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Speaker 1: Hello, and welcome to our special edition of The Credit Edge,

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Speaker 1: a weekly markets podcast. My name is James Crombie. I'm

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Speaker 1: a senior editor at Bloomberg and I'm joined by David

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Speaker 1: Havens and Paul Goulberg, two of our ACE analysts at

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Speaker 1: Bloomberg Intelligence.

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Speaker 2: How you doing, guys, Great to be with you.

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Speaker 3: Thank you.

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Speaker 1: So we're here to talk about private credit, which is

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Speaker 1: getting a lot of attention these days, most of it negative.

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Speaker 1: We've been through a bit of a panic over the

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Speaker 1: last few months. Direct lending has a lot of exposure

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Speaker 1: to software which is being replaced by AI. The value

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Speaker 1: of direct loans is in question. Some portfolios are being

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Speaker 1: aggressively marked down. The SEC is probing where the Blackrock,

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Speaker 1: the world's largest asset manager, is accurately valuing its loans

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Speaker 1: business development companies which give retail investors access to the

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Speaker 1: high returns promised by private credit. I meanwhile seeing massive

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Speaker 1: redemption requests. I could go on, but let me start

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Speaker 1: by asking you both. Firstly, with David, what do you

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Speaker 1: make of all this fear and how justified is it? Really?

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Speaker 2: Well? James, what's the bad news? Yeah, there's there's been

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Speaker 2: a slew of not so great news out about business

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Speaker 2: development companies, direct lending in private private credit in general

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Speaker 2: over the past couple of months, and from my perspective,

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Speaker 2: I think that there's a lot of noise and I

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Speaker 2: think maybe the signal is being lost to some extent

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Speaker 2: out there, because if you go and look at the

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Speaker 2: performance of BDC's in the first quarter, which is you know,

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Speaker 2: the easiest and quickest way first to find public information

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Speaker 2: on these companies, you definitely see a little bit of deterioration,

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Speaker 2: but you don't see massive deterioration. If you look at

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Speaker 2: you know, we sort of go through about thirty of

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Speaker 2: the largest BDC's, probably eighty percent of the industry. We're

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Speaker 2: looking at nan accruals. They ticked up. They took up

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Speaker 2: to one point six percent of the portfolio from one

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Speaker 2: point two percent. That's a reasonable increase, more than we've

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Speaker 2: seen in the past, but it's not a dramatic increase.

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Speaker 2: And then if we look at other things like payment

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Speaker 2: in kind income, it actually declined a little bit on

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Speaker 2: a percentage basis in the first quarter from where we

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Speaker 2: were last year. So there's definitely been a lot of

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Speaker 2: a lot of bad news. There's been a lot of

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Speaker 2: negative media attention. But when you go and look at

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Speaker 2: the portfolios themselves, there's not a tremendous amount of distress

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Speaker 2: in them.

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Speaker 1: Well, what's you'll view? Are you are you more worried

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Speaker 1: than David or do you think we're overestimating the natural

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Speaker 1: extent of the damage.

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Speaker 3: I don't think so. I think it's worth sizing sort

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Speaker 3: of that market that's allowed to be redeemable. So if

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Speaker 3: you'll think about one point eight trillion dollars of private credit,

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Speaker 3: the funds that are redeemable probably about ten to fifteen

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Speaker 3: percent or so. If you add the asset backs and

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Speaker 3: all these other things into the equation, that number is

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Speaker 3: are single digits. So we went through the eight largest managers,

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Speaker 3: including the blue Out, Blackstone, and KKR, And except for

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Speaker 3: blue Out that has a slightly higher exposure and Blackstone

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Speaker 3: that has a somewhat higher exposure because of the b

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Speaker 3: credit and b read to the funds that you can redeem,

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Speaker 3: the actual funds for all the other ones that you

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Speaker 3: can redeem, we're talking about less than five percent of

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Speaker 3: credit assets and even the smaller single digit number of

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Speaker 3: the overall assets of those managers. So the institutional money

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Speaker 3: is still coming in the flows were pretty healthy in

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Speaker 3: the first quarter, and as we walked out of the

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Speaker 3: first quarter with the guidance, the Guidance is still looking

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Speaker 3: to fundraising across the business, potentially more than them and

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Speaker 3: last year.

