Speaker 1: This is Bloomberg business Week Inside from the reporters and
Speaker 1: editors who bring you America's most trusted business magazine.
Speaker 2: Plus global business, finance and tech news.
Speaker 1: The Bloomberg Business Week Podcast with Carol Messer and Tim
Speaker 1: Stenebeck from Bloomberg Radio.
Speaker 3: Carol Masser, we are live at the Milk and Institute
Speaker 3: Global Conference and a highlight for us right now someone
Speaker 3: well known to the Bloomberg audience. We're talking about David Hunt,
Speaker 3: President CEO of the massive Global Asset Manager PGM. They've
Speaker 3: got one point two trillion of assets enter management. One
Speaker 3: hundred and sixty two of the largest three hundred global
Speaker 3: pension funds are clients. You see a lot.
Speaker 4: Hello, we do.
Speaker 5: Cal is so nice to be with you.
Speaker 6: Thank you for having me.
Speaker 3: David, It's nice to have you here. So when you
Speaker 3: talk with your clients, you hear their concerns. What is
Speaker 3: top of mind for that?
Speaker 6: I would say that, you know, although the media likes
Speaker 6: to cover are we going to have a recession of
Speaker 6: soft landing or hard landing? In general, our institution clients
Speaker 6: believe that the market is pretty good at pricing in
Speaker 6: those risks, and as more information comes, the kind of
Speaker 6: giant abacus will actually reprice the markets a bit. What
Speaker 6: they worry about is the things that the market doesn't
Speaker 6: price very well, and those are things which have lower probability,
Speaker 6: but if they happen, actually are quite damaging. And they also,
Speaker 6: in general are things where kind of, you know, the
Speaker 6: market relies on the rational man school of thought that
Speaker 6: people will at the end of the day be reasonable.
Speaker 3: But what happened, and the two.
Speaker 6: Biggest ones that our clients are worried about right now
Speaker 6: is one, what will happen if Putin increasingly feels like
Speaker 6: he's backed into a point, and what if he does
Speaker 6: decide that he is really going to escalate things? And
Speaker 6: are we going to have the backing in that case
Speaker 6: of a lot of the non aligned countries who have
Speaker 6: been waffling more recently on a lot of these topics.
Speaker 3: That's one to put that out there, but anyway, go ahead.
Speaker 6: And the second one comes more from our delightful hometown
Speaker 6: of Washington, DC, where the market at the moment would say,
Speaker 6: you know, any rational person will assume that these nice
Speaker 6: people will actually reach an agreement on this, and it
Speaker 6: may take till eleven fifty nine, right before the deadline,
Speaker 6: but ultimately they'll come to another group. And that is
Speaker 6: in fact what's happened in the past.
Speaker 5: But what if that doesn't.
Speaker 6: Happen, what if the political calculations now in Washington have changed,
Speaker 6: and don't we need to be thinking about what is
Speaker 6: the implication of that, what's the volatility that will.
Speaker 5: Lead into that?
Speaker 6: On behalf of our clients. And so I would say
Speaker 6: those are the kinds of kind of scenario based work
Speaker 6: that we're doing with clients, almost beyond the classic market cycles,
Speaker 6: which the market price is in pretty well.
Speaker 3: So, David, take us there factor those in. Let's start
Speaker 3: with whot factor that in? What would be the implications
Speaker 3: potentially for global financial markets?
Speaker 6: Well, I think that you have to start with the
Speaker 6: obvious things there, which is that you know, we'd have
Speaker 6: energy prices that would probably really begin to rise up.
Speaker 6: You know, you would absolutely have a much bigger shift
Speaker 6: than we've had now on you know, who is actually
Speaker 6: going to align with NATO and who won't. So you know,
Speaker 6: for the most part, NATO has been I think, done
Speaker 6: a good job of staying very aligned. But they haven't
Speaker 6: brought in a lot of the global South. They haven't
Speaker 6: burned along India there's a whole variety of people that
Speaker 6: you know, China has played this very you know, cleverly
Speaker 6: in some ways. And you know, to what extent if
Speaker 6: Putin really escalates things will that no longer become acceptable
Speaker 6: and we will actually have more of a bipolar world
Speaker 6: than we do today. And that would fragment trade, it
Speaker 6: would fragment technology. So all of those implications are the
Speaker 6: kinds of things that we're beginning to kind of game
Speaker 6: theory our way through today.
Speaker 3: Interesting, So go all right, so game theory is through
Speaker 3: the debt seal, so in the worst case scenario.
Speaker 6: So that's particularly fascinating one because as long as the
Speaker 6: as the market based thinks that the politicians will solve this,
Speaker 6: the politicians don't actually have any real incentive to solve it,
Speaker 6: so there's no pressure on them. The only way pressure
Speaker 6: begins to build on them is to the extent that
Speaker 6: we start to see some volatility and we start to
Speaker 6: see the market saying, wow, now maybe this doesn't get solved.
Speaker 6: And so I do think you will see and you
Speaker 6: saw Yllen's comments to today about a June you know, kind.
Speaker 3: Of getting out of cash.
Speaker 6: So we are going to see in May the beginnings
Speaker 6: of that discussion of volatilty, you'll see it covered a
Speaker 6: lot more fundamentally, and you're going to have to see
Speaker 6: some of the game theory elements of Well, if we
Speaker 6: don't reach an agreement, what are the range of things
Speaker 6: that the government will have to start scaling back line
Speaker 6: and what will their priorities in orders be.
Speaker 3: So, if you're doing game or game theory right now,
Speaker 3: when do you know just to pull the trigger and
Speaker 3: putting those theories into.
Speaker 6: You don't And I think that's one of the really.
Speaker 3: You start to do it now, Well.
Speaker 6: You don't know which of them is going to happen,
Speaker 6: which is why you need to build in some real
Speaker 6: flexibility into your strategies and into and into your portfolios,
Speaker 6: because I don't think anybody here can predict how this
Speaker 6: is going to come out.
Speaker 3: I didn't really hear you talk about the FED. So
Speaker 3: where how does that factor in or do you feel
Speaker 3: like that's all factored into the markets already?
Speaker 6: Well, our internal view is that the market is not
Speaker 6: pricing the FED incorrectly. Our view is that markets are
Speaker 6: too optimistic at the moment that the US economy is
Speaker 6: stronger than the markets realize. That's going to cause the
Speaker 6: FED to need to keep rates higher for longer than
Speaker 6: the markets realized. I mean, remember the markets think, you know,
Speaker 6: we're going to have actually break cuts this year. We
Speaker 6: think that's quite unlinkedly, so our view would be that
Speaker 6: markets are too optimistic for that.
Speaker 5: But as I said before, those are.
Speaker 6: Things that the market will reprice as it gets better
Speaker 6: and more information, as opposed to some of these other risks,
Speaker 6: which actually the market really struggles with pricing well at all.
Speaker 3: David, you've seen a lot of market cycles. I'm not
Speaker 3: aging you.
Speaker 7: You've just seen nice I've seen a lot of market
Speaker 7: cycles too, But I do wonder, you know, in the
Speaker 7: last year, who would have predicted, right, the war in Ukraine,
Speaker 7: the crypto collapse, what we're you know, bank runs?
Speaker 3: Who would have thunk if you will? And you just
Speaker 3: laid out two significant things that could certainly change things dramatically.
Speaker 3: Is there something I don't know? You know, it does
Speaker 3: make your doing game theory, but it's challenging for investors.
Speaker 3: So how do they protect themselves or what do you Yeah.
Speaker 6: No, it's it's very challenging and obviously the great protection
Speaker 6: in a world where a well, where.
Speaker 3: Do you find that protection when we even started to
Speaker 3: question treasuries.
Speaker 6: So the place that you find it is in diversification.
Speaker 6: And so you know, we've really been great believers that
Speaker 6: the most diversified institutional portfolios are the ones that are
Speaker 6: best positioned for resiliency in these kinds of things.
Speaker 3: So what is diversification means?
Speaker 6: So if you went back twenty five years, most institutional
Speaker 6: investors would be in public stocks and box and then
Speaker 6: along came this rather strange thing called private equity, which
Speaker 6: people were a little worried about in the beginning and
Speaker 6: then ultimately sort of became an asset class. And now
Speaker 6: we're actually seeing private alternatives more broadly really coming into
Speaker 6: their own. So private alternatives, which are in addition to
Speaker 6: private equity but includes real estate and private credit, I
Speaker 6: think importantly have been for us and for many others,
Speaker 6: you know, really our fastest growing businesses. So we manage
Speaker 6: about three hundred billion in private alternatives. And our view
Speaker 6: is as the banking system continues to be very capital constrained,
Speaker 6: and I think they're going to get some new regulations
Speaker 6: on top of what they've already got that's even going
Speaker 6: to constrain their credit to supply more. That is going
Speaker 6: to mean more and more companies are going to look
Speaker 6: to non bank lenders such as US to meet their needs,
Speaker 6: and so that is going to be a business which
Speaker 6: will also help diversify institutional portfolios away from the treasury
Speaker 6: problems and other things that we started our conversational.
Speaker 3: Well, it's interesting, you know, in terms of your institutional
Speaker 3: and global pension funds that you guys are that are
Speaker 3: investing with you, what kind of managing are you having
Speaker 3: to do of performance or not because you're not feeling
Speaker 3: any kind of performance hits in this environment by firms
Speaker 3: you mean defaults or not even defaults, but just expectations
Speaker 3: in terms of returns.
Speaker 6: So return expectations, you know, I would say for private
Speaker 6: ac what do you have come down a little bit? Yeah,
Speaker 6: in private credit actually because much of that, particularly direct lending,
Speaker 6: is floating rate, the returns are actually going up and
Speaker 6: have been actually quite robust. And I think that's one
Speaker 6: of the reasons that many institutional investors have been looking
Speaker 6: to add that to their portfolio because that's actually returning
Speaker 6: better than it did and there are in some ways
Speaker 6: using that as opposed to real estate that which they liked.
Speaker 6: The income from but now worries a little bit riskier
Speaker 6: and they're liking the direct lending piece better.
Speaker 3: Have you seen an uptick in terms of your private
Speaker 3: credit demand because of what's happened in the bank and
Speaker 3: the collapses.
Speaker 6: We have, And that's obviously a long term trend. I mean,
Speaker 6: ever since the GFC, the banks have been lending at
Speaker 6: a much less rate because of all the new regulation
Speaker 6: that came on. But in the last four or five months,
Speaker 6: as people have had questions about banks and people began
Speaker 6: to think that rates we're going to go up, we've
Speaker 6: seen very robust demand from middle market companies for borrowing fu.
Speaker 3: And that's where it's middle market companies in particular. Thing
Speaker 3: you really see you expect that to continue?
Speaker 1: I do.
Speaker 6: I do, and I think that'll be true, particularly as
Speaker 6: these regional lenders find that they aren't really able to
Speaker 6: continue to expand their lending.
Speaker 3: Yeah, it's interesting. When we were talking about global real estate,
Speaker 3: the real concerns were about the middle market because they're
Speaker 3: just not a both the banks aren't there for them, right,
Speaker 3: So interesting you feel comfortable mid market real estate lending, to.
Speaker 6: Our our view is first of all, everybody talks about
Speaker 6: real estate. But actually what they mean is office. Yeah,
Speaker 6: but remember real estate has got a lot of food
Speaker 6: groups in it. Yeah, and some of them are doing
Speaker 6: just great. So broadly, are we comfortable with our real
Speaker 6: estate portfolio. It's position for a recession and we're very
Speaker 6: comfortable with cover a.
Speaker 3: Lot of ground. David Hunt, thank you so much. David Haunt,
Speaker 3: President CEO of p Jim joining us here at Bloomberg.
