that the returns that they're getting in the

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Speaker 4: private markets, the spread differential is stickier. I'm not saying

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Speaker 4: it's one hundred percent locked in stone, but it's stickier.

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Speaker 4: And then last, but not least, and we can talk

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Speaker 4: about this too, is when you're in a syndicated loan

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Speaker 4: and something goes wrong, it's much harder for everybody to

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Speaker 4: come together and come up with a path to a solution,

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Speaker 4: even if the private equity find is willing to support

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Speaker 4: the business, simply because some lenders have sold out. Some

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Speaker 4: lenders have bought in a discount and they're happy to

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Speaker 4: get out at forty cents because they bonded in twenty cents. Right,

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Speaker 4: there's a lot of people to come to terms with.

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Speaker 2: Yeah, you just need a lot more signatures.

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Speaker 4: You need a lot more signatures. One of the things

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Speaker 4: we used to say was if you can get everybody

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Speaker 4: in a room, you can get a deal. But if

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Speaker 4: you can't get everybody in the room, it's really hard

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Speaker 4: to get a deal. And if not everybody has the

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Speaker 4: same cost basis and incentives, you can't get a good deal.

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Speaker 4: And so I think the other thing that people underappreciate

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Speaker 4: in the direct lending business, in part because these amendments

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Speaker 4: and restructuring sits that are private until they are realized,

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Speaker 4: and even when they're realized that probably stay private. People

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Speaker 4: don't realize what tools we all have to protect our

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Speaker 4: investors capital that might be absent in the broadly syndicated

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Speaker 4: low market.

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Speaker 2: Maybe we talk about liquidity a little bit, and I

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Speaker 2: don't mean liquidity of the assets, but your investor liquidity,

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Speaker 2: Like what rights do do they have, you know, for

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Speaker 2: redemption and you know withdrawing funds and things like that.

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Speaker 4: So there are a couple of things that make Newberger

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Speaker 4: private debt different. We talked about one of them, which

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Speaker 4: is that our direct lending platform sits next to a

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Speaker 4: fund of funds platform. The other thing is we largely

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Speaker 4: manage capital for institutional investors. We do it in draw

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Speaker 4: down funds, We do it in Evergreen style vehicles, but

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Speaker 4: we do not do it in vehicles that offer liquidity

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Speaker 4: to investors. There are a lot of competing products out

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Speaker 4: there that offer liquidity to investors.

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Speaker 3: What we have said.

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Speaker 4: Is the ability to get you the illiquidity premium without

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Speaker 4: the illiquidity. That sounds a little like magic, doesn't it.

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Speaker 4: So that's not what we do.

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Speaker 2: Sounds like an asset liability mismatch.

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Speaker 3: It's it's it would be complicated to pull off.

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Speaker 4: Yeah, and with our investor base. When I think about

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Speaker 4: how we got into the Evergreen business, it was an

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Speaker 4: existing investor of ours who'd been in Fun one, Fun two,

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Speaker 4: Fun three and said, it's very difficult to project how

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Speaker 4: much capital we'll actually have deployed, because committed and deployed

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Speaker 4: are not the same thing. We're a very small team

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Speaker 4: in terms of the investment personnel for this particular pension

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Speaker 4: and we've decided we love this asse a class and

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Speaker 4: so far, Newburger, you've done a great job. We'd love

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Speaker 4: to continue working with you, but we don't want to

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Speaker 4: keep subscribing to closed end funds that you know, ramp

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Speaker 4: up in terms of deployment and then ramp down. So

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Speaker 4: can you create an evergreen vehicle? And we said, of course, boss,

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Speaker 4: how would you like it to look? And how would

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Speaker 4: you like it not to look? And some of the

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Speaker 4: things that they did not want was they didn't want

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Speaker 4: to share the portfolio with retail investors who they thought

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Speaker 4: would have different motivations and different decisions over a long

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Speaker 4: period of time. And they didn't want to see liquid

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Speaker 4: investments mixed in with illiquid investments. They wanted a pure

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Speaker 4: play direct lending portfolio. They just wanted it to recycle

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Speaker 4: principle indefinitely until they said it was time to redeem.

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Speaker 1: Okay, this direct lending market that we seem to be

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Speaker 1: focusing on here, I mean, how act how big is

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Speaker 1: it in terms of addressable opportunity because we've we've heard

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Speaker 1: you know, estimates from two trillion to forty trillion, if

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Speaker 1: you've include everything including you know, ig investment grade directly

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Speaker 1: and ABF and everything else that is now called private credit.

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Speaker 4: So the big numbers definitely make sense to me if

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Speaker 4: you define private credit broadly. Newburger does have private investment grade.

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Speaker 4: We have asset based financing we called specialty finance. This

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Speaker 4: is all outside of my purview and area of expertise,

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Speaker 4: but people generally think that for just straight up US

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Speaker 4: direct lending to private equity owned companies, it's probably at

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Speaker 4: least a trillion dollars. I was looking at our pipeline

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Speaker 4: statistics this morning, and in the second half of last

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Speaker 4: year we were consistently seeing ten billion dollars of opportunity

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Speaker 4: per month, So that trillion dollars seems like a safe

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Speaker 4: number to me.

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Speaker 2: Okay.

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Speaker 1: And then, you know, it looks very much like the

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Speaker 1: syndicated loan market did twenty five years ago, and there was,

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Speaker 1: you know, an evolution of that. Will we see a

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Speaker 1: similar evolution in this market in terms of trading, in

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Speaker 1: terms of you know, ma that are more transparent, in

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Speaker 1: terms of you know, much more of a public style,

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Speaker 1: you know, almost like the Broady syndicated market, even though

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Speaker 1: there are a few lenders in there.

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Speaker 4: It's a very interesting question and it's a broad question,

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Speaker 4: so I think in some respects yes, in some respects, gosh,

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Speaker 4: I hope not and probably not. So let's think about

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Speaker 4: some of the things that are changing and some of

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Speaker 4: the things that I think structurally are unlikely to change.

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Speaker 4: So you talked about transparency on MARS. I think that's

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Speaker 4: a really good one to start with. People who are

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Speaker 4: managing portfolios that offer liquidity are probably doing monthly marks

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Speaker 4: at a minimum, and so if we're moving from quarterly

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Speaker 4: mark marks to monthly marks, it's not minute marks, but

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Speaker 4: it's an important move in that direction. I don't think

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Speaker 4: that's hard to do. Many of your valuations might not change,

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Speaker 4: but some of your valuations might change. Particularly the companies

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Speaker 4: that are underperforming right you're learning more about them on

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Speaker 4: a daily, weekly based those could change. I think the

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Speaker 4: use of third party valuation advisors helps to create more

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Speaker 4: trust in the marks, but also more conformity in the marks,

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Speaker 4: because again I can't see my competitors' portfolios and they

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Speaker 4: can't see mine. But we use a third party valuation advisor,

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Speaker 4: and they are a market leading third party valuation advisor,

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Speaker 4: and part of their analysis is to pick up on

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Speaker 4: variations in marks. And ask a lot of questions because

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Speaker 4: maybe those variations shouldn't be there, So I think that helps.