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Speaker 2: I also think it's important to add on about the

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Speaker 2: redemptions that the You know, there's a lot of attention

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Speaker 2: given to the gates coming down and people being restricted

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Speaker 2: from getting money out of funds, which is that that's

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Speaker 2: obviously not an ideal situation, but a much less ideal

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Speaker 2: situation would be people being able to take money out

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Speaker 2: of out of these funds whenever they wanted to, because

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Speaker 2: you would have a significant mismatch of assets and liabilities.

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Speaker 2: You'd have fundamentally illiquid assets being backed by liquid liabilities.

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Speaker 2: That would be a recipe for disaster for these funds.

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Speaker 2: So the gates are actually a defense mechanism for the funds.

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Speaker 1: But for people who are not sort of very deep

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Speaker 1: in the weeds of private credit or even know what

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Speaker 1: it is. I mean, just the idea that there are

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Speaker 1: thousands of retail investors trying to get out all of

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Speaker 1: a sudden, you know, from a market that had grown

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Speaker 1: very very quickly. It's immediately you know concerning that, you know,

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Speaker 1: what do they know about?

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Speaker 3: What all this?

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Speaker 1: You know, what's in these portfolios? What are they worried about?

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Speaker 1: And do they know something that's terrible that we should know?

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Speaker 1: And I'm not asking any questions. I'm going to leave.

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Speaker 1: I'm going to get out now while I can. Do

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Speaker 1: you do you not think that that kind of fear,

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Speaker 1: you know, has a has a kind of ability to

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Speaker 1: feed on itself and also bring in institutional outflows at

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Speaker 1: some point.

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Speaker 3: So what so what we got from the survey and

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Speaker 3: the survey that we've done a while that in the

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Speaker 3: middle of April when all the headlines were up there,

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Speaker 3: it's an institutional survey across the investors, the LPs, the managers,

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Speaker 3: the gps, and the bankers who support that space. And

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Speaker 3: on the institutional side, yes, they fully acknowledge the risks

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Speaker 3: that come from the wealth space. They also acknowledge potentially

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Speaker 3: slower inflows from the wealth space in the shorter term,

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Speaker 3: But what they're not seeing isn't necessarily the longer term

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Speaker 3: slow down and demand for the private credit askets. They

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Speaker 3: still see that structural move into that space.

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Speaker 2: I think you also see in the in the survey

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Speaker 2: you know, this institutional client base or this institutional group

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Speaker 2: of they're not clients. This institutional group takes a longer

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Speaker 2: term strategic view, so they're they're looking out, you know,

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Speaker 2: over the course of several years, thinking in terms of what,

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Speaker 2: you know, what their own business strategies might be if

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Speaker 2: you're a bank, or what your own investment strategies might

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Speaker 2: be if you're an asset manager. And they don't necessarily

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Speaker 2: respond to immediate headlines. And then if you drill down

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Speaker 2: into the redemptions the retail investors that have been driving

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Speaker 2: some of this, there tends to be a concentration of

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Speaker 2: some kind of whale type investors that are I think,

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Speaker 2: if I'm not mistaken, I think a fair amount of

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Speaker 2: the sort of horder money that we've seen is actually

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Speaker 2: international money as well.

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Speaker 1: Is there a reason why they want to get out now?

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Speaker 2: Though?

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Speaker 1: What was the trigger?

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Speaker 3: James? A lot of these lodge investors, mostly most of

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Speaker 3: them are substantial sized family offices that invested in the space.