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Speaker 3: A lot going on. It was so funny. We woke
Speaker 3: up this morning. We're like a good thing. It's a
Speaker 3: quiet Monday. So much to talk about with our guests,
Speaker 3: So thank you for the market setup. I do want
Speaker 3: to get to our guest because eighteen months ago our
Speaker 3: next guest told our Bloomberg team that it was the
Speaker 3: golden age of private credit. Dun Dun Dun with us
Speaker 3: as Mark at Nasio. He's a maaging partner at the
Speaker 3: Global alternative credit investment from Crescent Capital Managing Partners. They
Speaker 3: had some forty billion in assets under management as the
Speaker 3: end of twenty twenty two. Mark also chairman and owner
Speaker 3: of the Milwaukee Brewers baseball club.
Speaker 4: Hello, very nice to see you again.
Speaker 3: It's great to see you again. You know, I had
Speaker 3: a question and we were talking over here. What's easier
Speaker 3: owning an MLB team, investing in today's environment or growing
Speaker 3: up in New Jersey and telling people that you're from
Speaker 3: New Jersey. I can say that because I'm from New Jersey. No,
Speaker 3: I'm just playing with you.
Speaker 4: It's always nice to connect with the fellow jersey its.
Speaker 3: I love New Jersey. Tell us about today's environment versus
Speaker 3: a year ago.
Speaker 8: So I actually bothered to go back and listen to
Speaker 8: my broadcast and both on television and radio.
Speaker 4: You have to see how badly I screwed up.
Speaker 3: You did not not even.
Speaker 8: I think the golden age of credit was almost eighteen
Speaker 8: months ago I talked about and last year I was
Speaker 8: worried about stagflation, and fortunately we didn't get that.
Speaker 4: And so the.
Speaker 8: Environment for which we will discuss, the environment for private
Speaker 8: credit is still is still quite good.
Speaker 3: Actually for all levels for all types, because it's interesting.
Speaker 3: I just give up a real estate panel and they're saying,
Speaker 3: you know, for valued properties, trophy properties, Class A properties,
Speaker 3: you know, you're still seeing interest when you go down
Speaker 3: the scale. It's not so much private credit, no distinctions
Speaker 3: or yeah.
Speaker 8: So real estate credit, in including real estate private credit
Speaker 8: is a whole different animal than corporate credit, which is
Speaker 8: what we focus on, right, And there's a number of
Speaker 8: structural challenges in real estate. There's a maturity wall in
Speaker 8: CMBs that's coming up very fast, right with funds that'll
Speaker 8: be you know, needing to have liquidating and need to
Speaker 8: have buyers, which we don't have. Clos for the most part,
Speaker 8: have extended maturities now.
Speaker 4: And you know, I think all so and it's easy
Speaker 4: for me to say, and they'll say the same about us.
Speaker 4: But not sure.
Speaker 8: And I participated in a lot of conferences like this, yeah,
Speaker 8: and managed to oversee a couple of endowments.
Speaker 4: On charitable side.
Speaker 8: I'm not sure the real estate marks are in the
Speaker 8: right place just yet, not yet, so that needs to
Speaker 8: sort of work its way through and and so it's
Speaker 8: challenging to find, you know, the right part in the
Speaker 8: capstack to invest in real estate now, whereas you could
Speaker 8: argue the same thing with corporate credit, and it's easier
Speaker 8: to go senior because right now senior loans you yield
Speaker 8: over ten percent, which isn't you know, it isn't bad
Speaker 8: right right with with the new you know for you know,
Speaker 8: sofa you know, close to five percent now.
Speaker 3: Well, so it's interesting, So does that does this environment continue?
Speaker 3: I'm like, I'm just curious. I think we're at this
Speaker 3: juncture mark where we're trying to figure out, you know, recession,
Speaker 3: no recession. We'll see what that we get from the
Speaker 3: Fed this week. I mean, like, first of all, with
Speaker 3: the Fed, how closely do you watch in terms of
Speaker 3: what they're doing interest rates? We always does it matter
Speaker 3: to you?
Speaker 4: So moment to moment it doesn't.
Speaker 8: Now, once you've had you know, four and a half,
Speaker 8: you know, four hundred and fifty bases point, you know,
Speaker 8: increase in.
Speaker 4: The right in the last year, you have to start watching.
Speaker 8: And so but now everybody's on the edge of their
Speaker 8: seat about whether the Fed's gonna hike and pause or not.
Speaker 8: And you know, one of the things we talked about
Speaker 8: there was a private panel here yesterday for they called
Speaker 8: them Finance leaders.
Speaker 4: But so I crashed that.
Speaker 3: Party, no part of it.
Speaker 8: But you know, Mike Milken came in and the tone
Speaker 8: for the conferences and the theme is somewhat optimism, but
Speaker 8: he came in and talked.
Speaker 4: To us about how we need to have realism and
Speaker 4: so it really we all know.
Speaker 8: The first priority for the FED is to fight inflation,
Speaker 8: and they're going to have to beat inflation almost at
Speaker 8: any cost. So that if that's a when we're rate
Speaker 8: hike or even two in a pause, that's great.
Speaker 4: If it has to keep going, you know, that starts
Speaker 4: to get.
Speaker 8: Into creating real credit issues, not only in you know,
Speaker 8: corporate credit obviously, but also in.
Speaker 5: Obviously in real estate.
Speaker 3: Well how problematic could it be?
Speaker 8: Well, it's it's very problematic, depending on So I was
Speaker 8: at a gathering JP Morgan had that Jamie Diamond spoke
Speaker 8: at and he was optimistic too and very bullish on America,
Speaker 8: which we all you know, I think everyone here.
Speaker 4: Is, which is great, and we have a global audience here.
Speaker 3: Yeah, you can feel it.
Speaker 4: You can feel it right.
Speaker 8: And obviously the fact I think you know that the
Speaker 8: takeover today by JP Morgan on ufr C definitely its
Speaker 8: okay now we're over that hump.
Speaker 9: You know.
Speaker 4: However, he left us.
Speaker 8: With the thought everybody should go back to their offices
Speaker 8: and budget for you know what happens if short rates
Speaker 8: go to seven percent?
Speaker 4: Well that is that.
Speaker 8: Would put you know, right now, in our credit portfolios,
Speaker 8: for example, we have a handful of credits that are
Speaker 8: not you know, within are not covering the cash flow. Yeah,
Speaker 8: you'll hear a lot of managers like us say, like
Speaker 8: our portfolio is, for example, the average credit quality free
Speaker 8: cash flow is one point six times plenty of cushion.
Speaker 8: But the question is how many credits are when times
Speaker 8: or below?
Speaker 4: Right now?
Speaker 8: We have just a handful and those are the ones
Speaker 8: we focus on. If you get another two hundred basis
Speaker 8: points built into the system, it's gonna be a lot
Speaker 8: more than a handful of credits that have How much
Speaker 8: more I think it depends on, Uh, you know, we've
Speaker 8: always lent to six times cash flow, so I think,
Speaker 8: you know or under so I think we'll be okay.
Speaker 8: But the broader market is already stretched out to seven
Speaker 8: recent transactions. You've seen seven times and maybe a pick
Speaker 8: component which pick toggle, which you'll.
Speaker 3: Pick toggle, go back to It all comes around.
Speaker 8: It's like the USC you know, student body left, student
Speaker 8: body right off tackle play.
Speaker 3: How likely is it we get another two hundred basis points?
Speaker 3: Does that even make sense? I mean, the FED certainly
Speaker 3: seems like they're on this mission, but you you have
Speaker 3: to ask what cost.
Speaker 4: Here's where you get worried.
Speaker 8: Right, everybody is lined up on the side of the
Speaker 8: trade that that's not going down. Everybody you talk to, everybody.
Speaker 8: The only in fact, the only person I've said you
Speaker 8: heard raise that was in this private session that Jamie
Speaker 8: Diamond had, And so you know, I okay, it creates
Speaker 8: all kinds of prompts for the deficity. There's the whole
Speaker 8: domino effect, well beyond what you know I do in
Speaker 8: my day job, right and sou But they've got to
Speaker 8: be they can't.
Speaker 4: They've got to be.
Speaker 3: Inflation, all right, they have to be inflation. It's interesting,
Speaker 3: all right. So so if they continue on the course
Speaker 3: which they seem to do, I mean, are you anticipating
Speaker 3: a recession? I mean, it's interesting this panel I just
Speaker 3: came off of, and you know, I said a year ago,
Speaker 3: what's surprised you about what happened over the past year?
Speaker 3: And one of the individuals David who is over at Hine.
Speaker 3: So global corporate real estate are global real estate of
Speaker 3: all kinds, and just said, I really thought we'd be
Speaker 3: through the recession at this point. So I'm just curious
Speaker 3: how you see it.
Speaker 8: That's real estate rest colored classes. So it keeps getting
Speaker 8: pushed out right, And look, we can manage through a recession.
Speaker 4: That's not an issue.
Speaker 8: And I think there are a lot of other things
Speaker 8: now that are much greater fears that seem to be surmounted.
Speaker 8: Every banking executive here we had a dinner last night
Speaker 8: that Jane.
Speaker 4: Fraser spoke at.
Speaker 8: Yeah, you know, the US banking system globally is considered
Speaker 8: the strongest in the world. She pointed out this forty
Speaker 8: seven hundred banks in our country and there's three that
Speaker 8: have had issues, and so we don't have you know,
Speaker 8: the financial system is strong. And so the question is
Speaker 8: whether either rates get so high that they and we
Speaker 8: still have growth, right and pretty much everywhere labor costs
Speaker 8: are high in certain sectors by chain is actually sort
Speaker 8: of figured out. So if it just ends up being
Speaker 8: a slow down, that that would be okay. And that's
Speaker 8: surmountable for I think for everything, for not only for
Speaker 8: corporate credit, but for real estate as well.
Speaker 3: So when you look at investments, most attractive is it
Speaker 3: high yield? Is it bank loans, direct lending?
Speaker 8: So we you know, we're the high yel market is
Speaker 8: finally high yield. Interestingly, you know, the generic high yeal
Speaker 8: bond market is yielding only quote only eight percent.
Speaker 4: We're delighted with that. Yeah, anything we have floating rates.
Speaker 8: Ten percent plus. So for investors, you know, we now
Speaker 8: have concerns about credit, so we can't call it the
Speaker 8: Golden age anymore. Yeah, but for our embedded portfolios, which
Speaker 8: are in really good shape, the investors are getting hundreds
Speaker 8: of basis points more in yield now than they did
Speaker 8: eighteen months ago.
Speaker 3: Investors are happying, not too shappy brewers. What can we
Speaker 3: expect this year? Is that easier?
Speaker 10: No?
Speaker 8: And I'll tell you that I got involved in English
Speaker 8: football in the last six months.
Speaker 4: And I was going to tell you, if you say, well,
Speaker 4: what's harder investing?
Speaker 8: I love that one, or or growing up in New Jersey,
Speaker 8: the answer would have been English football it's hard. And
Speaker 8: Todd Bowley may have a perspective and that I'm just
Speaker 8: clearly Chelsea, I'm sure. So look We're off to a
Speaker 8: good start. We're eighteen and ten. That beats ten and eighteen.
Speaker 4: Like with credit, you just worry about everything. We've had
Speaker 4: a number of injuries.
Speaker 8: Yeah, but the team looks you know that. You take
Speaker 8: a lot in sports from the feel of the clubhouse.
Speaker 4: Yeah, and our clubhouse feels great.
Speaker 3: Well. I have to say it was great to catch
Speaker 3: up with you again. Thank you for giving us all
Speaker 3: so much time. Mark Adanazio, be welcome. Good to see you.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 3: This is Carol Masser. So, as you know, we're at
Speaker 3: the Milky and it's a two global conference. It's an
Speaker 3: incredible gathering of so many different individuals and I'm delighted
Speaker 3: to have with us. Sheila bateels she's the vice Chairman
Speaker 3: to be Capital, former chairman of Goldman Sachs Asset Management.
Speaker 3: Because I feel like, first of all, great to have
Speaker 3: you here again and tell us to get here. I
Speaker 3: always feel like a great indicator of the economy is
Speaker 3: what's going on in the startup world. So tell us
Speaker 3: what you're seeing. Let's go macro.