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Speaker 3: Also, what I think.

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Speaker 4: Hopefully won't change is there's a big difference between underwriting

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Speaker 4: to syndicate, and I did that at one point I

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Speaker 4: was a leverage finance banker at Goldman ZAX and underwriting

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Speaker 4: to hold for a long period of time. Especially if

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Speaker 4: you know your investors well and feel deeply accountable and

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Speaker 4: grateful to them, it's inevitable that when your job is

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Speaker 4: to underwrite and send, part of what's informing your decision

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Speaker 4: making is how easy is this to syndicate? I think

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Speaker 4: the story I've told people is if all the airports

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Speaker 4: shut down tonight and I had no place to sleep,

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Speaker 4: and I asked either of your gentlemen if I could

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Speaker 4: sleep on your couch for the night because all the

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Speaker 4: hotels were booked out, you might think, just based on

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Speaker 4: this interaction today and reading my bio, I seem like

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Speaker 4: a reasonable person. I probably won't steal your silverware, and

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Speaker 4: perhaps I could sleep over for a night. But if

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Speaker 4: I asked to join your lease and live with you

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Speaker 4: for four years, you might want Oh, I don't know.

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Speaker 3: Some references and a credit check.

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Speaker 4: And so that's the difference in terms of underwriting and seriousness.

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Speaker 4: When you're underwriting to hold for five years versus I'm

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Speaker 4: underwriting to syndicate. It's just different. And so I certainly

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Speaker 4: hope that those two disciplines and that level of commitment

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Speaker 4: and seriousness stays the way it is in the direct

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Speaker 4: lending market.

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Speaker 1: But things do go wrong, as you say, you know

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Speaker 1: that there are these private restructurings. We've been talking about

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Speaker 1: good good pick and bad pick, you know, those sorts

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Speaker 1: of things, and you know, non accruals, all that stuff.

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Speaker 1: So that does seem to be more stress. I'm interested

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Speaker 1: in your view of you know, when you do see

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Speaker 1: a restruction, when you do see something go wrong, but

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Speaker 1: you but you privately negotiate a solution. You know, to

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Speaker 1: what extent are these just punts down the road? You know,

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Speaker 1: we're we're seeing some bad capital structures limping along through

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Speaker 1: Leem's and other things, and they end up going bankrupt

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Speaker 1: in the end.

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Speaker 3: So there was a.

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Speaker 4: Lot in that question that I want to address. First

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Speaker 4: of all, I want to talk about the concept of

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Speaker 4: bad pick and good pick. Just because there's bad pick

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Speaker 4: doesn't mean the other pick is good. So I think

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Speaker 4: there's bad pick and then there's pick on purpose. Yeah,

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Speaker 4: I'm not labeling it good.

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Speaker 2: I would say less pick is probably good.

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Speaker 4: The less pick the better. So why don't I start

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Speaker 4: with just a couple of statistics in our portfolio across

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Speaker 4: our entire invested program, which is a billion dollars in

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Speaker 4: the ground, I have two percent of bad pick. So

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Speaker 4: I'm not perfect, right, we didn't make every investment correctly.

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Speaker 4: We are working with the private equity sponsors, you know,

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Speaker 4: in terms of amendments, restructurings in a number of instances.

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Speaker 4: But I can I can live with two percent and

435
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Speaker 4: continue to work hard on that. The pick on purpose

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Speaker 4: is when you are competing for and underwriting, in many

437
00:24:32,359 --> 00:24:34,639
Speaker 4: cases with the broadly syndicated loan market because it's a

438
00:24:34,680 --> 00:24:39,280
Speaker 4: really big, really attractive loan, and you think, okay, how

439
00:24:39,320 --> 00:24:41,480
Speaker 4: can I compete, and look, one way to compete a

440
00:24:41,520 --> 00:24:43,800
Speaker 4: so lower price. One way to compete is to up leverage.

441
00:24:43,840 --> 00:24:46,480
Speaker 4: Another way to compete is to offer something that the

442
00:24:46,520 --> 00:24:49,040
Speaker 4: broadly syndicated loan market can't offer. There's a long list

443
00:24:49,080 --> 00:24:52,320
Speaker 4: of those things, but one of them is a partial

444
00:24:52,640 --> 00:24:57,440
Speaker 4: pick toggle for some defined period of time. So I

445
00:24:57,440 --> 00:24:59,720
Speaker 4: think the reason why people call it not bad pick,

446
00:25:00,520 --> 00:25:03,000
Speaker 4: which is not to say good pick but not bad pick,

447
00:25:03,160 --> 00:25:04,159
Speaker 4: is one it's on purpose.

448
00:25:04,240 --> 00:25:05,800
Speaker 2: I was thinking of it a strategic pick.

449
00:25:05,960 --> 00:25:11,119
Speaker 4: Strategic pick. It's on purpose too. It's an option that

450
00:25:11,160 --> 00:25:12,960
Speaker 4: doesn't mean they're going to use it. You as the

451
00:25:13,040 --> 00:25:16,120
Speaker 4: underwriter can say, wow, is that there? Because they have

452
00:25:16,240 --> 00:25:19,320
Speaker 4: to use it. There's so much debt burden versus free

453
00:25:19,359 --> 00:25:22,199
Speaker 4: cash flow generation that without the pick, they're not going

454
00:25:22,280 --> 00:25:25,000
Speaker 4: to make it. Maybe don't do that. That's going to

455
00:25:25,040 --> 00:25:30,119
Speaker 4: be pick not on purpose, bad pick pretty quick. Or

456
00:25:30,119 --> 00:25:32,400
Speaker 4: maybe they're just asking for it for sport, to give

457
00:25:32,440 --> 00:25:34,080
Speaker 4: themselves a little bit of room.

458
00:25:34,320 --> 00:25:36,080
Speaker 2: Or maybe it's a great company that doesn't have all

459
00:25:36,119 --> 00:25:36,920
Speaker 2: the revenues yet.

460
00:25:37,520 --> 00:25:39,800
Speaker 4: Yes, that's right, you know, maybe they'll grow into their

461
00:25:39,800 --> 00:25:42,159
Speaker 4: capital structure, so you could ask that question. And then

462
00:25:42,200 --> 00:25:45,679
Speaker 4: it's also a percentage of the spread, which is not

463
00:25:45,800 --> 00:25:48,360
Speaker 4: the same thing as a percentage of the yield. Right,

464
00:25:48,440 --> 00:25:50,840
Speaker 4: So it might be a quarter of the total yield

465
00:25:50,880 --> 00:25:53,199
Speaker 4: where interest rates are today, it might be half the spread.

466
00:25:53,800 --> 00:25:55,800
Speaker 4: And then it has a time limited amount to it.

