WEBVTT - Sculptor Sees Opportunity in Busted Capital Structures 0:00:18.360 --> 0:00:20.880 Hello, and welcome to the Credit Edge, a weekly markets podcast. 0:00:21.000 --> 0:00:23.440 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:23.760 --> 0:00:27.120 This week, we're very pleased to welcome Jimmy Levin, CEO 0:00:27.240 --> 0:00:30.240 and Chief investment officer of Sculptor Capital. How are you, Jimmy, 0:00:30.600 --> 0:00:32.400 I am great, Thanks for having me. Thank you so 0:00:32.479 --> 0:00:34.120 much for joining us today. We're very excited to get 0:00:34.120 --> 0:00:36.239 your credit market views, and we're also delighted to have 0:00:36.280 --> 0:00:41.080 back on the show Stefan Koba, chef from Bloomberg Intelligence. Hello, Stefan. Hi, James, 0:00:41.360 --> 0:00:45.159 and from Bloomberg News, Renne Garthia Perez, who covers distressed 0:00:45.200 --> 0:00:48.480 debt and of course football from London. How are you Rene? 0:00:48.960 --> 0:00:52.240 Hello, I am freezing in our studio in London. 0:00:52.720 --> 0:00:54.280 Okay, Well, I hope it warms up with there. But 0:00:54.440 --> 0:00:56.800 just to set the scene a bit here from New York. 0:00:57.280 --> 0:00:59.320 Credit markets are rallying after taking a bit of a 0:00:59.360 --> 0:01:01.920 hit at the start of August. Investors are bracing for 0:01:02.000 --> 0:01:04.400 volatility in the run up to FED easing, which is 0:01:04.440 --> 0:01:07.080 expected to start this month. Lower rates will take some 0:01:07.120 --> 0:01:09.399 of the pressure off weak companies that were struggling with 0:01:09.480 --> 0:01:12.200 high borrowing costs. Over the last few years, and there's 0:01:12.200 --> 0:01:15.440 a lot more debt issuance. Companies are taking advantage of 0:01:15.560 --> 0:01:18.080 very strong investor demand for corporate bonds and loans, with 0:01:18.160 --> 0:01:21.440 yields at historically high levels, and September is typically a 0:01:21.480 --> 0:01:23.640 heavy month for bond isshuents. We are off to a 0:01:23.680 --> 0:01:26.800 record start today, but there's still a lot more demand 0:01:26.840 --> 0:01:29.160 than net supply of corporate debt, which is a technical boost. 0:01:29.240 --> 0:01:32.000 Credit markets are supported by resilience in the economy and 0:01:32.000 --> 0:01:35.600 investors are betting on a soft blanding. However, there is 0:01:35.600 --> 0:01:38.160 a lot to worry about in debt markets. We're seeing 0:01:38.200 --> 0:01:42.560 more creditor on creditor violence, aggressive liability management exercises, and 0:01:42.640 --> 0:01:46.960 cooperation agreements, as well as defaults and bankruptcies. Then there's 0:01:47.000 --> 0:01:51.000 commercial real estate stress war, the US election, global geopolitics 0:01:51.000 --> 0:01:54.480 plus recession risk hasn't really gone away. So Jimmy, what's 0:01:54.520 --> 0:01:56.160 your take? Are you bullet for the rest of twenty 0:01:56.160 --> 0:01:56.600 twenty four? 0:01:57.360 --> 0:01:59.960 Well, maybe we have to zoom out a little bit 0:02:00.120 --> 0:02:05.360 from that. You listed a handful of great sounding things 0:02:05.400 --> 0:02:09.040 for the economy and markets. In a handful of items 0:02:09.040 --> 0:02:11.600 that could be a problem for economies and markets, I'd 0:02:11.600 --> 0:02:14.960 start by saying there's usually that list on both sides, 0:02:15.800 --> 0:02:18.840 and today's no different. There are some tailwinds, there are 0:02:18.880 --> 0:02:21.600 some headwinds, but I think to set the stage for 0:02:21.800 --> 0:02:25.720 credit investing more broadly, you've heard, whether it's from US 0:02:26.600 --> 0:02:29.640 firms like ours, you've heard talk over the last couple 0:02:29.720 --> 0:02:31.160 of years that it's a great time to be a 0:02:31.160 --> 0:02:34.640 credit investor. You've probably heard that over and over again, 0:02:34.680 --> 0:02:37.920 and it always has a different phrase. Sometimes it's equity 0:02:38.040 --> 0:02:40.760 like returns for credit like risk or some derivative of 0:02:40.800 --> 0:02:44.480 that sort of concept. Golden age, Yeah, golden age. You know, 0:02:44.800 --> 0:02:48.720 we've heard them all. So let's start with what is 0:02:48.720 --> 0:02:52.320 that backdrop and why is everybody saying that? And from 0:02:52.360 --> 0:02:56.400 our perspective, we try to frame it as the perspective, 0:02:56.440 --> 0:02:59.960 returns on offering credit come from the risk free rate, 0:03:00.800 --> 0:03:04.560 the i'll call it generic non investment grade credit spread, 0:03:05.120 --> 0:03:08.920 and then the complexity premium, and people call that last bucket. 