Speaker 11: First of all, Well, look, I think the macro environment
Speaker 11: was already difficult for venture given what had gone on
Speaker 11: in tech, and then you layer on what's going on
Speaker 11: in banking, and it's a bit of a perfect storm
Speaker 11: when you think about what founders have to go through
Speaker 11: in normal times to start a company, much less today.
Speaker 3: So has it stopped.
Speaker 11: It hasn't stopped. Okay, it hasn't stopped. I think the
Speaker 11: good news is when you hear about dry powder, that's
Speaker 11: not a fake thing, that's real.
Speaker 3: Yeah.
Speaker 11: You know, we were fortunate enough to be capital to
Speaker 11: raise a large fund last year. We still have plenty
Speaker 11: of that to deploy with our existing companies and to
Speaker 11: look for new opportunities. I think that one of the
Speaker 11: things you see experienced investors say to us right now,
Speaker 11: people that have been LPs over many vintages, is they
Speaker 11: remember what happened after the global financial crisis. They remember
Speaker 11: what happened in the dot com bubble. The next four
Speaker 11: to five years after those were some of the best vintages,
Speaker 11: and once again we're in one of those periods, and
Speaker 11: we have a new series of technologies, one of them
Speaker 11: being generated of AI that could be so impactful to
Speaker 11: the good I want to talk about that Tilla, but
Speaker 11: I want to ask you. I am curious that Silicon
Speaker 11: Valley Bank, the collapse of that bank, which was so
Speaker 11: crucial to the startup community and out there in San Francisco,
Speaker 11: Silicon Valley. What impact did you see as a result
Speaker 11: of that specifically? Well, I think you know, one good
Speaker 11: thing saw was the community came together quite strongly, right
Speaker 11: behind their companies together to try to work things out,
Speaker 11: to try to make sure people were making peril and
Speaker 11: all the mundane things that you need to keep an
Speaker 11: ecosystem going when it's taken a big hit. I also
Speaker 11: think you saw recognition, and maybe maybe the UK was
Speaker 11: a little faster to this in the US that the
Speaker 11: innovation economy has a huge number of jobs associated with it.
Speaker 11: So letting it flounder because of an issue like this
Speaker 11: is not about letting some tech bros suffer in particular
Speaker 11: zip code in California. It's about real companies that have
Speaker 11: been founded anywhere from Ohio to Jakarta, having a funding plan,
Speaker 11: having a business plan, having hired people, and not being
Speaker 11: able to fulfill their promises to their clients and their employees.
Speaker 3: Did you have any direct impact from the collapse any
Speaker 3: of your companies, your portfolio companies.
Speaker 11: You know, we've been very lucky. We had We did
Speaker 11: not have anything particularly notable for ourselves or our portfolio companies.
Speaker 11: We've always encouraged and maybe it's because Howard Morgan has
Speaker 11: chair with his storied history and venture, and me with
Speaker 11: my golden background and that associated risk obsession, always felt
Speaker 11: that diversification was important and cash management was important, and
Speaker 11: so had given that advice, had taken that advice, and
Speaker 11: you know we're able to manage through it quite quite effectively.
Speaker 3: All right, So talk to me about opportunities that you
Speaker 3: guys are seeing of interest right now? What's coming your way?
Speaker 3: You mentioned AI, right, we're all just talking a generative
Speaker 3: AI and it's interesting it's coming up. I'm sure a
Speaker 3: lot here in terms of panels, and we're all trying
Speaker 3: to figure out how many opportunities are coming your way?
Speaker 3: Is it a lot of them in terms of deals
Speaker 3: that you're looking at?
Speaker 11: Look, I think there's a number of things coming, but
Speaker 11: I think there's a number of companies we already invested in. Yeah,
Speaker 11: that people and appreciate that this is AI. You know,
Speaker 11: it's like, what is that?
Speaker 5: What is that?
Speaker 3: No, you have it already.
Speaker 11: It's why Google knows what you're gonna ask it before
Speaker 11: you've asked.
Speaker 3: Right, you're tight, it's right when it fills in a letter.
Speaker 11: It's why they know your dress size when you're you know,
Speaker 11: bought something a certain number of times. It's it's embedded
Speaker 11: slowly but surely in so many places. And so what
Speaker 11: we've what we've seen that we're excited about is there
Speaker 11: are so many mundane ways AI can make businesses do better,
Speaker 11: can achieve cost reductions, which in this environment is probably
Speaker 11: one of the primary things people are looking for in
Speaker 11: a way for your business to thrive. At the same time,
Speaker 11: everybody's worried about a recession. If you have a business
Speaker 11: that shows up that can save money, right, you're welcome
Speaker 11: with open arms, come in. Help us, help us save money,
Speaker 11: or help us find places that are new revenue sources.
Speaker 3: So, when you think of AI or what you're seeing
Speaker 3: in terms of, you know, possible companies to invest in
Speaker 3: or you are investing. It is a lot more it's
Speaker 3: not kind of out there, right, it's much more simplistic.
Speaker 3: As you say, maybe it makes you more productive. This
Speaker 3: is what we're talking about.
Speaker 11: A great example is a company we invested in a
Speaker 11: while ago, not recently, but that does document analysis and
Speaker 11: management basically information management for the contracts that a company
Speaker 11: might have. And you think about a huge multinational if
Speaker 11: thousands and thousands of contracts, right, who knows what's in them,
Speaker 11: who's managing them? Like supply chain, who's checking them?
Speaker 12: Right?
Speaker 11: And that became important during COVID because of disruption clauses.
Speaker 11: What's important now? Well, we've done some projects with that company,
Speaker 11: and our good friends at BCG with whom we have
Speaker 11: a special relationship, work with them as well, and we realized,
Speaker 11: you know, for one of the special projects they did,
Speaker 11: a company they were pitching had CPI clauses embedded all
Speaker 11: over the place in their deals that they hadn't executed on.
Speaker 11: So they were owed higher fees for their services and
Speaker 11: they had never claimed those fees. They had never asked
Speaker 11: their clients to act on the CPI clauses that had
Speaker 11: been embedded because they forgot what's in the thousand pictures doctor.
Speaker 3: You think about something like filtering through right.
Speaker 11: AI can find things like that in a systematic way,
Speaker 11: as opposed to you're just relying on who's the person
Speaker 11: that's most on top of their clients to figure that out.
Speaker 3: So in this environment, are is there a valuation reset
Speaker 3: that you're seeing in terms of some of the deals
Speaker 3: and when it comes to funding.
Speaker 11: Yeah, Look, I think roody bandies are about different percentages.
Speaker 11: Probably the most common I think that people are seeing
Speaker 11: across his face is down forty fifty percent.
Speaker 3: Right.
Speaker 11: In terms of valuation significant, it's significant, I think it
Speaker 11: very much depends on the stage. I think you've seen
Speaker 11: a lot more weakness in late stage.
Speaker 3: Within the first.
Speaker 11: Quarter, only about eight percent of funding going to late stage.
Speaker 11: Sixty seven percent went to early stage, and funding there
Speaker 11: and valuations there are much less challenged. I also think
Speaker 11: that a lot of people were reliant and hoping that
Speaker 11: M and A would come back quickly, and I think
Speaker 11: it's much slower go because even corporate M and A,
Speaker 11: even companies that were looking to maybe acquire as their
Speaker 11: source of innovation, because it's still hard for companies to
Speaker 11: innovate from within. They can afford to wait a bit,
Speaker 11: and they can afford to push on valuations or push
Speaker 11: some unique terms.
Speaker 3: Is it still like, you know, the goal is it IPO?
Speaker 3: I mean, we've talked about for years. I feel like
Speaker 3: that there was so much funding out there and enabled
Speaker 3: startup companies to stick around for a little bit longer,
Speaker 3: which and some would argue was a good thing that
Speaker 3: they could really kind of develop themselves. But I'm just curious,
Speaker 3: what are your expectations in terms of IPO markets and
Speaker 3: what we might see.
Speaker 11: Look, I think inevitably they'll come back, they always do,
Speaker 11: but I do think it does serve as a wake
Speaker 11: up call as to is that the best route for
Speaker 11: every company? And so when you think about growth and
Speaker 11: you think about most founders ambitions for their companies, I
Speaker 11: think IPO is the easy one that seems like, oh,
Speaker 11: I'm gonna build this and I'm gonna turn it into
Speaker 11: its standalone success. But for some companies it might make
Speaker 11: sense to stay private a lot longer and figure out
Speaker 11: your funding from that perspective. For some, you know, corporate
Speaker 11: M and A was something that was rejected two or
Speaker 11: three years ago that today they look at and say,
Speaker 11: maybe that makes sense. Maybe I'd have an installed client
Speaker 11: base of the ten thousand best customers around the world
Speaker 11: I need right away if I would just allow myself
Speaker 11: to become part of a bigger enterprise right and I
Speaker 11: think more people have opened their eyes to those different
Speaker 11: types of exit opportunities or future steps for their companies.
Speaker 3: One thing I want to ask you guys are playing
Speaker 3: an enterprise, fintech, healthcare, bioit We talked there's a category
Speaker 3: opportunistic sort of my infrastructure, tech for commerce and emerging
Speaker 3: markets and more. What's the most active area right now
Speaker 3: when it comes to investing for you guys, Well, it's interesting.
Speaker 11: I'd say it's much more about what are the most driven,
Speaker 11: interesting founders. I wouldn't say a sector stands out the most.
Speaker 11: I do think, you know, enterprise and healthcare still have
Speaker 11: a fair bit of resilience, and that's been great to see.
Speaker 11: I mean, healthcare needs so much done and there's so
Speaker 11: much value there. I feel like there's a lot of
Speaker 11: activity right now, a lot of activity. Now you have
Speaker 11: to make sure it's at the right valuation. Enterprise and
Speaker 11: software as a service has been more resilient than we expected,
Speaker 11: and that's uh. I think that's a positive as well.
Speaker 11: And then you know one area that we've been spending
Speaker 11: quite a bit more time on that we already have
Speaker 11: embedded in some portfolios and we'll probably dedicate ourselves to
Speaker 11: in a standalone way sometime in the future.
Speaker 3: Is climate tech? Climate tech huge interesting?
Speaker 11: An AI plus climate We see what we learned there
Speaker 11: twenty seconds.
Speaker 3: Climate tech because of the money we're seeing from governments,
Speaker 3: or what's what's changed? Because I feel like.
Speaker 11: A carrot and a stick. Do you have the governments
Speaker 11: that are demanding new rules, new regulations, companies that have
Speaker 11: to comply standards that are starting you unify from a
Speaker 11: global perspective, and then you have the flip side, which
Speaker 11: is the stick. The stick is the risk.
Speaker 13: Ye.
Speaker 11: The stick is what you'll face by not doing something
Speaker 11: and finding that you've built a plant in a place
Speaker 11: that's subject to floods, or you've you know, in short,
Speaker 11: a risk that's truly uninsurable.
Speaker 3: So glad we ended on that note. I went there
Speaker 3: free to check in with you and thank you so much,
Speaker 3: Thanks so much, have a great look and conference. Thanks
Speaker 3: for going on. Chilipatel, vice chairman at Being Capital.
Speaker 1: Here at Milkin, you're listening to the Bloomberg Business Week Podcast.
Speaker 1: That's us live weekdays from two to five pm Easter.
Speaker 2: On Bloomberg Radio, the Bloomberg Business App, and you too.
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Speaker 3: Just indeed, everybody, we are finishing up one more day
Speaker 3: and some more wonder full interviews Carol Mass here at
Speaker 3: the Milkin Institute Global Conference, and of course, as you
Speaker 3: know on YouTube and on our Bloomberg original streaming service.
Speaker 3: I have to say in a special edition of the
Speaker 3: BW Daily, some reporting by our team Cat Doherty and
Speaker 3: Alison McNeely, they noted the glum mood among the financial
Speaker 3: elite at the Milkin Institute conference here hasn't been limited
Speaker 3: to bankers. They talked about the lousy environment for private
Speaker 3: equity fundraising, but as our next guest will tell you,
Speaker 3: they were actually putting the finishing touches on a capital
Speaker 3: raise while at Milkin, So we're going to get into
Speaker 3: it with us on site here at Milkin is one
Speaker 3: of the co founders of the private equity firm Red
Speaker 3: Arts Capital, Nick Antwine, and he joins us bocome.