467
00:25:56,400 --> 00:25:59,000
Speaker 4: So I'm not advocating to doing a lot of it. Again,

468
00:25:59,080 --> 00:26:01,600
Speaker 4: just for context. Zero point eight percent of that in

469
00:26:01,640 --> 00:26:02,840
Speaker 4: my portfolio.

470
00:26:02,400 --> 00:26:04,840
Speaker 2: So your total pick is about three percent, that's right,

471
00:26:05,080 --> 00:26:08,600
Speaker 2: So just you know, to put that in context, I

472
00:26:08,680 --> 00:26:11,440
Speaker 2: run through the numbers for the top thirty BDCs, which

473
00:26:11,440 --> 00:26:14,560
Speaker 2: are probably eighty percent of the industry or more and

474
00:26:15,680 --> 00:26:18,160
Speaker 2: close to four hundred million dollars of assets three hundred

475
00:26:18,160 --> 00:26:20,520
Speaker 2: and fifty billion of assets, and I think their average

476
00:26:20,560 --> 00:26:22,760
Speaker 2: pick is about six point two six point three percent.

477
00:26:23,000 --> 00:26:25,679
Speaker 4: I'm good and bad or yeah, I'm not surprised to

478
00:26:25,720 --> 00:26:28,359
Speaker 4: hear that. So I think it's not dissimilar to our

479
00:26:28,400 --> 00:26:31,879
Speaker 4: statistics on defaults and losses because of our ability to

480
00:26:31,920 --> 00:26:34,679
Speaker 4: be highly selective. As long as we continually employ that

481
00:26:34,800 --> 00:26:39,080
Speaker 4: ability to defend our investors capital, we should be able

482
00:26:39,119 --> 00:26:42,040
Speaker 4: to stay below other people's statistics.

483
00:26:43,520 --> 00:26:47,520
Speaker 2: And so there obviously has been a proliferation of of

484
00:26:47,560 --> 00:26:49,800
Speaker 2: private lenders that have come into the market. You know,

485
00:26:49,920 --> 00:26:51,760
Speaker 2: and I think you've written about it or been asked

486
00:26:51,800 --> 00:26:56,760
Speaker 2: about it. You know, it's an interesting space. There are

487
00:26:56,960 --> 00:26:59,680
Speaker 2: permanent residents, there may be some tourists that have stumbled

488
00:26:59,680 --> 00:27:04,160
Speaker 2: into the space. When you're competing, where are you sort

489
00:27:04,160 --> 00:27:06,840
Speaker 2: of saying, huh, what are these guys up to? What

490
00:27:06,880 --> 00:27:09,560
Speaker 2: are they doing? We would never do this without naming names.

491
00:27:09,600 --> 00:27:11,359
Speaker 2: I mean, is there sort of a specific sort of

492
00:27:11,440 --> 00:27:14,560
Speaker 2: type that you see, Is it a certain structure that

493
00:27:14,600 --> 00:27:17,080
Speaker 2: you see, or is it just something adjacent to the

494
00:27:17,160 --> 00:27:19,080
Speaker 2: direct lending area.

495
00:27:19,240 --> 00:27:20,959
Speaker 4: Yeah, so again, it's very hard for me to comment

496
00:27:21,000 --> 00:27:24,399
Speaker 4: on what my competitors are doing and why they're doing it.

497
00:27:25,040 --> 00:27:31,800
Speaker 4: I think that one thing that people underappreciate about the

498
00:27:31,920 --> 00:27:34,400
Speaker 4: complexity of what we do for a living. So this

499
00:27:34,440 --> 00:27:39,040
Speaker 4: is the inefficiency versus competition. So a private equity fund

500
00:27:39,119 --> 00:27:43,280
Speaker 4: is not going to call one lender for financing solution, right,

501
00:27:43,280 --> 00:27:46,760
Speaker 4: That would be silly, it would be foolhardy. So they're

502
00:27:46,800 --> 00:27:49,400
Speaker 4: going to call some number, let's say it's five, let's

503
00:27:49,400 --> 00:27:52,840
Speaker 4: say it's fifteen. They're probably fifty direct lenders that they

504
00:27:52,880 --> 00:27:55,640
Speaker 4: could call. Now, again that's market wide, not size adjusted,

505
00:27:55,680 --> 00:27:58,720
Speaker 4: but those numbers seem reasonably right. YouTube would know better

506
00:27:58,800 --> 00:28:02,200
Speaker 4: than me, probably not calling fifty out of fifty because

507
00:28:02,240 --> 00:28:05,240
Speaker 4: there's declining marginal benefit to calling number forty eight, forty

508
00:28:05,320 --> 00:28:07,840
Speaker 4: nine to fifty. So I think we can agree that

509
00:28:07,880 --> 00:28:10,840
Speaker 4: the market's competitive because if you call six people, you're

510
00:28:10,840 --> 00:28:14,240
Speaker 4: going to get a pretty reasonably aggressive bid, including from

511
00:28:14,320 --> 00:28:16,080
Speaker 4: us on leverage and pricing.

512
00:28:16,080 --> 00:28:17,520
Speaker 3: In terms, but.

513
00:28:17,480 --> 00:28:21,560
Speaker 4: It's inefficient in the sense that a sub segment of

514
00:28:21,600 --> 00:28:25,080
Speaker 4: the market is getting called on any particular opportunity. So

515
00:28:26,800 --> 00:28:30,960
Speaker 4: part of what is difficult to do is how do

516
00:28:31,040 --> 00:28:33,840
Speaker 4: I get called for the next one while I said no,

517
00:28:33,960 --> 00:28:39,240
Speaker 4: thank you to this one. And in reality, people are

518
00:28:39,280 --> 00:28:43,680
Speaker 4: balancing seelectivity on this opportunity in front of me right now,

519
00:28:44,320 --> 00:28:47,040
Speaker 4: with deal flow in the future from that private equity sponsor,

520
00:28:47,680 --> 00:28:49,600
Speaker 4: And so I think a lot of people are spending

521
00:28:49,640 --> 00:28:53,680
Speaker 4: time saying, gosh, this feels a little aggressive.

522
00:28:54,000 --> 00:28:54,160
Speaker 3: Now.

523
00:28:54,200 --> 00:28:56,200
Speaker 4: It could be aggressive on a whole range of things.

524
00:28:56,480 --> 00:28:59,480
Speaker 4: The business model isn't that great, The leverage is punchy,

525
00:29:00,160 --> 00:29:02,160
Speaker 4: it's going to need to grow into its capital structure.

526
00:29:03,640 --> 00:29:06,200
Speaker 4: Maybe the sponsor isn't the right fit for that company

527
00:29:06,520 --> 00:29:09,239
Speaker 4: given their expertise and the thesis here, or the industry here.