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Speaker 3: A lot of that was a pure RB charge because

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Speaker 3: the publicly traded BDCs, they were trading that twenty plus

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Speaker 3: discounts to net asset values. So you have similar types

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Speaker 3: of assets one that Greg has a panic and does

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Speaker 3: not have the gates and has a much lower navy

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Speaker 3: in the public space. And other ones are the private

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Speaker 3: BDCs where you cannot get out and do not have

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Speaker 3: to revalue them to the extent of absolutely crazy market.

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Speaker 3: So as an arbit charge, you pull out a one

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Speaker 3: and you get in a twenty percent discount. And the

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Speaker 3: similar types of assets. And this is typically the larger

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Speaker 3: sophisticated family office investors.

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Speaker 1: Okay, I mean, I'm not going to call them dumb money,

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Speaker 1: but it is on page one. Of some of those

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Speaker 1: perspectives is that the fund has the has the you know,

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Speaker 1: the ability, but not actually the obligation to redeem up

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Speaker 1: to five percent, you know, and they don't have to

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Speaker 1: do anything. I don't think if they don't want to,

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Speaker 1: is that is that right, David? They don't have to redeem.

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Speaker 2: They don't. The convention is to limit redemptions to five

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Speaker 2: percent per quarter. We saw a Blackstone and someone else

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Speaker 2: I'm failing to recall, right now, go above that five

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Speaker 2: percent redemption amount. But they don't have to redeem anything,

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Speaker 2: you know. The board of directors, you know, has the

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Speaker 2: discretion to make decisions that are in the best interest

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Speaker 2: of the you know, sort of food u siary responsibility

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Speaker 2: of the fund. But five percent is a pretty reasonable number,

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Speaker 2: I think.

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Speaker 1: Okay, just taking to this with this team, I mean,

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Speaker 1: we're going to have probably in about a month or so,

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Speaker 1: another redemption window. They come up every quarter. Each fund

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Speaker 1: will have to report how much they were asked to

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Speaker 1: give back and how much they actually did give back.

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Speaker 1: Are we going to go through the exactly the same

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Speaker 1: thing again, because you know, those who didn't get out

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Speaker 1: last time, they still want to get out, do they?

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Speaker 3: I would guess probably yes. So if we think about

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Speaker 3: the experience of the period the real estate privately managed

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Speaker 3: fund by Blackstone, but two years ago when the raids

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Speaker 3: started going out, there was a similar reaction and kind

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Speaker 3: of a panic to get out. Took about three plus

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Speaker 3: quarters for those to start turning around to become net

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Speaker 3: inflows from the outflows. But now the fund is doing

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Speaker 3: well two hours later.

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Speaker 2: Yeah, And I think that maybe if you just sort

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Speaker 2: of think in terms of net you know, sort of

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Speaker 2: redemption requests and then you know, sort of the overall netflows,

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Speaker 2: I think probably where we're going to what we're going

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Speaker 2: to see is maybe a little bit of a buyer

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Speaker 2: strike in terms of the sort of subscription for new

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Speaker 2: shares in these private BDCs.

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Speaker 1: Okay, so we can all put in our calendar another

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Speaker 1: private credit freak out in a few weeks or months.

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Speaker 1: Just get used to it. But going back to the survey,

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Speaker 1: Bloomberg Intelligence, in an effort to bring transparency to this market,

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Speaker 1: you did a survey. It was I think first half

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Speaker 1: of April. You asked one hundred and forty participants to

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Speaker 1: answer a range of questions. There was a variety of

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Speaker 1: different respondees throughout the world. What were the surprises for you,

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Speaker 1: David from that survey?

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Speaker 2: Yeah, well, I think something that I think comes as

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Speaker 2: a little bit of a surprise is the is it

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Speaker 2: people maybe weren't umier than you would have expected if

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Speaker 2: you sort of think about when the survey went out.