Speaker 10: Welcome, great to be here, Thanks for having me.
Speaker 3: It's great to have you here. I want to get
Speaker 3: to the capital raise in just a moment. But the
Speaker 3: stresses that we are seeing in the banking community, the
Speaker 3: regional banks, what impact are you feeling at all when
Speaker 3: it comes to I don't know your world in general,
Speaker 3: or people may be coming to you where they can't
Speaker 3: get funding elsewhere.
Speaker 12: Sure.
Speaker 13: Well, I think it's stratified between size of business. So
Speaker 13: our firm focuses on middle market companies, so some of
Speaker 13: those businesses might be more impacted than others. Fortunately, our
Speaker 13: portfolio has not been impacted today.
Speaker 3: You haven't seen any impact. Okay, So tell me about
Speaker 3: this fundraise. You guys just wrapped up what fundraising from
Speaker 3: about two hundred and seventy million for a debut of
Speaker 3: your private equity fund. Tell me about it.
Speaker 14: Yes, and it was oversubscribed right, Yes, our target.
Speaker 13: Was two twenty five So yeah, we're sector focused on
Speaker 13: investing the supply chain and logistics, and we believe deeply
Speaker 13: in sector expertise.
Speaker 10: So I think that was part of.
Speaker 13: The pitch, was this is a right time to be
Speaker 13: investing in supply chain given all the challenges we saw during.
Speaker 3: COVID because of the unshoring that's going on somewhat of
Speaker 3: the as I have some of the conversations I've hit
Speaker 3: here at Milkin, it's not that globalization is it's just
Speaker 3: moving around. Maybe it's gonna be different markets, but there
Speaker 3: is more onshoring going on.
Speaker 10: This is absolutely true.
Speaker 13: I think you're seeing it across the board, big Fortune,
Speaker 13: five hundreds and smaller businesses. I think people have learned
Speaker 13: and even though supply chain challenges have diminished somewhat here
Speaker 13: in this country, people have learned that there needs to
Speaker 13: be additions to the supply chain strategy, so there isn't
Speaker 13: one point of failure in the future.
Speaker 3: What kind of companies in particular, I know trucking is
Speaker 3: among some of the companies that you guys have been
Speaker 3: involved in. What particularly is coming before you?
Speaker 10: Yeah, so we're spending a lot of time looking at warehousing.
Speaker 13: I think that's a trend regardless what's going on in
Speaker 13: terms of onshoing or near shoring.
Speaker 14: Is the ACTI actual buildings or that's correct.
Speaker 13: Yeah, the businesses that operate within warehousing facilities. We are
Speaker 13: particularly focused on investing right now in transloading or rail
Speaker 13: related services around warehousing, so moving big, heavy, bulky loads.
Speaker 13: And we're also focused on contract packaging. We have a
Speaker 13: business called Corgistics that is invested in They're a large
Speaker 13: contract packager focused on consumer brands as well as.
Speaker 10: Industrial brands, and we're spending a lot of time in
Speaker 10: aerospace and defense as well.
Speaker 3: What'speci Vickar there? I was curious about that.
Speaker 13: Yeah, so we like manufacturers of parts and components that
Speaker 13: go into engines, maintenance repair of those engines. Obviously, commercial
Speaker 13: airlines were heavily impacted by COVID, but there's a major
Speaker 13: ramp up and an unfortunately because a lot of the
Speaker 13: uncertainty globally, there's also a high.
Speaker 10: Demand for defense related aerospace services.
Speaker 3: So it's actually the supply chains of the things that
Speaker 3: are moving things.
Speaker 14: Around, that's correct.
Speaker 3: Like you can break it down so many different ways.
Speaker 3: What are the valuations on things? I mean, are have
Speaker 3: they come down a bit in terms of when you're
Speaker 3: you know.
Speaker 10: Well, I think that goes back to the size of businesses.
Speaker 10: As we discussed before.
Speaker 13: I also think that there is a bit of a
Speaker 13: gap or a delta between what the sellers are expecting
Speaker 13: and what buyers are willing to pay for businesses, and
Speaker 13: some of that has to do with, you know, leverage
Speaker 13: capacity and what lenders are willing.
Speaker 3: To do in favor of the buyers. Are the sellers.
Speaker 10: I think it's been well.
Speaker 13: I think it's sellers expectations might be a little bit
Speaker 13: higher than what what buyers are willing to pay, and
Speaker 13: you see that probably more likely in the higher higher
Speaker 13: ends of the market than the lower ends of the market. Right,
Speaker 13: But in our space, I think there's plenty of opportunities still,
Speaker 13: particularly because we're so focused.
Speaker 3: Nick, I'm wondering. I mean, I love that you play
Speaker 3: in the middle market space. I mean, I feel like
Speaker 3: we often talk about the big, you know, publicly traded companies,
Speaker 3: but there's so many companies in the middle market space,
Speaker 3: and it's one of the areas I think that we're
Speaker 3: concerned about not being able to get the financing they
Speaker 3: need or the funding that they need. Based on the
Speaker 3: activity that you're seeing in the companies that you're seeing,
Speaker 3: what does it tell you about the economic outlook?
Speaker 10: Yeah, I think it's mixed.
Speaker 9: Right.
Speaker 13: In some parts of the economy, things are very strong.
Speaker 13: As we touched on in aerospace and defense, the industries
Speaker 13: are booming and others, for instance and trucking where we
Speaker 13: do not have any investments. Currently, freight rates have been
Speaker 13: significantly impacted. Now that's again off of kind of an
Speaker 13: all time high during COVID, But I think there are
Speaker 13: some woves and that does create opportunities for investment, particularly
Speaker 13: if companies or families are looking to exit or have
Speaker 13: liquidity challenges.
Speaker 3: Because a lot of times there are family owned businesses
Speaker 3: right in that space. Having said that, what are the
Speaker 3: exits for you guys? What's your time frame of holding?
Speaker 3: Is it typical private equity or is it maybe a
Speaker 3: sell to a company or something much more quickly.
Speaker 13: Yeah, so we are a typical private equity firm. I
Speaker 13: think what perhaps might be a little bit different. I
Speaker 13: think this is a trend that we're seeing in private
Speaker 13: Equeen in general, is it's so hard to find the right.
Speaker 10: Business, the right culture, the right people.
Speaker 13: So when you find that the idea of having to
Speaker 13: flip things right away, it can be challenging. So I
Speaker 13: think what part of our thematic related investment work is
Speaker 13: to find businesses where we understand what the strategy is
Speaker 13: to grow a business before we get involved, and so
Speaker 13: what we tell sellers and families is that if the
Speaker 13: strategy is to grow over a longer period of time,
Speaker 13: we can help provide the solutions to do that. If
Speaker 13: it's really just they're looking for the liquidity and they're
Speaker 13: looking for stewardship for the business for the future, that's
Speaker 13: a different strategy as well.
Speaker 3: Listen, we only have unfortunately thirty forty seconds you're black
Speaker 3: owned private equity firm. It's a rarity. Yes, I know
Speaker 3: it is unfortunate. And these are some things I'm going
Speaker 3: to talk about with Hope Bryant in a little bit.
Speaker 3: But I am curious, does it also maybe help you
Speaker 3: in the middle market space to some extent are not
Speaker 3: necessarily is it? Does it help you or is it?
Speaker 14: Sometimes I think.
Speaker 13: Diversity is good for business, not just the right thing
Speaker 13: to do, it's good for business. Diversity of thought is
Speaker 13: incredibly powerful competitive advantage. We don't market to our firms
Speaker 13: that we're black owned. We market that we're experts in
Speaker 13: our space. But it's something we consider. And then for instance,
Speaker 13: today are our firm is about fifty percent women.
Speaker 3: I love that.
Speaker 10: I saw that it is also rarety improvident.
Speaker 3: So diversity with internally as well.
Speaker 14: Yeah, you got to you got to walk the walk
Speaker 14: right and it.
Speaker 3: Brings you also diverse thinking, diverse ideas right in terms
Speaker 3: of investments.
Speaker 5: That's correct.
Speaker 3: Thank you so much. I hope we can stay in touch,
Speaker 3: love to hear more as you guys are making investments
Speaker 3: and where you're going. Logistics is always a fun space
Speaker 3: in terms of what it tells us. Nick Antoine of
Speaker 3: Red Arts Capital. Right here at Milkan, folks, you are
Speaker 3: listening and watching Bloomberg Business Week. This is Bloomberg.
Speaker 1: You're listening to the Bloomberg Business Week podcast live week
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Speaker 3: One of the more talked about topics at Milking this
Speaker 3: year is, yes, we've been talking about the regional banks,
Speaker 3: but we have talked a lot, maybe even more so
Speaker 3: about what's going on in commercial real estate, real estate
Speaker 3: in general. Yesterday I had an all star lineup on
Speaker 3: real estate, including this gentleman next to me. Sean Dobson
Speaker 3: is Chairman CEO and chief investment officer at Amherst. They've
Speaker 3: got seventeen point six billion in assets under management. I
Speaker 3: think that was at the end of last year. They're
Speaker 3: buying their renovating homes, they're investing in single family rentals,
Speaker 3: mortgage backed securities, and commercial real estate. So, man, this
Speaker 3: is the person to talk to real estate.
Speaker 5: Hold on. I've built you up and it's expectations better
Speaker 5: than that.
Speaker 3: Please go wherever you want.
Speaker 14: Good to see you again, Very good to see you.
Speaker 3: So I know we're going to rehash some of the
Speaker 3: stuff we talked about on our panel, but you know,
Speaker 3: coming out of the Great Financial Crisis took what was
Speaker 3: a difficult environment, but it was really opportunistic for you. Correct,
Speaker 3: it was the bold your company. Talk to us about
Speaker 3: that time and maybe is it you know how you
Speaker 3: think about some of the crises people are talking about now?
Speaker 5: Is it sure? That's always the question? Is this another
Speaker 5: two thousand and eight? So for us, it was interesting.
Speaker 15: The roots of our firm are actually in analyzing mortgages,
Speaker 15: which is pretty boring, so we can kind of put
Speaker 15: everyone to sleep talking.
Speaker 14: About the fixtrate mortgage with data is important.
Speaker 15: But data is very important, and we tackled this sort
Speaker 15: of over twenty five years where we'd stopped thinking about
Speaker 15: the mortgage market in general and started thinking.
Speaker 5: About each mortgage in each house.
Speaker 15: And so now with you know, with data and analytics
Speaker 15: and the scale of operation we can we can sort
Speaker 15: of weave to together the story of what's going on
Speaker 15: with the eighty to one hundred million real estate parcels
Speaker 15: in the world and then look at sort of the larger,
Speaker 15: bigger trends. And so with the financial crisis, for us,
Speaker 15: it was all about understanding the level of credit risk
Speaker 15: that was built up in the market that was really
Speaker 15: heavily dependent on home prices continuing to outperform, and so
Speaker 15: we positioned our clients into sort of really asymmetric return
Speaker 15: trades that benefited from how underperforming. Now, this is not
Speaker 15: two thousand and eight today, not at all, not at all.
Speaker 15: You've got a very different infrastructure. But one of the
Speaker 15: things that came out of two thousand and eight was
Speaker 15: very difficult for the average American family to get a mortgage.
Speaker 15: So we were sitting around the table in two thousand
Speaker 15: and nine kind of exhausted from anticipating it, and then
Speaker 15: you know, the mess that it occurred, and we thought
Speaker 15: about what is the next and this is what Amherst does.
Speaker 15: We don't do sort of running in and buy something
Speaker 15: and hope it appreciates. For like, what's the next thing
Speaker 15: that we can do to provide a lot of service
Speaker 15: to a lot of people for a trade that's very durable,
Speaker 15: And we thought about what's going to happen to all
Speaker 15: these homes. Families still need to live in the home.