528
00:29:09,280 --> 00:29:10,800
Speaker 4: Right there's a whole host of reasons where it could

529
00:29:10,800 --> 00:29:14,520
Speaker 4: feel a little punchy. But if I say no, thank you,

530
00:29:15,400 --> 00:29:17,800
Speaker 4: somebody else will say yes please behind me, and somebody

531
00:29:17,800 --> 00:29:21,440
Speaker 4: else will say yes please behind that person. And those

532
00:29:21,480 --> 00:29:23,520
Speaker 4: people who agree to stretch just a little bit, they're

533
00:29:23,520 --> 00:29:26,520
Speaker 4: getting the deal flow going forward. So what's magical about

534
00:29:26,520 --> 00:29:29,360
Speaker 4: the Newburger platform is we're going to get the next

535
00:29:29,360 --> 00:29:32,520
Speaker 4: opportunity going forward because we're an LP, and if we're

536
00:29:32,520 --> 00:29:34,600
Speaker 4: not an LP, they'd like us to be an LP

537
00:29:34,640 --> 00:29:36,400
Speaker 4: in the next fund. Whether we are an LP or not,

538
00:29:36,400 --> 00:29:37,920
Speaker 4: they'd like us to be an LP in the next fund.

539
00:29:38,200 --> 00:29:40,719
Speaker 4: And so it's to their advantage to show us as

540
00:29:40,800 --> 00:29:45,520
Speaker 4: much debt deal flow as possible, even if we're selective.

541
00:29:46,080 --> 00:29:50,120
Speaker 4: And so that's a very small advantage, the ability to

542
00:29:50,200 --> 00:29:54,560
Speaker 4: separate today's selectivity from tomorrow's deal flow. But it's a

543
00:29:54,640 --> 00:29:59,360
Speaker 4: small competitive advantage that repeated one hundred times, two hundred times,

544
00:29:59,360 --> 00:30:03,720
Speaker 4: three hundred times leads to better results. So I'll give

545
00:30:03,720 --> 00:30:08,360
Speaker 4: you maybe a simpler example. I like to downhill mountain bike.

546
00:30:08,400 --> 00:30:11,560
Speaker 4: I promise I were armor and a full face helmet, etc.

547
00:30:11,800 --> 00:30:13,560
Speaker 4: I am a creditor after all, but I do really

548
00:30:13,600 --> 00:30:15,000
Speaker 4: like to downhill single trap mountain bike.

549
00:30:15,040 --> 00:30:16,000
Speaker 2: Gott to watch your shoulders.

550
00:30:17,160 --> 00:30:21,400
Speaker 4: And I tell people that I avoid falling off my bike,

551
00:30:22,160 --> 00:30:23,960
Speaker 4: which means I mostly don't fall off my bike, but

552
00:30:24,000 --> 00:30:26,320
Speaker 4: sometimes I fall off my bike. I think a lot

553
00:30:26,360 --> 00:30:30,400
Speaker 4: of times when people talk about sectors that are commonly

554
00:30:30,480 --> 00:30:34,600
Speaker 4: viewed to be risky, they say we avoid investments in

555
00:30:34,600 --> 00:30:38,240
Speaker 4: in energy, in cyclicals, in retail and restaurants. We don't

556
00:30:38,240 --> 00:30:41,000
Speaker 4: avoid those. We just don't do them. It doesn't matter

557
00:30:41,040 --> 00:30:43,320
Speaker 4: how low the leverage is, how high the pricing is,

558
00:30:43,360 --> 00:30:46,040
Speaker 4: and how great the private equ responsor is, we just

559
00:30:46,560 --> 00:30:51,240
Speaker 4: don't do it. And so I think, again, it's those

560
00:30:52,680 --> 00:30:57,760
Speaker 4: subtly different choices, just a little bit more conservatism magnified

561
00:30:57,760 --> 00:30:58,600
Speaker 4: one hundred times.

562
00:30:58,920 --> 00:31:00,000
Speaker 3: That makes a big difference.

563
00:31:00,640 --> 00:31:02,560
Speaker 1: He passing on more deals now than you were six

564
00:31:02,600 --> 00:31:03,080
Speaker 1: months ago.

565
00:31:04,360 --> 00:31:07,520
Speaker 4: You know, it's it's interesting by number, yes, because hard

566
00:31:07,520 --> 00:31:09,720
Speaker 4: because our plapeline is just bigger.

567
00:31:10,080 --> 00:31:10,920
Speaker 3: I would also.

568
00:31:10,760 --> 00:31:18,000
Speaker 4: Say the private equity funds appreciate Newberger's LP dollars more

569
00:31:18,200 --> 00:31:20,880
Speaker 4: in twenty twenty two, twenty twenty three, twenty twenty four,

570
00:31:20,920 --> 00:31:24,160
Speaker 4: twenty twenty five, and hopefully twenty twenty six than they

571
00:31:24,160 --> 00:31:25,760
Speaker 4: did in twenty twenty one, when it was easier to

572
00:31:25,800 --> 00:31:26,920
Speaker 4: raise your next fund.

573
00:31:27,360 --> 00:31:28,440
Speaker 3: So we've always been an.

574
00:31:28,320 --> 00:31:31,760
Speaker 4: Important strategic partner as a platform. We're a much more

575
00:31:31,800 --> 00:31:34,640
Speaker 4: important strategic partner today for a whole host of reasons.

576
00:31:36,320 --> 00:31:39,080
Speaker 4: I think what tends to happen is that the reasons

577
00:31:39,120 --> 00:31:42,080
Speaker 4: that you pass look a little bit different. So the

578
00:31:42,160 --> 00:31:44,760
Speaker 4: first thing that we're looking at is what's the industry. Right,

579
00:31:44,800 --> 00:31:46,920
Speaker 4: So when we talk about things like growth rates, that's

580
00:31:47,000 --> 00:31:49,880
Speaker 4: industry wide. If an industry grows at three percent and

581
00:31:49,920 --> 00:31:51,960
Speaker 4: we find a company that grows at nine percent, I'm

582
00:31:52,000 --> 00:31:54,160
Speaker 4: going to assume that nine percent converges to the meme,

583
00:31:54,680 --> 00:31:58,080
Speaker 4: not that it has somehow invented a new mousetrap. That's

584
00:31:58,080 --> 00:31:59,000
Speaker 4: an equity thesis.

585
00:31:59,040 --> 00:32:00,240
Speaker 3: That's not my sys.

586
00:32:00,800 --> 00:32:03,600
Speaker 4: So some of the factors that we're looking for industry specific,

587
00:32:03,760 --> 00:32:11,640
Speaker 4: right installation from an economic cycle, growth rate, fragmentation, pricing.