0:03:09.160 --> 0:03:13.520 Sometimes that's called alpha, sometimes that's called excess return, excess spread. 0:03:13.840 --> 0:03:16.000 But it's those three pieces. And so if you take 0:03:16.520 --> 0:03:18.640 those three pieces today, and this has kind of been 0:03:18.680 --> 0:03:20.640 true for the last couple of years, moving around up 0:03:20.680 --> 0:03:23.399 and down for each of the three, but the risk 0:03:23.440 --> 0:03:27.760 free part, depending on your rate view, it's in the 0:03:27.800 --> 0:03:33.160 four or five range. The non investment grade credit spread 0:03:33.720 --> 0:03:37.080 it's in the three four five range, and that complexity 0:03:37.120 --> 0:03:40.520 premium is also in the three four five range. So 0:03:41.040 --> 0:03:43.840 depending on which where we pick in these different ranges, 0:03:44.240 --> 0:03:48.080 you're getting to a load to mid teens gross on 0:03:48.200 --> 0:03:52.600 levered rate of return to generally take pretty reasonable credit risk. 0:03:53.120 --> 0:03:55.840 So before we talk about anything else, we kind of 0:03:55.840 --> 0:03:59.920 pause there if returns on offer are in the low 0:04:00.040 --> 0:04:02.960 amid double digits to take reasonable credit risk. And we're 0:04:03.000 --> 0:04:04.920 on radio, so you can't say you can't see the 0:04:04.920 --> 0:04:07.200 reasonable in air quotes, right, Everyone's got their own version 0:04:07.200 --> 0:04:10.920 of reasonable. But to take pretty reasonable credit risk and 0:04:11.000 --> 0:04:14.480 make that kind of return, that generally counts as a 0:04:14.480 --> 0:04:17.560 good time to be investing. Right, even at the simplest level, 0:04:17.560 --> 0:04:20.200 Compare that to a few years ago. Risk free was 0:04:20.480 --> 0:04:24.400 zero or one, and the credit spread component was two 0:04:24.520 --> 0:04:28.599 or three or four, and that complexity premium was one 0:04:28.680 --> 0:04:32.440 or two or three. And so the Old World's six, seven, 0:04:32.520 --> 0:04:36.599 eight became the New World's eleven, twelve, thirteen, fourteen, fifteen. 0:04:36.640 --> 0:04:40.000 And I think that generically is what have what has 0:04:40.040 --> 0:04:44.479 credit market investors excited before we even talk about what's 0:04:44.560 --> 0:04:45.880 what and what are the categories? 0:04:46.400 --> 0:04:50.600 Hi, Jimmy, very interesting complexity premium view. I would agree. 0:04:50.720 --> 0:04:54.000 I was curious to hear your views on interest rate 0:04:54.440 --> 0:04:58.400 cuts from the Fed or across the globe more generally 0:04:58.440 --> 0:05:01.320 as well. Do you see a risk rates remaining elevated 0:05:01.400 --> 0:05:04.280 for longer to fight inflation or do you think the 0:05:04.360 --> 0:05:07.719 central banks will do a good job at supporting growth 0:05:07.839 --> 0:05:11.120 by steadily cutting rates in the next twelve months. 0:05:11.200 --> 0:05:13.560 Well, I'll start with a disclaimer, which is that we're 0:05:13.600 --> 0:05:17.280 generally not in the business of predicting the path of rates. 0:05:17.680 --> 0:05:20.279 It matters a lot. We have to have review We 0:05:20.360 --> 0:05:23.520 from time to time have a view, but trying to 0:05:23.520 --> 0:05:26.040 figure out if the next meeting ought to be priced 0:05:26.040 --> 0:05:29.400 at one or two or one point three, that's not 0:05:29.520 --> 0:05:33.080 our exact skill set. I think what we try to 0:05:33.120 --> 0:05:35.799 do as as investors, and I think this applies today. 