Speaker 15: They need the type of amenities that a home presents,
Speaker 15: the local, the school district, and that type of thing,
Speaker 15: the things that multi family maybe doesn't do a great
Speaker 15: job providing. They need this type of real estate. But
Speaker 15: if they can't get a mortgage, how are they to
Speaker 15: how are they going to live in this in.
Speaker 5: This real estate?
Speaker 15: So around post financial crisis, as okay, let's figure it out,
Speaker 15: and so we built a national platform that does all
Speaker 15: of the basics that leverage off of all of our technology.
Speaker 5: We already were pricing the home and thinking about the.
Speaker 15: Home as a as an investment, and so, okay, how
Speaker 15: do we activate this investment when really it's a lot
Speaker 15: of grander decisions of an acquisition and underwrite repair. So
Speaker 15: we built a national general contracting. I never thought that
Speaker 15: Amherston ended up owning trucks with people running around fixing air.
Speaker 3: Condition Well that's what's interesting, right, I mean, because it's rental.
Speaker 5: It's rental.
Speaker 3: Right.
Speaker 15: Yeah, So in the US about two thirds of people
Speaker 15: own their home, which is pretty good for a global
Speaker 15: comparison of home ownership versus rentorship. But that means about
Speaker 15: a third of American families are living in a home
Speaker 15: that they're leasing. And I spent the first sort of
Speaker 15: two thirds of my career helping and participating in the
Speaker 15: mortgage market and.
Speaker 5: Helping people own.
Speaker 15: And I spent about the last third of my career,
Speaker 15: the most recent third, hopefully not the last third, but
Speaker 15: the most recent third of my career, focus on that
Speaker 15: rental segment that you know, there's so such a big market.
Speaker 5: You're talking about.
Speaker 15: Fifteen million families live in as separately detached home right
Speaker 15: that they're leasing from an owner operator. And of those
Speaker 15: there's only like half a dozen of us that are
Speaker 15: big owner operators. The rest of them are owned by
Speaker 15: individual investries.
Speaker 3: Does that continue in terms of the amount of people
Speaker 3: that are in rental? And you know, some of the
Speaker 3: things that can him up on the panel show, and
Speaker 3: I thought was really interesting. We talked about demographics. Right,
Speaker 3: older folks, they're not leaving their homes. They don't want
Speaker 3: to have that three percent mortgage or four percent or
Speaker 3: whatever to you know, let low mortgage. But there are
Speaker 3: some things going on. So does that stay? Does that
Speaker 3: continue where people don't buy a home?
Speaker 5: I think I does.
Speaker 15: I think it's here to stay. I think that there's
Speaker 15: a little lot consumer preference at stake here. Owning a
Speaker 15: home means sort of committing to stay in one location
Speaker 15: for a longer period of time. We see less that
Speaker 15: about a quarter of our residents move out every year. Wow,
Speaker 15: So some of this is it's not time to buy.
Speaker 5: Some of this it's.
Speaker 15: Very difficult to buy, and we have to provide them
Speaker 15: the type of services that they're accustomed to. Coming out
Speaker 15: of multi family. We have a lot more professional management.
Speaker 15: So I think there will be a lot more growth
Speaker 15: in the rental segment. One of the things that to
Speaker 15: point out, you just point out something super important that
Speaker 15: most people didn't haven't really fully adjusted for yet. I
Speaker 15: don't think so. My dad is eighty five years old.
Speaker 15: He's fantastic. He's still the smartest guy in the room.
Speaker 15: When my father was born in nineteen thirty seven, the
Speaker 15: life expectancy for a male in the US and the
Speaker 15: UK was sixty three years.
Speaker 5: So he's out form, which we love. But today go dad.
Speaker 15: So today a male born in the US or UK
Speaker 15: has a life expectancy of eighty three years, so that
Speaker 15: twenty year expansion life expectancy is a third and that
Speaker 15: changes everything. And one of the things that changed was
Speaker 15: how real estate gets recycled back into the market. So
Speaker 15: the US we have a decade of underinvesting in real estate,
Speaker 15: and then we have the use case extending extending, and
Speaker 15: then on the front side we have more people choosing
Speaker 15: to rent or requiring to rent.
Speaker 5: What happened to the GFC.
Speaker 15: So you can just kind of see there's a lot
Speaker 15: of tailwinds behind the asset class.
Speaker 3: This is what I find fascinating about housing, Like the
Speaker 3: supply demand. It's so basic, but it really it's.
Speaker 15: Not that complicated that you have to have the demand
Speaker 15: the supply where people want to demand. This is another issue. Yeah,
Speaker 15: Another big issue is the age of our housing stock.
Speaker 15: The average home United States built in nineteen seventy seven,
Speaker 15: it's got less than eight foot ceilings, and it's got
Speaker 15: one bathroom for every three bedroom.
Speaker 3: I grew up in a house in the nineteen fifties,
Speaker 3: don't even know.
Speaker 15: Well, that's not the product that people want today. And
Speaker 15: so we have this unbelievable business that takes that home
Speaker 15: and modernizes it and basically recycles it.
Speaker 3: Well, I guess what I'm also curious about is what
Speaker 3: happened to the oversupply of housing coming off the Great
Speaker 3: Financial Crisis where people were talking about blowing up houses,
Speaker 3: you know, increasing immigration so that immigrants could buy home, Like,
Speaker 3: what happened to that oversupply?
Speaker 5: We bought it.
Speaker 15: We did because it wasn't the supply demanding balance that
Speaker 15: they thought about them was geez, we lost a lot
Speaker 15: of our consumers that were.
Speaker 5: Going to buy.
Speaker 15: But we realized is that you didn't lose the fact
Speaker 15: that people want to live there. But someone has to institutionalize.
Speaker 5: The equity supply to that home.
Speaker 15: So how do you get scaled equity into these micro assets?
Speaker 15: And so that's the challenge that we took on. That's
Speaker 15: kind of thing we like to do.
Speaker 3: So what do you do with home? Like, so talk
Speaker 3: about the building side of it. So, all right, if
Speaker 3: we need more supply. I think one of the things
Speaker 3: that also came up on the panels that there's not
Speaker 3: workers there that you need to necessarily build these.
Speaker 15: Yeah, there are so many multiple variables that make housing
Speaker 15: so expensive to manufacture. About two thirds or maybe sixty
Speaker 15: percent of a home that's built on site cost is labor.
Speaker 15: We like to we point out to people that there
Speaker 15: are more barrels of oil in a home, and there
Speaker 15: are sticks and timber, So what do you mean just
Speaker 15: transportation cost of all the materials and the people and
Speaker 15: so you have to form up this construction site every
Speaker 15: day and then take it down when you're.
Speaker 5: Building homes on site.
Speaker 15: So we've really gone deep in trying to understand what
Speaker 15: can we do to bring down the cost of housing.
Speaker 5: One of the things we're doing or innovating is.
Speaker 15: A new type of factory where we it's the same
Speaker 15: home you would build on site, but it's built modually
Speaker 15: and then we so our labor pool is quite different.
Speaker 5: We have tradesmen that are you know, they're really able.
Speaker 15: To perfect what they do to build the home, and
Speaker 15: then we can sort of, if you will, export the
Speaker 15: labor cost of a small town into the real estate
Speaker 15: market of a big town, so it really unlocks it
Speaker 15: brings to American manufacturing jobs. It allows us to create
Speaker 15: really good, high paying jobs right towns of that maybe
Speaker 15: don't have as much opportunity.
Speaker 3: How much of that is going on, that's fascinating.
Speaker 5: It's been around for a long time, modulate right Modules's.
Speaker 15: Been a long time, but we think that we've uncovered
Speaker 15: a little bit of our of of what's happened to
Speaker 15: the market. But the housing the the industry is to
Speaker 15: build a home and sell it, or preferably sell a
Speaker 15: home and then and then build it right. So they
Speaker 15: don't have a long demand function for their manufacturing base.
Speaker 15: So imagine if BMW or General Motors waited for.
Speaker 5: You to order a car before they started the factory
Speaker 5: every day. That's how the US housing market works.
Speaker 15: There's no they don't have an elongated demand cycle, and
Speaker 15: there's a lot of price risk in the asset itself
Speaker 15: as we're seeing today. So what we think we can
Speaker 15: do by having an opportunity to either sell the home
Speaker 15: or provide the home as a rental and have capital
Speaker 15: for that asset available. For years in advance, we were
Speaker 15: striking capital relationships with global investors that last five seven
Speaker 15: ten years. So now we can create a really reliable
Speaker 15: long term capital base for the asset before it's built.
Speaker 3: Rental the business of being in renting homes versus building
Speaker 3: and selling. What's more profitable.
Speaker 15: It depends on where you are in the cycle. The
Speaker 15: big thing that we point out to people is that
Speaker 15: you need to have a monetization.
Speaker 5: Strategy that moves with interest rates.
Speaker 15: And if you're just building them to sell and like
Speaker 15: you're in, affordability is really a difficult thing right now,
Speaker 15: All of a sudden, the home builder it gets concerned
Speaker 15: about their takeout and they have to shrink their capacity.
Speaker 15: So I think that the winning strategy is going to
Speaker 15: be get manufacturing right and then let the capital markets
Speaker 15: provide you a longer term, more stable exit price for
Speaker 15: your product.
Speaker 3: All right, So affordability is tough right now, right, and
Speaker 3: lot of people can't afford a home. You've got higher
Speaker 3: mortgage rates which dampens buying. So give me an idea
Speaker 3: of what you're anticipating, like the dynamics that are sometimes conflicting,
Speaker 3: the strange that are out there, What does it mean
Speaker 3: for the residential housing market in the next six to
Speaker 3: twelve months.
Speaker 5: Yeah, terms of.
Speaker 3: Demand and pricing, and sure, and I know it's location location.
Speaker 15: We have our view, Yeah, exactly, it's location dependent for sure.
Speaker 15: But the thing I get you can think about is
Speaker 15: incomes grew a lot, and that really grew affordability. Now
Speaker 15: interest rates have risen a lot, and that takes away affordability.
Speaker 15: What we think about this is that the marginal home
Speaker 15: sale is what determines the price.
Speaker 5: So you have the stock of homes, then you have
Speaker 5: the flow of homes.
Speaker 15: Right, the flow is down fifty percent because about seventy
Speaker 15: percent of us homeowners went out and we're able to
Speaker 15: refinance into a mortgage that was sub four percent. So
Speaker 15: that means that's seventy percent of the sixty percent of homes,
Speaker 15: so maybe forty fifty percent of all the homes in
Speaker 15: the country. The person living there would literally have to
Speaker 15: double their mortgage payment to replace the same home. So
Speaker 15: in the mortgage world, we call this the lock and
Speaker 15: effect when a group of homeowners are really disincentivized from moving.
Speaker 15: So think about what that does is supply it brings down.
Speaker 15: So we can't really see home prices fall just because
Speaker 15: rates went up, because there's really no homes for sale
Speaker 15: in the meantime, I think overall we may be underestimating
Speaker 15: how much incomes grew, so houses may not be as
Speaker 15: unaffordable as they were. But there's definitely a case of
Speaker 15: a strange statistic today that even we can't tell you
Speaker 15: what the how this is going to turn out. But ordinarily,
Speaker 15: if you were to lease a home versus buying the home,
Speaker 15: you would your monthly payment would be.
Speaker 5: A little bit higher.
Speaker 15: And that's because the person leasing the home has to
Speaker 15: take on repairs and maintenance. So if you buy the home,
Speaker 15: you take on the responsibility, So your principal interest, tax,
Speaker 15: and assurance would be slightly lower than your rental payment.
Speaker 15: That's inverted now, it's inverted significant. It's way cheaper to
Speaker 15: rent than it is to buy because you just had
Speaker 15: this shock to the system. So we think that that
Speaker 15: probably you will correct itself over time. It may correct
Speaker 15: from rents rising. But you mentioned before about sort of
Speaker 15: locations and location and pricing. One of the things that
Speaker 15: we're really really after this is like not exactly ingenious.
Speaker 15: People need to be able to afford the product. No, yeah,
Speaker 15: so our rents are sort of below twenty five percent
Speaker 15: of all is this school the first year exactly like
Speaker 15: try try to sell something your customers can afford, ding, Ding.