588
00:32:11,800 --> 00:32:14,000
Speaker 4: Some of that is industry. Then you've got to look

589
00:32:14,000 --> 00:32:16,440
Speaker 4: at the company. We talk a lot about is this

590
00:32:16,440 --> 00:32:18,600
Speaker 4: the meto company in a great industry or is this

591
00:32:18,640 --> 00:32:21,560
Speaker 4: a market leading company in a great industry. A market

592
00:32:21,640 --> 00:32:24,160
Speaker 4: leading company people will step into save a me too

593
00:32:24,240 --> 00:32:29,160
Speaker 4: company can die. So that's an important difference to understand

594
00:32:29,840 --> 00:32:34,160
Speaker 4: that underwriting is pretty consistent no matter what environment we're in. Right,

595
00:32:34,200 --> 00:32:36,000
Speaker 4: you can tell what's a great industry and what's a

596
00:32:36,000 --> 00:32:39,440
Speaker 4: great company, and what's a okay industry and company, and

597
00:32:39,480 --> 00:32:41,760
Speaker 4: what's a not very good industry and company from a

598
00:32:41,800 --> 00:32:45,120
Speaker 4: lending perspective, But then what varies a lot because of

599
00:32:45,200 --> 00:32:48,360
Speaker 4: risk tolerance is what's the amount of debt that the

600
00:32:48,400 --> 00:32:50,720
Speaker 4: sponsor is going to put on it, what's the pricing,

601
00:32:50,760 --> 00:32:54,160
Speaker 4: and what are the terms. So in a more risk

602
00:32:54,480 --> 00:32:58,600
Speaker 4: forward environment, you might say great industry, great company, bad loan.

603
00:32:59,440 --> 00:33:02,320
Speaker 4: In an environment like twenty twenty two, if you see

604
00:33:02,320 --> 00:33:03,920
Speaker 4: a good industry and a good company's probably going to

605
00:33:03,960 --> 00:33:06,160
Speaker 4: be a pretty good loan because debt was harder to

606
00:33:06,200 --> 00:33:09,080
Speaker 4: come by and then last, but not least. And this

607
00:33:09,160 --> 00:33:11,760
Speaker 4: for us is also a constant across environments is who's

608
00:33:11,800 --> 00:33:15,040
Speaker 4: the private equi sponsor? What does their track record tell

609
00:33:15,080 --> 00:33:17,760
Speaker 4: us about them? Because remember we don't just interact with

610
00:33:17,800 --> 00:33:21,680
Speaker 4: them as a lender to a company. We have done

611
00:33:21,680 --> 00:33:23,760
Speaker 4: diligence on them as a fund. We can see their

612
00:33:23,760 --> 00:33:27,600
Speaker 4: track record from inception by partner, by strategy. We know

613
00:33:27,680 --> 00:33:30,320
Speaker 4: what they do when something underperforms. We know if they

614
00:33:30,320 --> 00:33:32,920
Speaker 4: support with more capital, or if they commit credit or violence.

615
00:33:32,960 --> 00:33:34,360
Speaker 4: You know, we have a good idea of all of that.

616
00:33:34,920 --> 00:33:35,680
Speaker 3: Is this the right.

617
00:33:35,560 --> 00:33:39,280
Speaker 4: Private equity fund for this company? And sometimes it's a

618
00:33:39,320 --> 00:33:41,680
Speaker 4: great company, great industry, the right amount of leverage, but

619
00:33:41,680 --> 00:33:43,800
Speaker 4: it's just not the right match with the private equi sponsor.

620
00:33:43,880 --> 00:33:45,960
Speaker 4: And then we'll still turn it down, yep, on.

621
00:33:46,080 --> 00:33:49,280
Speaker 1: The sectors you invest in. I think before the show

622
00:33:49,280 --> 00:33:51,200
Speaker 1: we were talking and you kind of when else to

623
00:33:51,320 --> 00:33:53,200
Speaker 1: which sectors do you like? I think you said you

624
00:33:54,320 --> 00:33:56,320
Speaker 1: there was some sectors you hated in some sectors you

625
00:33:56,360 --> 00:34:01,200
Speaker 1: hated even more. Yeah, So I was curious on your

626
00:34:01,360 --> 00:34:05,280
Speaker 1: views around technology, AI, software, all that.

627
00:34:07,960 --> 00:34:11,880
Speaker 4: So we were talking about a software company earlier today

628
00:34:11,960 --> 00:34:14,640
Speaker 4: that we're a big investor in, and the company does

629
00:34:14,680 --> 00:34:18,040
Speaker 4: software for pharmacovigilance. I didn't know what pharmacovigilance is, but

630
00:34:18,080 --> 00:34:22,560
Speaker 4: here's what it is. When a pharmaceutical company puts a

631
00:34:22,600 --> 00:34:25,840
Speaker 4: drug out into market, the FDA requires them to track

632
00:34:25,960 --> 00:34:29,880
Speaker 4: any negative adverse effects and report back on that to

633
00:34:29,920 --> 00:34:33,239
Speaker 4: the FDA. And it's a very cumbersome process to do

634
00:34:33,320 --> 00:34:36,359
Speaker 4: that because some people are calling a hotline, some people

635
00:34:36,360 --> 00:34:38,719
Speaker 4: are reporting it to their doctor, et cetera. And so

636
00:34:38,760 --> 00:34:44,440
Speaker 4: the software pulls in that data and then reports it

637
00:34:44,480 --> 00:34:47,160
Speaker 4: to the FDA. So this is an interesting business because

638
00:34:47,280 --> 00:34:49,759
Speaker 4: demand for the business is non negotiable.

639
00:34:49,960 --> 00:34:50,120
Speaker 3: Right.

640
00:34:50,120 --> 00:34:53,640
Speaker 4: This seems pretty non cyclical to me. It's very diversified

641
00:34:53,640 --> 00:34:55,960
Speaker 4: in terms of the drugs and the companies that it

642
00:34:55,960 --> 00:34:58,480
Speaker 4: works with. So if some drugs stops being used, some

643
00:34:58,600 --> 00:35:01,400
Speaker 4: other new drug is being launched. Generally speaking, we are

644
00:35:01,440 --> 00:35:05,439
Speaker 4: all taking more medication than we used to, and there's

645
00:35:05,440 --> 00:35:09,440
Speaker 4: a lot more drug interactions because people are taking more medications,

646
00:35:09,440 --> 00:35:12,120
Speaker 4: including the GLP ones right, which interact with lots of

647
00:35:12,120 --> 00:35:15,880
Speaker 4: other medications. So from a demand perspective, it's really interesting.

648
00:35:16,239 --> 00:35:19,040
Speaker 4: It has all of the cashflow characteristics that you would

649
00:35:19,040 --> 00:35:26,000
Speaker 4: think of for a software company, and that makes it

650
00:35:26,520 --> 00:35:29,560
Speaker 4: very appealing as a lender, as a private equi owner. Also,

651
00:35:29,560 --> 00:35:32,320
Speaker 4: the private responsor's done very well with it. The question

652
00:35:32,400 --> 00:35:34,719
Speaker 4: on AI for a company like this is is it

653
00:35:34,760 --> 00:35:36,200
Speaker 4: a risk? Is it an opportunity?

654
00:35:36,239 --> 00:35:36,800
Speaker 3: Is it both?

655
00:35:38,440 --> 00:35:43,480
Speaker 4: Our belief at this point and nobody knows the future is.