0:05:37.480 --> 0:05:40.160 Everything in the real world moves a little slower than 0:05:40.160 --> 0:05:42.360 the market wants it to be. So again, if we 0:05:42.720 --> 0:05:45.040 think about the last couple of years where interest rates 0:05:45.800 --> 0:05:48.120 have been topics number one, two, three, four, and five 0:05:48.160 --> 0:05:52.120 on everyone's list. For every conversation, there have been moments 0:05:52.120 --> 0:05:56.279 in time where the market moves to and I'm exaggerating, 0:05:56.520 --> 0:05:59.320 you know, one hundred percent probability of rates staying high forever, 0:05:59.560 --> 0:06:02.120 and then it moves to a one hundred percent probability 0:06:02.120 --> 0:06:05.960 of rates being dramatically cut instantly, and it oscillates back 0:06:06.000 --> 0:06:10.160 and forth between those. I think what's realistic is rates 0:06:10.160 --> 0:06:13.520 are pretty high right now. They're generically in the restrictive zone, 0:06:13.680 --> 0:06:15.840 and they're going to go from that to something more 0:06:15.880 --> 0:06:19.080 normal over a couple of years. And I know that's 0:06:19.120 --> 0:06:21.400 a cop out answer, but I think it's not really 0:06:21.440 --> 0:06:25.000 possible to predict. And I also think it doesn't hugely 0:06:25.120 --> 0:06:30.279 matter for being a credit investor, Meaning if one is 0:06:30.320 --> 0:06:33.479 doing a type of fundamental credit investing today, that works 0:06:33.480 --> 0:06:38.080 out fabulously if there's six cuts, but it's a disaster. 0:06:38.160 --> 0:06:40.440 If there's three cuts and it's the greatest thing of 0:06:40.480 --> 0:06:43.960 all time. If it's the opposite, something's gone wrong already. 0:06:44.560 --> 0:06:48.960 We shouldn't be that sensitive to that level of granularity. 0:06:49.120 --> 0:06:53.840 But inflation is largely gotten under control and rates are 0:06:54.320 --> 0:06:57.600 likely to come down over time. There is always a 0:06:57.720 --> 0:07:02.280 risk of a reacceleration of inflation. Do we have an 0:07:02.279 --> 0:07:05.359 ability to predict that better than the market, probably. 0:07:04.920 --> 0:07:09.880 Not very clear. And on the back of normalizing rates 0:07:09.880 --> 0:07:14.040 and inflation, just to follow up on the recession risks, 0:07:15.280 --> 0:07:17.360 if you have a view on that, And the last 0:07:17.360 --> 0:07:20.680 time I checked, the probability of the United States entering 0:07:20.760 --> 0:07:24.240 recession the next twelve months stands at about thirty percent 0:07:24.800 --> 0:07:28.240 according to Bluebird Sensus, and this is still relatively high, 0:07:28.240 --> 0:07:31.440 but I believe this time last year the probability was 0:07:32.040 --> 0:07:36.120 maybe about fifty to sixty percent. So I was wondering, 0:07:36.120 --> 0:07:41.120 what's your take on these normalizing rates? Will they help 0:07:41.200 --> 0:07:43.920 us avoid our recession in the US? 0:07:43.960 --> 0:07:49.680 In your view, it's all circular, but inflation remaining under control, 0:07:49.800 --> 0:07:55.640 are coming down further, rates beginning to normalize from being restrictive, 0:07:55.960 --> 0:07:59.200 and all of that happening kind of slowly and smoothly 0:07:59.240 --> 0:08:03.960 and under control helps avoid a recession. And so similar 0:08:04.040 --> 0:08:07.320 to that rate comment that I made, where the market 0:08:07.320 --> 0:08:09.960 flip flops between one hundred percent probability of one thing 0:08:10.000 --> 0:08:12.280 and a one hundred percent probability of the other thing, 0:08:13.320 --> 0:08:15.760 we see that with recession talk as well. And I 0:08:15.880 --> 0:08:20.680 found last month the beginning of August during that selloff, 0:08:21.120 --> 0:08:24.760 to be a bit of a head scratcher. Essentially, there 0:08:24.800 --> 0:08:30.680 was a technical event in the Japanese market overnight and 0:08:30.800 --> 0:08:33.280 by I don't know, five or six or seven am 0:08:33.360 --> 0:08:36.600 New York time, there was there were calls for an 0:08:36.600 --> 0:08:39.800 emergency FED meeting to make a cut to avoid this 0:08:40.800 --> 0:08:47.160 impending recession. That seemed a little extreme. So I don't 0:08:47.160 --> 0:08:51.480 think the probability moves as quickly like rates. It's this 0:08:51.559 --> 