Speaker 15: So for us, we're sort of enthused by the fact
Speaker 15: that our rents are about a quarter of the family's
Speaker 15: gross income, and that makes them really sustainable, and it
Speaker 15: means they can float as income trax.
Speaker 3: It's interesting. So let me go back to all right,
Speaker 3: so then what worries you about the outlook?
Speaker 5: Well, look, you have.
Speaker 15: You have this crazy cross current now to where we're
Speaker 15: in our view, there was too much fiscal support to the.
Speaker 5: Economy, right of an overreaction.
Speaker 15: Now you have the Federal Reserve sort of counterbalance that
Speaker 15: with what we would argue was way too.
Speaker 5: Fast of reaction in monetary policy. So what this does
Speaker 5: is it just slows down the velocity of capital.
Speaker 15: So we think in ten twenty thirty year cycles, we
Speaker 15: think about affordability, we think about rent growth, income growth,
Speaker 15: national growth, what happens to each city.
Speaker 5: And now you just have a point in time where everyone.
Speaker 15: Is a little bit nervous to make it a big
Speaker 15: decision because you only get to capitalize your investment in
Speaker 15: these things once and you're not sure are they going
Speaker 15: to be less expensive tomorrow or more expensive tomorrow?
Speaker 5: And when you just have this much uncertainty in the market.
Speaker 15: You can see it in quoted volatility, you can see
Speaker 15: it in the shape of the e Oeld curve. What
Speaker 15: the real result of all this is people just don't
Speaker 15: do anything. So I think the thing that concerns this
Speaker 15: is just if capital becomes there's really no longer a
Speaker 15: penalty for not being invested, and so it just slows
Speaker 15: down long term capital formation.
Speaker 3: We've just got about forty five seconds left here. So
Speaker 3: you're the residential guy that was on the panel. I mean,
Speaker 3: you guys do mortgage back security, should you do some
Speaker 3: commercial I'm just curious your take on office.
Speaker 5: Since you're yeah. So we're in there.
Speaker 15: We have a port loans, we have some loans that
Speaker 15: have defaulted, and we've taken some properties over and I
Speaker 15: sent the last year really working closely with our teams
Speaker 15: to understand what the alternative use cases are for office.
Speaker 15: Suburban office probably has more flexibility than urban office, okay,
Speaker 15: and so the suburban offices, we're taking some down and
Speaker 15: putting back logistics centers and so it's really like logistics center,
Speaker 15: it's too much supply and it's real estate.
Speaker 5: We can take it down.
Speaker 3: It does the day to tell you that there's more
Speaker 3: more pain to come, a lot more pain to come,
Speaker 3: a lot more pain to come about sort.
Speaker 15: Well, I mean a lot of the pains already hear.
Speaker 15: The only question is not long before we all reckon?
Speaker 3: But is it again like the lower tier we talked
Speaker 3: about on the panel.
Speaker 15: Just there's like the top one percent of the office market.
Speaker 15: Everyone buys about No one vandor belt and two in
Speaker 15: a our rents. That's interesting but not really important.
Speaker 3: Thank you, so see it flew and you kept your voice.
Speaker 5: Thank you, thank you so much.
Speaker 3: Fun to have you on the panel of Fun to
Speaker 3: have you back here, Shun Tops and Chairman, CEO and
Speaker 3: chief investment officer at Amherst.
Speaker 1: Right here on Bloomberg, you're listening to the Bloomberg Business
Speaker 1: Week Podcast. Catch us live week days from two to
Speaker 1: five pm Easter on Bloomberg Radio, the Bloomberg Business App,
Speaker 1: and you too. You can also listen live to our
Speaker 1: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 3: Carol Master live at the Milk and Institute Global Conference.
Speaker 3: And I want to get to our guests because every
Speaker 3: time I speak with him, spend some time with him.
Speaker 3: He always inspires. He reminds us that will take work
Speaker 3: and conscious decisions to bring about a more equality and
Speaker 3: equitable world. So with us. As the chairman and CEO
Speaker 3: of the nonprofit in financial literacy and Economic Conclusion, Operation Hope,
Speaker 3: he's involved in so much to close the gap. He's
Speaker 3: also a vice chair of former President Bush's Council on
Speaker 3: Financial Literacy. I mean, you've worked with President Obama a
Speaker 3: council on financial capability. You've done so much of You're
Speaker 3: hands in so much financial literacy. You're thinking about, you know,
Speaker 3: housing access, what's top of mind as you had I'm
Speaker 3: sure a million conversations here at Milkin. And have we
Speaker 3: gotten better in terms of equity?
Speaker 9: We've gotten better. The world's gotten worse.
Speaker 3: Well that doesn't feel good.
Speaker 9: Yeah, Well, the world's in turmoil now, so it's hard
Speaker 9: to find stable ground to sit good ideas. We've got
Speaker 9: more good ideas, we've got more proven ideas. Me yesterday,
Speaker 9: Fast Company announced that we were the World Changing We
Speaker 9: won this World Changing Ideas Award. In a more stable time,
Speaker 9: that would have been the shot the news that sort
Speaker 9: of rang around the world and have been rallying around
Speaker 9: that you know, in this environment, you're an active shooter
Speaker 9: in Atlanta. You've got a bank going bus, you got
Speaker 9: to you got a stalemate in Washington, d C. On
Speaker 9: the debt crisis. You've got so's, so many things distracting people.
Speaker 9: The urgent is crowding out the important.
Speaker 3: And yet you are getting stuff done, John.
Speaker 9: Yet we're still getting stuff done. I'll just punched right
Speaker 9: through it, you know, over around it, through it. I
Speaker 9: go to it. And rainbow's only follows. Storms cannot have
Speaker 9: a rainbow without a storm first. I don't mind a
Speaker 9: good fight. I don't mind having to punch through the
Speaker 9: rhetoric with substance. I've been doing that my whole life.
Speaker 9: And we have a lot of substance now. And look
Speaker 9: we're here. I'm here talking to you. I mean, I'm
Speaker 9: not being pushed to the I'm not sorry. I'm not
Speaker 9: at the edges of the conversation. I'm often at the
Speaker 9: center of a conversation. That's where I've wanted to be,
Speaker 9: that's where the issue needs to be. We're just there
Speaker 9: in the very chaotic, crazy times. I think that we're
Speaker 9: sitting in a moment in history right now, Carol. The
Speaker 9: history is not too historic when you're sitting in it,
Speaker 9: it juste was like another day. But I think that
Speaker 9: what happens between now and twenty thirty, between the pandemic
Speaker 9: and George Floyd's murder and the attack on our capital
Speaker 9: which reset everything and the end of twenty thirty is
Speaker 9: what I call the third reconstruction, and this next ten
Speaker 9: this ten year period will decide the quality of life
Speaker 9: for the next one hundred years. So I don't mind
Speaker 9: being exhausted, worn out from work from cancer in the morning,
Speaker 9: can't see at night. I think it's relevant. I think
Speaker 9: it matters, is what I'm saying. What you're doing matters.
Speaker 9: You cannot have a movement without the media. Doctor King
Speaker 9: never would have had a movement if it wasn't for
Speaker 9: the media being amplifying his good message. So I think
Speaker 9: that all this is.
Speaker 3: Oh, I appreciate that. I mean, it's not perfect, because
Speaker 3: we know that. I want to ask about your partnership
Speaker 3: that you've had with Fulton Bank.
Speaker 14: Talk to me a little bit about yah.
Speaker 3: I feel like you know you and I've talked about
Speaker 3: this a lot of folks. There's lots of conversations. You
Speaker 3: actually take those conversations and put it into action. So
Speaker 3: tell us about this.
Speaker 9: Yeah, PhDs are good, PhDs are betterdu So the one
Speaker 9: thing I love about this And Fulton won't appreciate the
Speaker 9: waymen to characterize this, but I think it's an important characterization.
Speaker 9: A relatively small sized bank in Pennsylvania, small by banking standards,
Speaker 9: not small by bank their standards. It's actually a big
Speaker 9: bank by their standards. For Fulton Bank, is this great
Speaker 9: institution in Pennsylvania doing great work, but they're not a
Speaker 9: household name. This relatively small market cab bank based on
Speaker 9: the banks we hear on TV or in Bloomberg all
Speaker 9: the time, did a billion dollars in mortgage creation for
Speaker 9: African America, not just a minority, not women, not some
Speaker 9: super group of underserved, just African Americans. A billion dollars
Speaker 9: through Operation Hope in our hope and sides, proving that
Speaker 9: you can do well and do good, proving that you
Speaker 9: can move the needle on forty one percent of af
Speaker 9: Americans who own a home, and when seventy five percent
Speaker 9: of whites own a home, that delta thirty percent is
Speaker 9: the loss of wealth creation and the loss of tax base,
Speaker 9: the loss of opportunity. Last so the fact that one
Speaker 9: bank that is not yet a household name. They mean
Speaker 9: they will be after this interview. Right did a billion
Speaker 9: dollars of credible, well underwritten structured home ownership, tying it
Speaker 9: to our coaching work at Hope in Side where we
Speaker 9: got credit scores up, debt down, savings up. Some people
Speaker 9: could qualify. So did it in a safest down basis.
Speaker 9: We just did the hard work together. A billion dollars.
Speaker 9: That's a real number.
Speaker 3: What's interesting is Right it was for people who qualified,
Speaker 3: and you talked about getting the credit scores up. I mean,
Speaker 3: these are people that you guys have worked with, right,
Speaker 3: who wanted to be homeowners and what did they have
Speaker 3: to do? And you educated them and then they did
Speaker 3: the work.
Speaker 9: We were getting the bank out of the no business
Speaker 9: and back into the yes business by working with and
Speaker 9: I want to again, I command Fulton Banking, their leadership,
Speaker 9: their chairman. See I commend Wells Fargo. I command well
Speaker 9: as far as ordered a hundred of our Hope in
Speaker 9: Side locations plus. That's not charity, that's business. Bank of
Speaker 9: America's ordered one hundred plus.
Speaker 14: Locations true inside the.
Speaker 9: Inside the bank. We're the only nonprofit in US history
Speaker 9: allowed to operate inside of a bank branch. Truant once
Speaker 9: has been half of their bank branches. They have two
Speaker 9: thousand branches. You're talking about changing banking itself. But back
Speaker 9: to this example of Fulton. So we go into the
Speaker 9: bank branch and we can do what the banker can do.
Speaker 9: We can actually ask the personal direct question. Missus Jones. Yes,
Speaker 9: let's look at your credit report. This was like a
Speaker 9: bus accident. And we both have a nice laugh because
Speaker 9: missus Jones knows that she knows her history. Yeah, I
Speaker 9: haven't looked at my credit at score in a while. Okay,
Speaker 9: what's that? I don't know, John, what that's called an error? Okay?
Speaker 9: The law states that if the credit bureaus, three of
Speaker 9: them can't confirm that that's yours, they must remove it.
Speaker 9: How about we write a letter to the credit bureaus
Speaker 9: together and challenge them. Yes, we write that letter together.
Speaker 9: What's banking a trust business? It's about belief, It's about confidence.
Speaker 9: Credit comes to the Latin word credit o, which is
Speaker 9: credibility capital from the Latin word capitas knowledge in the head.
Speaker 9: Now that this is about money, it's about how you feel.
Speaker 9: So we get the letter to the credit bureaus. They
Speaker 9: can't confirm that it's hers. They are removing it. In
Speaker 9: thirty days, her credit score pops thirty points.
Speaker 3: That's free.
Speaker 9: So now you go yes, So now you go from
Speaker 9: five ninety to.
Speaker 5: Six point twenty.
Speaker 9: Well, what happens to listen to her, to missus Joe's
Speaker 9: self esteem, It goes up her belief in the financial system,
Speaker 9: her trust, her confidence, her sense of independence. So she
Speaker 9: now she's sitting going okay, what else can we do?
Speaker 9: So then we tackle the charge off on her credit
Speaker 9: bureau Well, that is hers. She was divorced ten years ago.