656
00:35:44,160 --> 00:35:48,799
Speaker 4: The more mission critical the process is, the less likely

657
00:35:48,880 --> 00:35:53,560
Speaker 4: people are to experiment with ripping it out easily. And

658
00:35:53,760 --> 00:35:57,160
Speaker 4: if you're a market leading company, you have the best data,

659
00:35:57,280 --> 00:36:00,920
Speaker 4: so you probably have the opportunity to create your own

660
00:36:00,960 --> 00:36:06,480
Speaker 4: AI tools to either stave off competition or enhance your

661
00:36:06,480 --> 00:36:09,719
Speaker 4: growth or your margins. Here, the great opportunity for this

662
00:36:09,760 --> 00:36:12,080
Speaker 4: company is to work on the front end. There's a

663
00:36:12,120 --> 00:36:15,920
Speaker 4: lot of business process outsourcing and humans on the front

664
00:36:16,040 --> 00:36:18,000
Speaker 4: end the data entry element of this.

665
00:36:18,440 --> 00:36:19,240
Speaker 3: If they can get.

666
00:36:19,120 --> 00:36:22,880
Speaker 4: AI to moderate that even a little, that would be

667
00:36:22,920 --> 00:36:25,920
Speaker 4: a real benefit to the company, to the lenders into

668
00:36:25,920 --> 00:36:28,160
Speaker 4: the private equity owner. So that's an example of one

669
00:36:28,200 --> 00:36:30,240
Speaker 4: where it's made it through the funnel.

670
00:36:30,239 --> 00:36:33,520
Speaker 1: But for direct lending writ large, is it a big

671
00:36:33,640 --> 00:36:36,040
Speaker 1: lending opportunity you know too, data centers to all of

672
00:36:36,080 --> 00:36:39,520
Speaker 1: that stuff. Because everyone's so excited about the whole AI

673
00:36:39,920 --> 00:36:43,440
Speaker 1: boom at the moment, lenders are really you know, there's

674
00:36:43,480 --> 00:36:45,520
Speaker 1: a lot of money at stake, you know, a lot

675
00:36:45,560 --> 00:36:49,000
Speaker 1: of money needs to be deployed to support that. Yeah,

676
00:36:49,040 --> 00:36:50,759
Speaker 1: how much direct lending comes into it?

677
00:36:50,880 --> 00:36:55,560
Speaker 4: Yeah, so for me probably not data centers. I think

678
00:36:55,560 --> 00:36:56,920
Speaker 4: where a lot of the money is going into is

679
00:36:56,920 --> 00:36:59,120
Speaker 4: to build data centers. Right, So if you think about

680
00:36:59,120 --> 00:37:01,080
Speaker 4: the cash flow of that, first you build it, the

681
00:37:01,080 --> 00:37:03,360
Speaker 4: capex goes out, the financing is needed at the beginning,

682
00:37:03,400 --> 00:37:06,719
Speaker 4: and then the cash flow comes back. So unless that

683
00:37:07,120 --> 00:37:10,640
Speaker 4: is part of an initiative by a much bigger, super

684
00:37:10,640 --> 00:37:14,759
Speaker 4: cash flowing company, we can think of those examples, that's

685
00:37:14,760 --> 00:37:17,359
Speaker 4: not something we would do because if you look at

686
00:37:17,360 --> 00:37:19,040
Speaker 4: what you're lending to, it's cash flow negative out of

687
00:37:19,040 --> 00:37:21,839
Speaker 4: the outset that would definitely have to be pick It's

688
00:37:21,880 --> 00:37:24,320
Speaker 4: not for us. That's a different kind of loan.

689
00:37:25,360 --> 00:37:30,120
Speaker 1: Aiither gets deployed in public betraded debt markets which are

690
00:37:30,160 --> 00:37:33,160
Speaker 1: more commoditized, and that gives you even more of an

691
00:37:33,239 --> 00:37:36,200
Speaker 1: edge as a private lender because you cannot access that.

692
00:37:36,360 --> 00:37:37,600
Speaker 1: But that would be another discussion.

693
00:37:37,760 --> 00:37:40,279
Speaker 4: Well, actually, no, we could talk about that. So one

694
00:37:40,320 --> 00:37:44,160
Speaker 4: of the things that's interesting about the Newburger platform. I

695
00:37:44,200 --> 00:37:47,200
Speaker 4: talked about the relationships and the deal flow and the

696
00:37:47,239 --> 00:37:49,520
Speaker 4: seele activity, the ability to say no, thank you. What

697
00:37:49,600 --> 00:37:52,359
Speaker 4: I didn't talk about that much was the information. So

698
00:37:52,719 --> 00:37:54,960
Speaker 4: when you think about the kind of information we have

699
00:37:55,080 --> 00:37:59,960
Speaker 4: about the private equity ecosystem, it's incredible. At the side

700
00:38:00,160 --> 00:38:02,200
Speaker 4: that we're lending to, most of the companies that we're

701
00:38:02,239 --> 00:38:05,080
Speaker 4: evaluating are already private eq we owned, and they're being

702
00:38:05,160 --> 00:38:08,800
Speaker 4: evaluated for sale by another private equity fund. We're probably

703
00:38:08,840 --> 00:38:11,479
Speaker 4: a limited partner investor in both private equity funds, which

704
00:38:11,480 --> 00:38:13,600
Speaker 4: means we have information about the performance of the company

705
00:38:13,680 --> 00:38:17,319
Speaker 4: that's being sold. The information that we're looking at is

706
00:38:17,760 --> 00:38:20,920
Speaker 4: from the owning private equity fund to its limited partners.

707
00:38:21,560 --> 00:38:26,279
Speaker 4: That's going to be more honest than the information that's

708
00:38:26,280 --> 00:38:27,839
Speaker 4: put together by sel side investment banker.

709
00:38:28,000 --> 00:38:31,680
Speaker 3: Let's just let's say that, and that.

710
00:38:31,600 --> 00:38:34,359
Speaker 4: Will give us a view of the business that can

711
00:38:34,400 --> 00:38:36,960
Speaker 4: be contrasted against what we're getting. A little less sie

712
00:38:37,000 --> 00:38:38,920
Speaker 4: in Yeah, maybe a little less spin right, like a

713
00:38:38,920 --> 00:38:40,479
Speaker 4: little like oh, it's all going to work out. Okay,

714
00:38:40,480 --> 00:38:43,239
Speaker 4: we smoothed out that underperforming segment, right, we just took

715
00:38:43,239 --> 00:38:46,080
Speaker 4: it out. So a lot of our data. As an

716
00:38:46,239 --> 00:38:49,759
Speaker 4: LP we're also Newbergers, a private equi co investor. We

717
00:38:49,840 --> 00:38:53,840
Speaker 4: run a GP led secondaries business that's extremely popular. We

718
00:38:53,840 --> 00:38:55,840
Speaker 4: have a capital solutions business, and then of course we

719
00:38:55,880 --> 00:38:58,440
Speaker 4: have this large direct lending business. There is an enormous

720
00:38:58,440 --> 00:39:01,960
Speaker 4: amount of unstructured data sitting in our files, and we

721
00:39:02,040 --> 00:39:07,279
Speaker 4: have been using AI tools that we are developing internally

722
00:39:07,440 --> 00:39:11,120
Speaker 4: to help camb that database and make us more efficient

723
00:39:11,280 --> 00:39:16,360
Speaker 4: at accessing it and pulling out investment opportunities, but also

724
00:39:16,760 --> 00:39:22,160
Speaker 4: trends by industry, by sponsor, by company type, etc. So

725
00:39:22,160 --> 00:39:24,480
Speaker 4: that we can learn faster.