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Speaker 2: It went out, you know, at a point when maybe

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Speaker 2: media attention around private credit direct lending was about as

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Speaker 2: negative as it possibly could be. But I think that

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Speaker 2: what you saw is the you know, primarily institutional investors

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Speaker 2: that are or institutionally oriented observers that are looking at

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Speaker 2: private credit. I think they sort of take a sober

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Speaker 2: view and I think that you know, they recognize that

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Speaker 2: there are you know, maybe an increased amount of risks

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Speaker 2: arounding the industry, but I think they also continue to

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Speaker 2: view it as a sector that has sort of long

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Speaker 2: term attractive features and and you know, fits into portfolios,

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Speaker 2: it has pretty good long term prospects.

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Speaker 3: What jumps out for you, Paul, I think it's a

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Speaker 3: lot of it has to do with the actual cyclical

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Speaker 3: reaction from retail investors and how institutional investors are different.

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Speaker 3: So we ran this survey every six months for the

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Speaker 3: for the last couple of years. Last one we've done

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Speaker 3: in September. The one before we ran in April, and

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Speaker 3: in April one the tariffs were announced last year. That

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Speaker 3: was a real freak out, so the numbers and the

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Speaker 3: expectation of growth and the penetration of a traditional fixed

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Speaker 3: income market, so almost every magic it was down very

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Speaker 3: substantially because people were thinking about very serious and certain

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Speaker 3: potential damage to the economy and the real creative issues.

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Speaker 3: Right So now we're in in the area where most

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Speaker 3: of the issues are kind of more cyclical, have to

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Speaker 3: do with the investor reactions to the headlines and so on.

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Speaker 3: So that's why from institutional investers you see in a

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Speaker 3: very relatively calumn reaction.

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Speaker 2: Yeah, and you know, one of the other things that

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Speaker 2: sort of jumped out is that there was a sharp

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Speaker 2: increase when we sort of talk to people or ask

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Speaker 2: people about the risks that they saw in terms of growth.

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Speaker 2: One of the things that really came from kind of

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Speaker 2: nowhere being flagged to catching a significant amount of attention

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Speaker 2: is the erosion of underwriting discipline. So that was a

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Speaker 2: pretty significant change from previous surveys that we've run to

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Speaker 2: This one and then the other one that sort of

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Speaker 2: stood out a little bit is uh, regulations. People used

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Speaker 2: to be a lot more focused on regulations and the

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Speaker 2: regulatory impact that you might that that might affect private credit.

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Speaker 2: That's less of a concern today than it was before.

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Speaker 2: It seems to have been supplanted by you know, credit

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Speaker 2: quality and underwriting discipline.

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Speaker 1: Erosion of underwriting discipline. Though, that's an immediately alarming sentence.

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Speaker 1: David expand on it, Please tell me more.

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Speaker 2: I think I think that there's some concern, and there's

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Speaker 2: this concern has been you know, sort of I think

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Speaker 2: growing for a period of time is that the success

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Speaker 2: of private credit has drawn in, for lack of a

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Speaker 2: better term, tourists into the industry, and I think that

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Speaker 2: there's some concern, you know, out there in the marketplace that,

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Speaker 2: uh that maybe some of the newer entrants, in order

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Speaker 2: to gain market share and make an impact and grow

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Speaker 2: their businesses, maybe doing loans on terms of conditions that

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Speaker 2: aren't as conservative as maybe some of the under term

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Speaker 2: players would like to see.

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Speaker 1: So that's just going to mean problems down the road,

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Speaker 1: more defaults, more pick more non accruals, all of that

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Speaker 1: is yet to come.

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Speaker 2: Could be. I think all that really links back. I

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Speaker 2: think that primarily links back to what's going on in

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Speaker 2: the economy, but it puts it puts the overall sort

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Speaker 2: of portfolios of company is in a more vulnerable position.