Speaker 9: It was a thousand dollars phone bill or balloons, one
Speaker 9: thousand dollars. They chased her, couldn't find her. That was
Speaker 9: sold to a credit repair agency, a debt collection agency
Speaker 9: for five cents on the dollar. We know that it's
Speaker 9: fifty bucks.
Speaker 5: What do they want?
Speaker 9: They want one hundred percent profit, They want one hundred bucks,
Speaker 9: Miss Jones. Let's call them together. We have missus Jones here.
Speaker 9: We're looking for her. She's looking for you. We want
Speaker 9: to pay our debt. We want a hundred bucks. No,
Speaker 9: we're gonna pay you two hundred bucks. Why because we
Speaker 9: want your absolute attention to take this off her credit
Speaker 9: report after she's satisized.
Speaker 3: We want them to fix it.
Speaker 9: And then when it shows back up out her credit
Speaker 9: report because it's been there ten years, were got to
Speaker 9: write another letter to the credit burials to get it
Speaker 9: off again. Get they get a two hundred percent of profit. Right,
Speaker 9: she got an eighty percent discount. Fair change is no robbery.
Speaker 9: Her credit score goes up another twenty thirty forty points.
Speaker 9: So now she's an example. And she said, let's just
Speaker 9: say six fifty six to sixty. She's now in striking
Speaker 9: distance of a six eighty prime rate mortgage. We work
Speaker 9: on our budget, we work in a few other things, right,
Speaker 9: and all of a sudden, she's a shiny Pinny John,
Speaker 9: I am like, it.
Speaker 15: Is amazing what you do.
Speaker 3: And the thing is, you are all about financial literacy.
Speaker 3: And I think you and I've talked about it. I
Speaker 3: wish kids were starting from kindergarten that they learned about
Speaker 3: you work on it from middle school through college.
Speaker 9: Right now now kindergarten, by the way you are doing,
Speaker 9: we're doing kids accounts in kindergarten and Lanta public schools.
Speaker 3: I mean, and you're working with employee I mean you
Speaker 3: get you're making a difference, right. People are really learning
Speaker 3: about the financial system so understanding how they can make
Speaker 3: it work for them.
Speaker 1: Yeah.
Speaker 9: So now we've told major employers, So Doug McMillan and
Speaker 9: the CEO of Walmart not co sharing financial literacy for all.
Speaker 9: Our mission is a get eighty percent of the fortune
Speaker 9: five hundred to embed financial literacy into their business plan.
Speaker 9: So this is not public affairs or community affairs. This
Speaker 9: is a serious business right. We say, this is what
Speaker 9: healthcare was forty or fifty years ago, financial well being
Speaker 9: inside the workplace. So then Delta CEO comes to us
Speaker 9: and says, this is something relevant to our people, that
Speaker 9: our folks who said this is important. We'll give a
Speaker 9: thousand dollars, sorry, invest one thousand dollars to every one
Speaker 9: of our workers who go through financial coaching for an
Speaker 9: emergency savings account. Because sixty four percent of Americans, Carol,
Speaker 9: don't have four hundred dollars for an unplanned event that
Speaker 9: affects their ability to focus on the job, their ability,
Speaker 9: they're stressed out on the job, they're not paying tension.
Speaker 9: So he's like, I want there, I want all share
Speaker 9: of mind. I don't want them stressed out. He achieved
Speaker 9: a year's worth of financial well being coaching targets in
Speaker 9: two months. With this program. He had ninety thousand employees
Speaker 9: at Delta, and I can't go through an airport now
Speaker 9: without two things happening. A Delta employee is saying I
Speaker 9: got my thousand dollars, or I'm in my coaching sessions
Speaker 9: right now, thank you, or the TSA agents screaming out
Speaker 9: the credit score to me.
Speaker 3: But how great is that? Listen? Fifteen seconds left. Final
Speaker 3: thought to anybody who's listening.
Speaker 9: You can be the change we want to see in
Speaker 9: the world. Figure out how you can help call Operation Hope. Volunteer,
Speaker 9: become a member, become a donor, become a partner. This
Speaker 9: is this is about making free enterprise work for all
Speaker 9: of God's children. This is silver rights. This is not
Speaker 9: about red or blue race. I mean politics are black
Speaker 9: or white. It's about green economics, more of it for all, GDP,
Speaker 9: for America and truly by getting more people.
Speaker 5: In the game.
Speaker 3: I love it, make so much sense.
Speaker 9: Love all you guys, Appreciate you. We want you at
Speaker 9: our whole global form.
Speaker 14: By the way, all right, JOHNA, You're special.
Speaker 3: You're a special.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
Speaker 1: live weekdays from two to five pm Easter on Bloomberg Radio,
Speaker 1: the Bloomberg Business app and YouTube. You can also listen
Speaker 1: live to our flagship New York station, Just Say Alexa,
Speaker 1: play Bloomberg eleven thirty a lot today.
Speaker 3: And have lots of conversations with folks at Milkin. But
Speaker 3: at the same time, things are getting done. The world
Speaker 3: is moving forward, and that is true when it comes
Speaker 3: to aviation and clean technology, which is something that's come
Speaker 3: up a lot here at Milkin. So we want to
Speaker 3: talk about that with our next guest. Delighted to bring
Speaker 3: in about Michtakoff. He's founder and CEO of Zerio Avia.
Speaker 3: They have backing for Bill Gates Breakthrough Energy Ventures and
Speaker 3: Jeff Bezos Climate Pledge Fund.
Speaker 12: Welcome, Welcome, thank you, thank you. Great to be here.
Speaker 3: I love talking clean technologies, I said to you, and
Speaker 3: I love talking what's going on with aviation. Till us
Speaker 3: about your company.
Speaker 12: First of all, yeah, so we started a company five
Speaker 12: years ago. More than five years. We have built a
Speaker 12: technology in house. We're flying multiple prototypes already, the largest
Speaker 12: one flying in the UK. The company is between the
Speaker 12: West Coast US and the UK twenty seaters and we
Speaker 12: just announced with Alaska, one of our launch partners and
Speaker 12: airline investor, a large aircraft development, seventy six seat aircraft.
Speaker 12: That's serious that we're looking to start running on our
Speaker 12: powertrain later this year and flight next year.
Speaker 3: So tell me about your powertrain.
Speaker 12: Yeah, So it's hydrogen electric so hydrogen on board the
Speaker 12: aircraft and then converting that to electricity using the fuel cells,
Speaker 12: and then electricity runs motors. All the critical technology we
Speaker 12: have in house, which is important because you cannot really
Speaker 12: use automotive technology. It's very hard to certify, so you
Speaker 12: need to develop everything from scratch your build to the
Speaker 12: whole base. So that's what we've done before that. Before zero,
Speaker 12: I did the electric car company and charging systems already
Speaker 12: in sustainable transport. This was natural sold that I sold
Speaker 12: that started to think about what's next. I'm a pilot
Speaker 12: to myself, so flying helicopters, airplanes, so personally connected to
Speaker 12: the industry and didn't really started seeing you know, people
Speaker 12: talking about, you know, maybe we should stop flying and
Speaker 12: maybe we should all sit at home. And I really
Speaker 12: didn't like that.
Speaker 3: So so is what we're doing. The focus on evs
Speaker 3: in their current state, not the future. In terms of
Speaker 3: alternative fuel, Is it hydrogen that really makes the difference?
Speaker 3: And you think that ultimately is what takes over?
Speaker 12: Well, I thank you. I know it depends on that
Speaker 12: your book, It depends on the type of but you know,
Speaker 12: we we like to think that we are unbiased. We're
Speaker 12: first principles based. Yeah, and my previous company was all
Speaker 12: about batteries.
Speaker 3: I know, is that the answer because that has problems too,
Speaker 3: and you need power to fuel those batteries.
Speaker 12: That's right, that's right. But so the secret sauce from
Speaker 12: my previous company was exactly around that. And I did
Speaker 12: apparently yesterday on the future of mobility and all that.
Speaker 12: We had a little bit of discussion around it, and
Speaker 12: the key was, yes, it requires a lot of new power.
Speaker 12: But those cars typically sits in the parking lot, either
Speaker 12: at your work or at your house for ninety five
Speaker 12: percent of the time, and if they keep kept plugged in,
Speaker 12: then you can use that battery capacity to store all
Speaker 12: that renewable power. So renewable power problem is, you know,
Speaker 12: sun shines, you have power. Sun doesn't shine, you don't
Speaker 12: have power, right, and everybody quotes that as a problem.
Speaker 12: But if you have storage connected batteries connected all the
Speaker 12: time in these electric vehicles, then you can store that
Speaker 12: power use it later, right, So that's why the thing
Speaker 12: will happen in the automotive space. So batteries work there.
Speaker 12: The bigger problem there is recycling off all these materials,
Speaker 12: right because right now you know, single digit percentage penetration.
Speaker 12: You know, we have enough materials is not a huge problem.
Speaker 12: But when you have you know, fifty seventy percent of
Speaker 12: all cars being electric lot, it's a lot of chart
Speaker 12: for aviation, this is a complete non starter because you
Speaker 12: know what's worked for your tesla, right for my wife's Deesla,
Speaker 12: because I don't have a car anymore, which is you know,
Speaker 12: a thousand cycles on the battery, that's three hundred thousand
Speaker 12: miles you know, or will drive three hundred thousand miles
Speaker 12: in the aircar. But in a commercial aircraft you go
Speaker 12: through that battery in six months, right, like what kind
Speaker 12: of side matter, and then you replace, replace, replace, So
Speaker 12: material problem is huge, and even before that it wasths
Speaker 12: too much. It doesn't work. Hydrogen is the only way
Speaker 12: to do large commercial aircraft A little long distances.
Speaker 3: But what about some of the concerns and problems with hydrogen.
Speaker 12: Yeah, so the main problem actually from the technology standpoints,
Speaker 12: the main problem is hydrogen takes more volume, yeah, to store.
Speaker 12: So what we are doing and we're going after the
Speaker 12: existing aircraft, existing fleets, and then existing types of aircraft,
Speaker 12: maybe new aircraft, but existing types. So what we do
Speaker 12: is we retrofit those aircraft and line fit and we're
Speaker 12: able to achieve about half the range. Right. So an
Speaker 12: example I mentioned in Alaska, they have thirty of those
Speaker 12: aircraft propel large propeller aircraft, seventy six seed aircraft on fleet.
Speaker 12: Those aircraft on fossil fuel, they can fly for one
Speaker 12: thy five hundred miles six hours in the air. Nobody
Speaker 12: flies those things for six hours. So we are coming
Speaker 12: in and we're saying we can't deliver half the range
Speaker 12: seven hundred miles, and all the operators say, well, that's
Speaker 12: fine because we fly them today three hundred miles four
Speaker 12: hundred miles max. Right, Because when they were designed back
Speaker 12: in the day, they were designed for long missions, not anymore.
Speaker 3: How big can you go in terms of like the
Speaker 3: jumbo plane that I'm going to take home from lax
Speaker 3: back to New York. Is this ultimately what you can do?
Speaker 12: Yeah, it is possible. So within ten years we're hoping
Speaker 12: to get to what's called single aisle, so Boying seven
Speaker 12: thirty seven or Airbus A three twenty in.
Speaker 3: What's holding you back from doing it? Today?
Speaker 12: We need to scale the technology, the fuel cells most
Speaker 12: importantly to these large power levels, high power levels. Right,
Speaker 12: So today we have the technology that powers already twenty
Speaker 12: seed aircraft and flying, and we're submitting that engine for
Speaker 12: certification later this year, right, launch in twenty twenty five,
Speaker 12: so two years out you'll be able to buy tickets
Speaker 12: fIF for that aircraft. The next size is the seventy
Speaker 12: six seed aircraft. That will take us about five years
Speaker 12: to get to commercial, but you know, within ten years
Speaker 12: we'll be able to get to to get you to
Speaker 12: New York.
Speaker 3: What's the safety?
Speaker 12: Yeah, frequently asked question to the point that at some
Speaker 12: point I had, you know, second page on my presentations, Hindenberg,
Speaker 12: you know, just showing.