726
00:39:24,840 --> 00:39:27,359
Speaker 1: Yeah, and make your mistakes. What are the messages you're

727
00:39:27,400 --> 00:39:30,080
Speaker 1: guessing right now? I'm curious as to what the matcro

728
00:39:30,200 --> 00:39:33,600
Speaker 1: story is because you know we're hearing about an economic slowdown.

729
00:39:33,640 --> 00:39:36,160
Speaker 1: You talked about the recession that never happens. I mean

730
00:39:36,200 --> 00:39:38,359
Speaker 1: are there any signs of stress in terms of the

731
00:39:38,360 --> 00:39:40,280
Speaker 1: fundamentals of the US economy.

732
00:39:40,960 --> 00:39:42,840
Speaker 4: So again, I have to look at it through the

733
00:39:42,920 --> 00:39:45,480
Speaker 4: lens of my portfolio. And when I look at the

734
00:39:45,480 --> 00:39:49,080
Speaker 4: companies in our portfolio that are underperforming, they have a

735
00:39:49,080 --> 00:39:52,160
Speaker 4: couple of things in common. One is more than one

736
00:39:52,200 --> 00:39:56,120
Speaker 4: thing went wrong. And this is actually a lesson learned.

737
00:39:56,120 --> 00:39:59,200
Speaker 4: If people haven't read this book Into Thin Air about

738
00:39:59,200 --> 00:40:02,080
Speaker 4: the ninety two Ever Expedition real for me, one of

739
00:40:02,120 --> 00:40:05,799
Speaker 4: the takeaways was people died because they made more than

740
00:40:05,800 --> 00:40:09,200
Speaker 4: one mistake. Even on everest. One mistake might not kill you,

741
00:40:09,840 --> 00:40:13,800
Speaker 4: but several mistakes in an environment that is that fraud

742
00:40:14,440 --> 00:40:17,960
Speaker 4: can be fatal. And so I look at some companies

743
00:40:18,040 --> 00:40:21,800
Speaker 4: that were maybe on they actually made something. Most of

744
00:40:21,800 --> 00:40:23,640
Speaker 4: our companies or services oriented, but we do have some

745
00:40:23,680 --> 00:40:26,120
Speaker 4: companies that make things. And if they were making something

746
00:40:26,160 --> 00:40:28,800
Speaker 4: before the pandemic, did they see a burst in demand

747
00:40:28,880 --> 00:40:32,000
Speaker 4: or did they see a slow down in demand? Was

748
00:40:32,040 --> 00:40:36,600
Speaker 4: their manufacturing capabilities affected by the resurgence of COVID? Probably

749
00:40:36,840 --> 00:40:40,520
Speaker 4: it was. Have they been hit by inflation, yes they have.

750
00:40:41,080 --> 00:40:43,960
Speaker 4: If it's an investment that that is that old, it

751
00:40:44,080 --> 00:40:47,359
Speaker 4: was structured before interest rates were so high. Right, So

752
00:40:47,400 --> 00:40:49,799
Speaker 4: cash flow was diverted to the lenders, which is great

753
00:40:49,840 --> 00:40:52,399
Speaker 4: for us and our investors, but it means there's less

754
00:40:52,440 --> 00:40:55,719
Speaker 4: money for the company to invest in its operations and

755
00:40:55,800 --> 00:40:56,560
Speaker 4: to create growth.

756
00:40:56,600 --> 00:40:56,759
Speaker 3: Right.

757
00:40:56,800 --> 00:40:59,800
Speaker 4: So a series of things have not gone to plan,

758
00:41:00,040 --> 00:41:04,160
Speaker 4: and that's where the companies are struggling as opposed to

759
00:41:04,320 --> 00:41:06,560
Speaker 4: one specific theme.

760
00:41:06,800 --> 00:41:10,800
Speaker 1: Okay, and now you're talking about let's say mid teens returns.

761
00:41:10,800 --> 00:41:12,919
Speaker 1: That's what people were pitching us earlier in the year

762
00:41:12,920 --> 00:41:15,399
Speaker 1: in terms of, you know, this product compared to other

763
00:41:15,440 --> 00:41:16,040
Speaker 1: things out there.

764
00:41:17,400 --> 00:41:20,080
Speaker 4: Some of it's very hard to talk about returns on

765
00:41:20,160 --> 00:41:24,000
Speaker 4: a vehicle because there's so many components to it. One

766
00:41:24,040 --> 00:41:26,600
Speaker 4: component that you had asked about earlier is how much

767
00:41:26,680 --> 00:41:28,200
Speaker 4: leverage do you put on your program? Right?

768
00:41:28,239 --> 00:41:29,799
Speaker 3: So if you put more leverage on your program, you

769
00:41:29,840 --> 00:41:30,920
Speaker 3: con juice the returns.

770
00:41:30,960 --> 00:41:32,960
Speaker 4: I would say, you increase the risk materially, if that's

771
00:41:32,960 --> 00:41:34,960
Speaker 4: why we top out it one to one. But you

772
00:41:35,040 --> 00:41:39,520
Speaker 4: can't compare two programs if they have different leverage. I

773
00:41:39,560 --> 00:41:43,960
Speaker 4: would say, at least for us, are there opportunities to

774
00:41:43,960 --> 00:41:45,720
Speaker 4: get higher spreads than we get?

775
00:41:46,000 --> 00:41:46,480
Speaker 3: Probably?

776
00:41:46,520 --> 00:41:48,439
Speaker 4: I mean, you listen to me talk about this, we're

777
00:41:48,480 --> 00:41:52,160
Speaker 4: pretty darn risk averse that said, the spread in our

778
00:41:52,200 --> 00:41:55,560
Speaker 4: portfolio today is five and a quarter, So that doesn't

779
00:41:55,640 --> 00:42:01,400
Speaker 4: sound low. That's what we're able to create. Is it

780
00:42:01,440 --> 00:42:02,600
Speaker 4: going to stay at that level?

781
00:42:02,760 --> 00:42:05,759
Speaker 3: I don't know. Is the base rate? And to stay where

782
00:42:05,760 --> 00:42:06,920
Speaker 3: it is? Nobody knows.

783
00:42:08,320 --> 00:42:11,200
Speaker 4: And then I think another really important factor is the losses.