0:08:54.960 is a slower moving machine. The economy has been growing 0:08:55.000 --> 0:08:59.080 really well, both nominally and real. The rate of that 0:08:59.200 --> 0:09:03.320 growth is slowing, which is what the FED and other 0:09:03.320 --> 0:09:05.440 central banks have been trying to achieve for the last 0:09:05.480 --> 0:09:08.080 couple of years. So it's not a surprise that the 0:09:08.200 --> 0:09:11.200 rate of growth is slowing down. That's been the goal, 0:09:11.280 --> 0:09:16.040 that's the point of the restrictive monetary policy. So we 0:09:16.080 --> 0:09:19.920 are getting that slowing in growth so far, and again 0:09:19.960 --> 0:09:23.319 this is not incredibly insightful. It's backward looking. So far, 0:09:23.400 --> 0:09:27.280 so good. It's worked, inflation is kind of moderating. The 0:09:27.360 --> 0:09:32.559 economy remains fairly strong, albeit slightly less strong. So we 0:09:33.200 --> 0:09:39.200 are definitively on the soft landing path. Can we be derailed? Absolutely, 0:09:39.320 --> 0:09:42.440 And again it could sound like a cop out, but 0:09:42.480 --> 0:09:44.800 this is the beauty of being a credit investor, Especially 0:09:44.800 --> 0:09:47.040 if you're a credit investor at a time where low 0:09:47.120 --> 0:09:49.480 double digit or low to mid teens rates of return 0:09:49.520 --> 0:09:54.440 are on offer. Credit investments shouldn't be that sensitive to this. 0:09:55.000 --> 0:09:59.760 So obviously certain credit investments are. And I'm speaking very 0:10:00.000 --> 0:10:03.839 generically now, if if one is investing in a zero 0:10:03.880 --> 0:10:09.320 to fifty percent LTV loan, whether the economy grows at 0:10:09.360 --> 0:10:11.800 three or shrinks at one, sure it's going to feel 0:10:11.800 --> 0:10:14.199 better growing at three than shrinking at one. But that 0:10:14.240 --> 0:10:18.040 loan ought to be protected. So as credit investors, we 0:10:18.080 --> 0:10:19.840 don't have to be as precise. 0:10:20.200 --> 0:10:24.280 Jimmy, for the soft lending that you were describing, is 0:10:25.160 --> 0:10:28.080 it impacting the opportunity set of what you were saying? 0:10:28.240 --> 0:10:33.040 Not really, so it has. So if I took that 0:10:33.160 --> 0:10:37.040 generic rate plus spread plus premium, and I just said 0:10:37.040 --> 0:10:41.280 four plus four plus four equals twelve. If we looked 0:10:41.920 --> 0:10:45.720 a year ago at this time, we would have said 0:10:46.520 --> 0:10:50.079 five plus five plus five, and so fifteen was the 0:10:50.679 --> 0:10:55.040 number on offer, again wildly genericizing across asset based finance 0:10:55.040 --> 0:10:57.360 and corporate credit and real estate finance and so on. 0:10:58.440 --> 0:11:02.960 So why did fifteen go to twelve? Because every day 0:11:03.280 --> 0:11:09.240 the soft landing remains in effect. Is a data landing 0:11:09.320 --> 0:11:16.280 remains in effect. So the smoother the landing, the better 0:11:16.360 --> 0:11:20.200 the narrative, and the longer it persists for allows the 0:11:20.200 --> 0:11:23.360 market to take some return out of the market. So 0:11:23.920 --> 0:11:29.720 would credit investors rather be investing against fifteen than against twelve? Sure, 0:11:29.800 --> 0:11:32.760 but twelve works works nicely as well. 0:11:33.280 --> 0:11:36.640 So you see return staying in the double digits range 0:11:36.679 --> 0:11:39.480 for the foreseeable that say year or more. 0:11:39.920 --> 0:11:42.080 Yeah, I think as long as the base rate is high, 0:11:42.080 --> 0:11:44.880 there's some correlation between all this, right. Some people quote yield, 0:11:44.920 --> 0:11:49.199 some people quote spread. There's always been correlation between those 0:11:49.200 --> 0:11:53.920 three components of return. Yeah, But while base rates are 0:11:54.240 --> 0:11:56.240 in the zone of where they are now, again, forget 0:11:56.240 --> 0:11:58.680 if they're twenty five high or lower, fifty high or lower. 