Speaker 3: Does it get safe then?
Speaker 12: And then you know the message there is technology has
Speaker 12: moved on, right in eighty plus years, Yeah, so we
Speaker 12: have one hundred week meaning you know society right, Yeah, worldwide.
Speaker 12: We have over one hundred thousand ground vehicles operated on
Speaker 12: hydrogen by unqualified personal You can you know, anybody can
Speaker 12: walk into Toyota dealership today and buy a hydrogen car,
Speaker 12: drive off, go into the fueling station and fuel up
Speaker 12: with hydrogen, buy herself himself without any training and no incidents.
Speaker 14: But I don't see that anywhere, Yeah, because.
Speaker 12: You know, hundred thousand is not a huge number with
Speaker 12: respect to you know, billions of vehicles worldwide, but they're there. O.
Speaker 12: California actually has like a third of them.
Speaker 3: But where are we then doing more of that versus
Speaker 3: the EV batteries?
Speaker 12: Yeah, the vehicles, the hydrogen fuel cell technology is expensive
Speaker 12: now relative to the combustion.
Speaker 14: Cars, relative to battery is much more expensive.
Speaker 12: So Toyota I think still loses money on every vehicle,
Speaker 12: and those are not cheap vehicles.
Speaker 3: I think the double the cost of combustion.
Speaker 12: It's probably ten x ten times, probably ten.
Speaker 14: And what about EV battle part of that is volume game.
Speaker 12: As well, right, so you know you don't you don't
Speaker 12: have a long going But in aviation everything is expensive, right,
Speaker 12: so your performance you're not based on cost, you based
Speaker 12: on performance and safety. So you have a lot more
Speaker 12: room on the cost basis, and that allows us to
Speaker 12: deploy these technologies in aviation. And coupled with the fact
Speaker 12: that you know, batteries will not work, sustainable aviation fuels
Speaker 12: are really fundamentally much more expensive than hydrogen that hydrogen
Speaker 12: electric that gives us an opportunity.
Speaker 3: You have airlines lending up to order.
Speaker 12: Absolutely, we have pre orders for about ten billion dollars
Speaker 12: of worth of future revenues. Might have American Airlines, United
Speaker 12: Airlines pretty bigger for the bigger actually for regional planes
Speaker 12: to start with. So in the next seven years we're
Speaker 12: looking to you know, fulfill those orders, start fulfilling those orders.
Speaker 12: We are now taking deposits, booking, productions, laws, very exciting time.
Speaker 3: Unbelievable now, it's fascinating. So you think in ten years
Speaker 3: from now it will be all over.
Speaker 12: Well, not quite all over the big twin aisle planes.
Speaker 12: It will take more time, right, So these are what
Speaker 12: you would take you know, from Lax to London for example, Right,
Speaker 12: So that will take some time, but I think technology
Speaker 12: will be available for all aircraft within twenty years. Yeah,
Speaker 12: and then it's a you know, how how quickly will
Speaker 12: we replace and that depends on how committed the governments are,
Speaker 12: how committed the you know, the operators are, and everybody else.
Speaker 3: We'll come back and let us know how things are going.
Speaker 14: Of course, love this space.
Speaker 3: Val Mitchakoff, he's stunder and CEO of Zero Avia, joining
Speaker 3: us here at Milk And you are listening and watching
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Speaker 5: Thirty Girl Man.
Speaker 3: So we are live and getting ready to wrap up
Speaker 3: our first day the Milkin Institute Global Conference here in
Speaker 3: Beverly Hills. Something that seems so relevant today may the
Speaker 3: uncertainty about I feel like many things, including our outlook.
Speaker 3: So let's get to it. We'll explain it a moment.
Speaker 3: Lisa Donahue is co head of the Americas and Asian
Speaker 3: Alex Partners. They're a financial advisory and global con consulting
Speaker 3: from known for their work on turnaround some legendary ones,
Speaker 3: including Reorg's of General Motors Kmart and then taking us
Speaker 3: way back to and Ron. Nice to have you here, Welcome,
Speaker 3: thank you, it's great to be here. So is this
Speaker 3: a good environment for turnarounds?
Speaker 11: You know, I think it is.
Speaker 3: I think that should we be slime or is that?
Speaker 16: Well, it depends on your perspective, right, Okay, Whenever there
Speaker 16: is risk and uncertainty, there's also opportunity, right, So I
Speaker 16: think you can be smiling because I think that, Yes,
Speaker 16: I think we're in for turbulent times. Yes, I think
Speaker 16: that there's a lot of disruption out there. But the
Speaker 16: good news is the smart CEOs that we're working with
Speaker 16: are thinking proactively. They're not waiting to be disrupted. They're
Speaker 16: trying to be the disruptors or to read the tea
Speaker 16: leaves and figure out how they can make their organizations
Speaker 16: fit for purpose.
Speaker 3: Lisa, what are the tea leaves that are like kind
Speaker 3: of front and center for some of your clients and
Speaker 3: your executives you're working with.
Speaker 16: Thinking about it on the disruption theme as we've kind
Speaker 16: of started out, If you think about it, things are
Speaker 16: moving so fast and from a financial environment, we've got
Speaker 16: high interest rates, we've got a tighter liquidity pool. From
Speaker 16: a disruption perspective, we have very fast paced technological change,
Speaker 16: We've got geopolitical uncertainty. We've got still in some areas
Speaker 16: dealing with some of the after effects of the global shutdown.
Speaker 17: For COVID right, and having to deal with supply chain disruptions.
Speaker 16: And what does that mean for onshoring, offshoring, redundant supply chains.
Speaker 16: You know, I think, if anything, what that showed us
Speaker 16: is that surety of product is at least as important
Speaker 16: as cost.
Speaker 3: So does that mean a lot more on shoring. Is
Speaker 3: that what we're seeing? I mean, I've certainly had talked
Speaker 3: to CEOs and they definitely are thinking about it and
Speaker 3: doing it. It's not just conversations, they're changing how they
Speaker 3: do it. I think supply to it. I think that's right.
Speaker 17: I don't let me make sure I'm clear, though. I
Speaker 17: don't believe that means the end of globalization.
Speaker 16: However, I do think what it means is moving things
Speaker 16: closer to clients, closer to customers, so that you have
Speaker 16: more of a shorty and you're comfortable with your ability
Speaker 16: to continue to deliver your product. But I do think
Speaker 16: that smart CEOs that we're working with are really rethinking
Speaker 16: their business models. And that includes the supply chain, that
Speaker 16: includes on where they're buying their parts, that includes you know,
Speaker 16: should they be thinking about moving away from China maybe
Speaker 16: to Japan right, maybe to Mexico, maybe to the Cridean
Speaker 16: And I think it depends on where the end product
Speaker 16: is going.
Speaker 3: Is it all industries that are kind of coming to you?
Speaker 4: Yes?
Speaker 3: Yes, not in you know a certain sector that is
Speaker 3: kind of dominating it. I'm just curious.
Speaker 17: Well, you know, it depends on what they're trying to solve.
Speaker 17: You know, folks come to us when they want results.
Speaker 17: They come to us.
Speaker 3: Is it when growth is stagnating or yeah, it could
Speaker 3: be growth.
Speaker 16: It could be strategy, could be We're doing a lot
Speaker 16: of kind of business model, operational model re engineering and reimagining.
Speaker 16: Now where folks are saying, look, I need to make
Speaker 16: sure I'm fit for purpose. I need to make sure
Speaker 16: that I have the nimbleness within each of my different
Speaker 16: business units. And you know, maybe we've gotten too big,
Speaker 16: Maybe we need to get back to basics.
Speaker 3: What is it that Mark Zuckerberg says the Year of efficiencies?
Speaker 3: But I do wonder if I think there are companies
Speaker 3: that got a little fat in terms of management and right,
Speaker 3: is that what you're saying, like stream money or is
Speaker 3: it processes? I think it's both actually, and I think
Speaker 3: it's all of the above.
Speaker 17: And I don't know if it's if it's fat.
Speaker 3: But we were really.
Speaker 16: Lucky in unprecedented you know times, and when there were
Speaker 16: some bumps, we had quantitative easing, we had government intervention,
Speaker 16: there were lots of different things that could happen. And
Speaker 16: I think now we're at the point where smart CEOs
Speaker 16: are thinking, you know what, I don't know if there's
Speaker 16: going to be a recession or not, but I do
Speaker 16: know my consumer and my customers behaving differently, so I
Speaker 16: do know that I have to be clear on my
Speaker 16: value add clear on my cost to deliver, and make
Speaker 16: sure that the value equation is still there.
Speaker 3: How did the bank collapses change things? Did it at
Speaker 3: all impact your world? Well?
Speaker 16: It did initially, because you know, we have a very
Speaker 16: we've got a big TMT technology practice. And if you
Speaker 16: think about that first time period when before things got
Speaker 16: stabilized and before the xsvality jumped in, I'm thinking the
Speaker 16: best v B exactly, and before the FDIC jumped in
Speaker 16: and said, oh it's not limited to just.
Speaker 17: Two hundred and fifty k.
Speaker 16: There was a period of aside from over that weekend,
Speaker 16: probably another two to three days before there was certainty,
Speaker 16: and that had customer panicked because you think about the
Speaker 16: whole venture community, right, and they were a huge lender
Speaker 16: to the venture community, so our tech custom stomers were
Speaker 16: a little unsettled. But I would say that was again
Speaker 16: a blip because if you think about what actually happened
Speaker 16: is the government came in again, right, and those assets,
Speaker 16: I mean.
Speaker 17: The estate is running through a bankruptcy, but the actual
Speaker 17: assets moved right, They're solid. So a little bit of
Speaker 17: a blip, not too much.
Speaker 3: I always thin about Bloomberg audience when we're talking to
Speaker 3: somebody like you, like, how should what should investors be?
Speaker 3: Kind of taking away from what you are saying and
Speaker 3: what it means, I don't know in terms of opportunities
Speaker 3: or the environment. Well, I think you know, as we.
Speaker 16: Said at the beginning, and you said, you know, should
Speaker 16: we be smiling?
Speaker 3: Should we not be smiling? I think believes at Catholic school.
Speaker 3: I think we caught on, But we'll explain that later. Folks,
Speaker 3: we were talking about it was all good.
Speaker 16: I feel like all my interviews, starting in with Catholic schools,
Speaker 16: there's usually nuns thrown in there somewhere too.
Speaker 3: But what what shod they take away? If they're listening
Speaker 3: to what you're saying, So what does it mean?
Speaker 16: I think they can take away that there's lots of
Speaker 16: opportunities because as you said, there's there's going to be
Speaker 16: folks that are reimagining what they do best and are
Speaker 16: their non core assets that they should be shedding and
Speaker 16: does it fit better.
Speaker 17: For somebody else? And I think that they should be looking.
Speaker 16: You know, if you're a private equity investor, you should
Speaker 16: be looking at your portfolios and making sure that your
Speaker 16: CEOs are like the smart ones we're working with and
Speaker 16: are thinking proactively and thinking nimbly and thinking about how
Speaker 16: to be financially fit and operationally fit right as we
Speaker 16: kind of continue to navigate these times because you know.
Speaker 17: The interest rate environment alone makes it makes it a
Speaker 17: bit challenging.
Speaker 3: Yeah, it's being like you said, preemptive about things and
Speaker 3: not kind of waiting for maybe another shoot to drop,
Speaker 3: if you will, really fascinating. Thank you so much. All right,
Speaker 3: fifteen seconds to people ask you about AI a lot.
Speaker 16: People do, and we were talking, Yeah, and we have
Speaker 16: a huge digital practice where we're super on top of it,
Speaker 16: and the things that are coming forward and the amazing
Speaker 16: technological advances and how much more efficient and how fast
Speaker 16: we can be.
Speaker 17: Yeah, it's exciting stuff.
Speaker 3: This was so much fun. I hope we can catch
Speaker 3: up again in the future. Lisa Donahue over at alex Partners,
Speaker 3: joining us here at Milton.
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