784
00:42:11,480 --> 00:42:16,080
Speaker 4: So I think our goal is to outperform investor expectations

785
00:42:16,120 --> 00:42:19,239
Speaker 4: by keeping losses as close to zero as possible. There

786
00:42:19,239 --> 00:42:21,720
Speaker 4: are going to be other people out there that attempt

787
00:42:21,800 --> 00:42:24,239
Speaker 4: to deliver the returns that their investors are asking for

788
00:42:24,360 --> 00:42:27,520
Speaker 4: by stretching for spreads maybe and if they pull it off.

789
00:42:27,640 --> 00:42:29,160
Speaker 3: Without higher losses, that'll work.

790
00:42:29,239 --> 00:42:31,640
Speaker 4: Or by putting more leverage on the portfolio and they

791
00:42:31,680 --> 00:42:34,239
Speaker 4: can pull it off without generating higher losses, that'll work.

792
00:42:34,280 --> 00:42:37,279
Speaker 4: But these are different approaches, and so I think it's

793
00:42:37,320 --> 00:42:42,440
Speaker 4: really hard to compare fun level returns to the investors.

794
00:42:42,480 --> 00:42:44,759
Speaker 3: There's just too many different ingredients that go into the cake.

795
00:42:44,920 --> 00:42:48,960
Speaker 2: Okay, So my colleagues in the news department have been

796
00:42:49,080 --> 00:42:55,040
Speaker 2: writing a bit about increased increased redemption requests, you know,

797
00:42:55,080 --> 00:42:58,440
Speaker 2: from some of the private BDC's that they're you know,

798
00:42:58,719 --> 00:43:00,200
Speaker 2: I think it might be come inform Asia but it

799
00:43:00,239 --> 00:43:02,680
Speaker 2: might be a little bit more widespread than that. It's

800
00:43:02,680 --> 00:43:05,960
Speaker 2: coming on the heels of what I think are isolated

801
00:43:06,120 --> 00:43:10,759
Speaker 2: fraudulent situations tricolor, you know, first brands, et cetera. You know,

802
00:43:10,840 --> 00:43:12,279
Speaker 2: kind of one off. So it seems like we've got

803
00:43:12,280 --> 00:43:16,680
Speaker 2: isolated problems rather than systemic problems. But have you seen

804
00:43:16,880 --> 00:43:19,920
Speaker 2: a change in just tone from the sort of questions

805
00:43:19,920 --> 00:43:22,120
Speaker 2: that you're getting from your own investors.

806
00:43:22,640 --> 00:43:22,879
Speaker 3: Yeah.

807
00:43:22,920 --> 00:43:27,520
Speaker 4: So, as we discussed, our investors are institutional and so

808
00:43:27,600 --> 00:43:33,359
Speaker 4: they don't redeem. But we pull this together. Sometimes for presentations,

809
00:43:33,400 --> 00:43:36,839
Speaker 4: we pull headlines about our asset class. And I think

810
00:43:36,880 --> 00:43:39,280
Speaker 4: the ratio of negative to positive is something like twenty

811
00:43:39,320 --> 00:43:41,760
Speaker 4: to one. So there's a slide that I do every

812
00:43:41,840 --> 00:43:44,920
Speaker 4: time I need to introduce a topic where I just

813
00:43:44,960 --> 00:43:48,880
Speaker 4: show headlines. Yeah, and they're all negative. So I have

814
00:43:49,080 --> 00:43:52,399
Speaker 4: actually started talking to investors that depending on who they

815
00:43:52,440 --> 00:43:54,880
Speaker 4: report to, because we all have bosses, right, So my

816
00:43:55,040 --> 00:43:58,759
Speaker 4: bosses are my investors, but my investors also have bosses, right,

817
00:43:58,840 --> 00:44:01,960
Speaker 4: Because if it's a pension fun then you have the

818
00:44:02,000 --> 00:44:04,360
Speaker 4: actual people whose retirement you're managing, and if it's an

819
00:44:04,400 --> 00:44:06,560
Speaker 4: insurance company, then it's you know, the heads of the

820
00:44:06,600 --> 00:44:08,960
Speaker 4: insurance company and the board and the shareholders, et cetera. Right,

821
00:44:08,960 --> 00:44:10,879
Speaker 4: so we all have bosses, And so I said, Look,

822
00:44:10,920 --> 00:44:12,680
Speaker 4: one of the things that I think we need to

823
00:44:12,719 --> 00:44:16,759
Speaker 4: be thinking about as you continue to deploy capital in

824
00:44:16,800 --> 00:44:20,080
Speaker 4: this assea class is the pace of negative headlines is

825
00:44:20,160 --> 00:44:22,200
Speaker 4: probably not going to go down.

826
00:44:22,480 --> 00:44:23,839
Speaker 3: It's probably going up.

827
00:44:24,400 --> 00:44:28,279
Speaker 5: Now we can talk about what's in your portfolio, and

828
00:44:28,320 --> 00:44:30,399
Speaker 5: I can give you headline statistics like I did today

829
00:44:30,440 --> 00:44:33,640
Speaker 5: about what percent is pick and what percent is strategic pick,

830
00:44:33,680 --> 00:44:35,920
Speaker 5: and what the defaults are and what the nan acrules

831
00:44:35,920 --> 00:44:36,719
Speaker 5: are and what the spread is.

832
00:44:36,800 --> 00:44:36,920
Speaker 3: Right.

833
00:44:36,920 --> 00:44:39,640
Speaker 4: We can answer all the questions with facts, but I

834
00:44:39,719 --> 00:44:42,719
Speaker 4: can't tell you that you won't get more questions over

835
00:44:42,800 --> 00:44:45,719
Speaker 4: time because people are going to be reading these headlines

836
00:44:45,719 --> 00:44:48,000
Speaker 4: and I don't think the headlines are going to be good,

837
00:44:48,000 --> 00:44:50,520
Speaker 4: but not not for any reason that I know of.

838
00:44:50,640 --> 00:44:52,200
Speaker 3: I just don't think they're going to be good.

839
00:44:52,440 --> 00:44:55,960
Speaker 1: Great stuff. Susan cassa head of private that at Newburger Berman,

840
00:44:56,040 --> 00:44:57,720
Speaker 1: It's been a pleasure having you on the credit Edge.

841
00:44:57,760 --> 00:45:00,000
Speaker 3: Thank you so much, James, Thank you, David.

842
00:45:00,280 --> 00:45:02,719
Speaker 1: Very grateful to David Haven's with Bloomberg Intelligence.

843
00:45:02,880 --> 00:45:06,200
Speaker 2: Cheers. Great to be with you all. Again For even.

844
00:45:06,000 --> 00:45:08,520
Speaker 1: More credit market analysis and insight, read all of David

845
00:45:08,520 --> 00:45:11,560
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846
00:45:11,600 --> 00:45:14,239
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847
00:45:14,280 --> 00:45:17,600
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848
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849
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851
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852
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853
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854
00:45:37,680 --> 00:45:41,120
Speaker 1: Bloomberg dot net. I'm James Crombie. It's been a pleasure

855
00:45:41,160 --> 00:45:43,280
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856
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