0:11:58.880 --> 0:12:00.520 As long as they're in the zone of where they 0:12:00.520 --> 0:12:03.800 are now, we ought to stay in the type of 0:12:03.840 --> 0:12:08.920 return environment that we're in. But to your point, if 0:12:08.960 --> 0:12:12.160 it's a quarter and then a year and then two 0:12:12.240 --> 0:12:15.959 years where it turns out the economy grew really nicely 0:12:16.080 --> 0:12:20.760 and earnings have growth has been strong, and inflation got 0:12:20.800 --> 0:12:24.920 back to target, then yeah, the returns on offer to 0:12:24.960 --> 0:12:27.320 be a credit investor probably won't be as good then 0:12:27.360 --> 0:12:27.840 as they are. 0:12:27.760 --> 0:12:31.800 Today, right, Indeed, good times to be in credit. But 0:12:32.160 --> 0:12:35.559 then similarly, I want to ask about the state of 0:12:35.600 --> 0:12:40.520 the US consumer. I cover container shipping, which is very 0:12:40.559 --> 0:12:45.400 much driven by consumer demand and by the number of 0:12:45.559 --> 0:12:50.600 containers filled with goods bit clothing, shoes, furniture shipped from 0:12:50.600 --> 0:12:55.720 Asia to the US personally, with interest rates going from 0:12:55.840 --> 0:12:59.040 zero to five percent, I'm rather surprised that the consumer 0:12:59.160 --> 0:13:01.880 demand seems to be holding on at least for now, 0:13:02.280 --> 0:13:05.240 and this is what container shipping companies that I cover 0:13:06.080 --> 0:13:09.680 tail investors. But I was curious to hear your views 0:13:09.720 --> 0:13:12.960 on the state of the UNS consumer going into Q 0:13:13.080 --> 0:13:15.319 four and next year as well. 0:13:15.480 --> 0:13:18.320 So the consumer started all this in a really good place. 0:13:19.840 --> 0:13:22.080 And by the way that's circular, maybe part of the 0:13:22.120 --> 0:13:25.240 reason that we were in this inflationary environment and that 0:13:26.240 --> 0:13:30.800 such restrictive monetary policy rates were required is because the 0:13:30.800 --> 0:13:34.240 consumer was so strong, meaning there was this accumulation of 0:13:34.360 --> 0:13:39.120 savings post COVID, both from stimulus and from lack of 0:13:39.160 --> 0:13:44.640 the opportunity to spend as much. Employment stayed really good, 0:13:44.920 --> 0:13:47.440 and so the consumer came into this period of time 0:13:47.920 --> 0:13:50.920 with a better financial position than it had had in 0:13:50.960 --> 0:13:54.679 a really long time. And again on this the real 0:13:54.679 --> 0:13:57.959 world moves more slowly than the Bloomberg screen we all 0:13:58.000 --> 0:14:00.880 stare at all day. Takes a while for that to 0:14:00.880 --> 0:14:06.400 burn off. But you see it in particularly in consumer credit, 0:14:06.400 --> 0:14:10.240 within asset based finance, you see that that excess has 0:14:10.280 --> 0:14:14.000 started to burn off, and like it does historically, it 0:14:14.080 --> 0:14:17.880 starts at the most challenged consumer at the lowest end 0:14:17.920 --> 0:14:20.120 and then kind of slowly works its way up. But 0:14:20.640 --> 0:14:24.280 you've seen that in consumer lending delinquencies, You've seen that 0:14:24.360 --> 0:14:28.000 in subprime audo versus prime auto. So yeah, some of 0:14:28.040 --> 0:14:30.760 the air is coming out of the ball, and again 0:14:31.040 --> 0:14:34.160 that shouldn't be a surprise because that's how this all 0:14:34.280 --> 0:14:36.240 was designed. It was designed to take air out of 0:14:36.280 --> 0:14:40.200 the ball. And there was a period time at the 0:14:40.240 --> 0:14:44.040 beginning of the inflation rate period that we're in where 0:14:44.520 --> 0:14:49.400 inflation was in excess of wage growth, and now you're 0:14:49.480 --> 0:14:52.680 kind of seeing that catchup. So you're getting the wage 0:14:52.720 --> 0:14:56.280 growth in excess of the now moderating inflation. And again 0:14:56.360 --> 0:15:02.080 maybe that's just kind kind of getting back to new. 0:15:00.960 --> 0:15:06.040 Going into specifics, how does sculpture trade this macro rates view? 0:15:06.080 --> 0:15:08.760 Where do you see opportunities. 0:15:08.600 --> 0:15:12.040 So to be clear, we don't intentionally trade the macro 0:15:12.160 --> 0:15:18.480 rates view. If anything, Our funds generally run duration neutral, 0:15:18.840 --> 0:15:21.360 or we try to have them be duration neutral, meaning 0:15:21.400 --> 0:15:24.600 we try not to take the interest rate risk. What 0:15:24.640 --> 0:15:29.120 we try to take is well selected credit risk, and 0:15:29.160 --> 0:15:33.040 we try to harvest that complexity premium or that excess 0:15:33.040 --> 0:15:37.040 spread or that alpha where whether it comes from process 0:15:37.200 --> 0:15:42.240 or from sourcing, or from complexity or from illiquidity, that's 0:15:42.280 --> 0:15:45.040 what we're trying to take out of the market, so 0:15:45.080 --> 0:15:47.880 to speak. And maybe it's worth for a second just 0:15:48.600 --> 0:15:52.080 laying out the three categories of the credit world that 0:15:52.680 --> 0:15:54.600 we try to invest in, or the way we define it. 0:15:55.080 --> 0:15:59.120 There's the corporate credit market. I'll say everyone knows that one. 0:15:59.120 --> 0:16:02.560 It's when companies are money more or less. There's the 0:16:02.640 --> 0:16:06.840 real estate credit market, which is think of that as 0:16:07.480 --> 0:16:10.080 loans on a building or loans on a real estate asset. 0:16:10.680 --> 0:16:13.320 It's conceptually similar to corporate credit in that it's a 0:16:13.400 --> 0:16:17.280 single name underwriting. And then there's asset based finance, which 0:16:18.040 --> 0:16:21.160 is the hardest to define. It's probably the most topical 0:16:21.160 --> 0:16:24.000 today and maybe the easiest way to start with the 0:16:24.000 --> 0:16:29.200 definition is asset based finance is everything else so it's 0:16:29.240 --> 0:16:32.440 all types of credit risk that aren't corporate credit and 0:16:32.480 --> 0:16:37.480 aren't single name real estate credit. So that includes generally 0:16:37.520 --> 0:16:41.280 pooled assets or pooled cash flows, or pooled loans of 0:16:42.080 --> 0:16:46.400 residential real estate, commercial real estate, consumer credit, auto loans, 0:16:46.480 --> 0:16:54.760 credit card loans, student loans, transportation, aviation, infrastructure. Those are 0:16:54.800 --> 0:16:58.680 all the underlying feedstock for this asset based finance market. 0:16:59.040 --> 0:17:02.680 And it includes taking that feedstock or those pools of 0:17:02.720 --> 0:17:07.480 assets and turning them into securitized products, or turning them 0:17:07.480 --> 0:17:14.080 into SRTs or CRTs or even unlevered asset pools. So 0:17:14.119 --> 0:17:17.440 there's the type of risk, which is all those categories 0:17:17.480 --> 0:17:20.240 I laid out, and then there's the structure of that risk, 0:17:20.600 --> 0:17:25.840 which can be varied again cash synthetic, thicknches, thin tronches, 0:17:25.880 --> 0:17:30.800 safe trunches, risky tranches. But it's pooling all those underlying 0:17:30.880 --> 0:17:34.360 risks into pools that can then be analyzed and assessed. 0:17:34.640 --> 0:17:37.359 That's what we call asset based finance. I'd say the 0:17:37.400 --> 0:17:40.960 words it used to be called would include securitized products, 0:17:41.040 --> 0:17:48.000 structured credit, principal finance, specialty finance, acid based finance reg CAP. 0:17:48.160 --> 0:17:51.280 All that today we'll put into that ABF bucket. 0:17:51.800 --> 0:17:57.000 In that acid in that broad universe of acid basin 0:17:57.040 --> 0:18:00.560 an sid you were just describing wearing partique or do 0:18:00.640 --> 0:18:05.840 you see the opportunities like are there any specific areas 0:18:05.960 --> 0:18:08.360 or products that you like more than others? And are 0:18:08.400 --> 0:18:11.800 there any corners or pockets of that market that you avoid? 0:18:12.480 --> 0:18:15.159 So it's the common question, and I wish I had 0:18:15.200 --> 0:18:18.600 a fancier answer to it, which is you know a 0:18:18.760 --> 0:18:20.679 kind of sector with a bow on it that looks 0:18:21.080 --> 0:18:25.600 perfectly dislocated. I guess the spoiler alert is that there's 0:18:25.640 --> 0:18:29.480 not one. And really the inefficiency is in the asset 0:18:29.480 --> 0:18:32.880 class itself. Well, I'll start with this anything that takes 0:18:33.280 --> 0:18:36.680 like two or three minutes to even start to describe 0:18:36.680 --> 0:18:38.840 at a high level, the asset class we're talking about 0:18:38.920 --> 0:18:42.520 is probably not the world's most efficient asset class. So 0:18:43.680 --> 0:18:48.480 because there's so much different collateral and so much different structure, 0:18:48.560 --> 0:18:53.719 and so many different forms of origination, it's an imperfect market. 0:18:53.920 --> 0:18:57.159 It's a market that's nowhere near as mature as the 0:18:57.200 --> 0:19:01.640 corporate credit market, and so the opera ortunity comes by 0:19:02.320 --> 0:19:05.560 waiting for what falls through the cracks. Now, at different 0:19:05.560 --> 0:19:09.199 points within the last couple of years, has there have 0:19:09.280 --> 0:19:13.200 there been more distinct themes. Yes, you know, at the 0:19:13.240 --> 0:19:17.320 beginning of the rate rise, it was, well, home prices 0:19:17.400 --> 0:19:21.560 must be going down, so you know, anything residential real 0:19:21.640 --> 0:19:24.560 estate related could be an opportunity. And then at some 0:19:24.640 --> 0:19:27.760 point it was, you know, commercial real estate is crashing 0:19:27.800 --> 0:19:30.240 and there's a regional bank crisis, and so anything related 0:19:30.240 --> 0:19:33.440 to commercial real estate must be the opportunity. And I 0:19:33.440 --> 0:19:37.320 could kind of keep going with each one, but there 0:19:37.359 --> 0:19:43.119 isn't a specific dislocation that The prevailing principle across the 0:19:43.119 --> 0:19:45.240 board in all of asset based finance is that it's 0:19:45.640 --> 0:19:50.880 generally a wholesale funded market. So when rates go from 0:19:50.880 --> 0:19:53.919 low to high and spreads go from tight to wide, 0:19:54.560 --> 0:19:57.719 it's disruptive to a wholesale funded market. And so it 0:19:57.760 --> 0:20:00.679 doesn't matter if the underlying asset classes a non QM 0:20:00.760 --> 0:20:04.960 loan or a single family rental pool, or a portfolio 0:20:05.040 --> 0:20:08.840 of aircraft, whatever it is at that moment in time. 0:20:08.880 --> 0:20:13.240 It's more that the market structure has been disrupted, and 0:20:13.280 --> 0:20:19.000 it's disrupted today cyclically, meaning the high rates and the 0:20:19.040 --> 0:20:23.320 inflationary environment and the regional bank consequences over the subsequent 0:20:23.359 --> 0:20:28.399 couple of years, and it's disrupted secularly, which is the 0:20:28.520 --> 0:20:32.600 twenty year trend of more and more regulation on both 0:20:33.000 --> 0:20:34.360 big banks and small banks. 0:20:34.760 --> 0:20:36.919 The stuff that falls through the cracks, as you put it, 0:20:36.960 --> 0:20:38.720 is it falling through the cracks because no one else 0:20:38.720 --> 0:20:40.920 wants it, because it's toxic, it's distressed, it's something you 0:20:40.960 --> 0:20:42.119 should be worried about. 0:20:42.680 --> 0:20:45.240 I would say, falling through the cracks because the market 0:20:45.320 --> 0:20:48.280 is more immature, and so I'll give you maybe some 0:20:48.400 --> 0:20:54.200 numbers that would help. When I started in the business, 0:20:55.280 --> 0:20:58.560 private credit meant direct lending, which meant small to middle 0:20:58.600 --> 0:21:03.360 market lending, and it was tiny. Today, as we all 0:21:03.359 --> 0:21:06.399 know and you all cover probably daily, private credit is 0:21:06.440 --> 0:21:09.240 close to two trillion dollars and direct lending is seventy 0:21:09.280 --> 0:21:14.600 five percent of that round numbers. So it sort of 0:21:14.640 --> 0:21:17.440 goes with logic that that market's now more efficient. When 0:21:17.480 --> 0:21:20.520 a financial sponsor buys a company and they want to 0:21:20.560 --> 0:21:24.359 borrow the first sixty percent of the capital structure, they 0:21:24.400 --> 0:21:27.120 can go to the investment banks that have been doing 0:21:27.200 --> 0:21:31.560 it for eternity. They can now go to the direct 0:21:31.640 --> 0:21:34.400 lending market, which has trillions of dollars and growing by 0:21:34.400 --> 0:21:37.320 the day, with I don't know dozens or hundreds of 0:21:37.359 --> 0:21:40.639 players and so there's going to be some efficiency to 0:21:40.680 --> 0:21:46.200 that market. Well, the private ABF market today is deminimus, 0:21:47.560 --> 0:21:50.840 and so it looks a lot from an efficiency standpoint, 0:21:50.920 --> 0:21:53.400 or from a falling through the crack standpoint, it looks 0:21:53.440 --> 0:21:56.080 a lot like the direct lending market looked fifteen years ago. 0:21:56.640 --> 0:22:00.760 It's niche, it's smaller, there are less players, every deal 0:22:00.840 --> 0:22:06.399 is different, relationships matter, all of that. It's the direct 0:22:06.440 --> 0:22:08.920 lending from fifteen years ago. 0:22:09.640 --> 0:22:13.960 And how much do you expect to see this market 0:22:14.000 --> 0:22:18.600 grow in the next I don't know, five to ten years. 0:22:18.320 --> 0:22:22.200 So I think because the playbook's already been written by 0:22:22.240 --> 0:22:24.640 the direct lending market, it won't take as long as 0:22:24.760 --> 0:22:28.760 that took. Right, So if that took fifteen years to 0:22:28.800 --> 0:22:31.280 get from a number close to zero to a number 0:22:31.320 --> 0:22:34.679 close to a couple a trillion, it won't take fifteen years. 0:22:34.840 --> 0:22:37.639 I don't know if it'll move twice as fast or 0:22:37.640 --> 0:22:41.520 what the coefficient is, but it'll go faster because the 0:22:41.560 --> 0:22:44.879 playbook's been written and the players who wrote the playbook 0:22:44.920 --> 0:22:50.240 are doing it again here. So it's coming to a 0:22:50.280 --> 0:22:50.960 theater near you. 0:22:51.920 --> 0:22:53.439 Do you expect it to be I don't know, like 0:22:54.359 --> 0:22:58.240 five times private credit or seven times the size of 0:22:58.240 --> 0:23:00.760 private credit quote. 0:23:01.000 --> 0:23:03.320 And I think that's probably where maybe some of those 0:23:04.160 --> 0:23:06.240 the numbers you were just thrown out come from. If 0:23:06.280 --> 0:23:11.720 you look at the underlying markets. The underlying credit markets 0:23:11.800 --> 0:23:15.680 upon which ABF are based are five to seven times 0:23:15.920 --> 0:23:18.920 the size of the non investment grade corporate credit market. 0:23:19.320 --> 0:23:22.639 So it's not illogical to think that it would have 0:23:22.680 --> 0:23:25.159 to move in that ratio. Right. And again this is 0:23:25.640 --> 0:23:27.600 these are all widely quoted numbers now. But if you 0:23:27.640 --> 0:23:30.119 take the direct lending market, the high yield market, and 0:23:30.160 --> 0:23:33.080 the bronze syndicated loan market and you get to five 0:23:33.160 --> 0:23:39.679 or six trillion, do that same math on REZI, consumer, commercial, corporate, 0:23:39.880 --> 0:23:42.960 hard asset, infra, etc. And that five or six is 0:23:43.000 --> 0:23:46.600 more like twenty five or thirty trillion. And that's what 0:23:47.240 --> 0:23:50.040 kind of creates some of these eye popping figures as 0:23:50.080 --> 0:23:52.600 far as predictions for the future. But to be clear, 0:23:53.920 --> 0:23:56.959 that's happening with or without us, with any of us. 0:23:56.760 --> 0:24:02.320 It's not a path. What we're focused on is when 0:24:02.359 --> 0:24:05.560 you start with that market that's five or seven times 0:24:05.560 --> 0:24:08.960 the size of the corporate market that doesn't yet really 0:24:09.080 --> 0:24:12.399 have an established private credit market, and you're in an 0:24:12.480 --> 0:24:15.720 environment where the base rates four or five and credit 0:24:15.760 --> 0:24:18.440 spreads are four or five and complexity premiums four or five. 0:24:19.760 --> 0:24:21.639 We think we've got a good few years ahead of 0:24:21.680 --> 0:24:25.439 us to go after that opportunity and create some return. 0:24:26.720 --> 0:24:29.480 Do you have dedicated funds for debt strategy or does 0:24:29.520 --> 0:24:33.879 it come from opportunistic credit or other funds that you 0:24:33.880 --> 0:24:34.399 already have? 0:24:34.680 --> 0:24:38.239 All of the above, all the above, So we do 0:24:38.280 --> 0:24:42.760 it in a few different formats. But you're certainly seeing 0:24:42.840 --> 0:24:47.480 from a again maturation or the very beginnings of maturation, 0:24:47.720 --> 0:24:51.320