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Speaker 1: Because the message I've been getting over the last you know,

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Speaker 1: a few months, while all this noise was going on,

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Speaker 1: was that, oh, we've all become much more diligent, We've

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Speaker 1: all done a lot more work, we're all paying a

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Speaker 1: lot more attention because the risks are there and we

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Speaker 1: know that the spotlight is on us. But this survey

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Speaker 1: would suggest the opposite, that actually people are just as

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Speaker 1: loose with the underwriting terms as they as they were

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Speaker 1: in the so called golden days of you know, last

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Speaker 1: year and the year before. What do you think about

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Speaker 1: that pool? Is that? Is that worrying at all?

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Speaker 3: Certainly is? I do also think that it has to

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Speaker 3: do with respondents for the survey versus the actual managers

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Speaker 3: right from when you hear in the car comentary. So

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Speaker 3: we respondent seeing some concerns, but the manager's not necessarily

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Speaker 3: being absolutely loose. You're also kind of they have to

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Speaker 3: think about large managers versus smaller managers, so that the

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Speaker 3: ones that David Caul tourists. So if we do get

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Speaker 3: this cycle going through through the industry, it could actually

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Speaker 3: make the larger managers stronger because we did see a

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Speaker 3: lot of the flows and a lot of the action

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Speaker 3: happening within the largest managers. Right, So if you think

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Speaker 3: about the other assets that they manage, the insurance money

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Speaker 3: and all these other things that are also in the

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Speaker 3: private credit domain but not accounted in that one point

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Speaker 3: eight two trillion dollar private credit number, these are all

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Speaker 3: the businesses that can actually attract the money. Right. We've

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Speaker 3: seen inflows into opportunistic funds in the secondary credit, so

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Speaker 3: all the other things that these guys do that we're

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Speaker 3: not really necessarily seeing or kind of one product funds.

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Speaker 2: I think that, you know, one of the things that

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Speaker 2: maybe stood out a little bit more was the focus

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Speaker 2: on markdowns. So two I would say two things. I

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Speaker 2: would say, you know, we asked a question like, what

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Speaker 2: what do you look at as sort of the leading

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Speaker 2: indication that that that problems might be growing in the

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Speaker 2: sector markdowns is the response that came back was with

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Speaker 2: the you know, most frequency pick was not the answer, okay,

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Speaker 2: and then we also we also or something that also

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Speaker 2: came back was a fair amount of concern about the

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Speaker 2: valuations out there at the marks and you know, I

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Speaker 2: think that's a pretty recurrent theme that comes back, you know,

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Speaker 2: from a lot of different people. My personal view is

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Speaker 2: that it's somewhat misplaced in private credit because I think

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Speaker 2: that it's two sides of the same coin. In private credit,

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Speaker 2: where you've got funds that are that are sort of

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Speaker 2: being run with assets to maturity, where you've got admitted

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Speaker 2: redemption capabilities, you don't have that daily you know, sort

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Speaker 2: of liquidity demand risk in place, and you're dealing with

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Speaker 2: level three assets which are difficult to value assets, then

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Speaker 2: marketing to model kind of makes sense. But if you're

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Speaker 2: living in a different world where you've got a trading

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Speaker 2: book and you're trading in and out of securities, then

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Speaker 2: you really do need to make sure that you're marked

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Speaker 2: as closely as possible to market. But in the case

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Speaker 2: of some of these assets, there just isn't a daily

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Speaker 2: market for some of them. If they traded, they were

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Speaker 2: trade by appointment. Makes it difficult.

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Speaker 1: And you've also noticed that some of the loans are

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Speaker 1: valued differently by the same loan by different BDCs, a

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Speaker 1: different valuation.

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Speaker 2: Yeah. I think there's a famous example in the third

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Speaker 2: quarter last year where there was a significant a large

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Speaker 2: loan Medalia which had a twelve or fifteen point difference

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Speaker 2: in terms of in terms of the market. That came

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Speaker 2: back into alignment later. But if you were trading, I

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Speaker 2: think that one guy should sell or buy to the other,

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Speaker 2: or vice versa.

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Speaker 1: If that's the Yeah, it also costs someone five billion dollars,

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Speaker 1: isn't it in terms of losses on Medellia.

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Speaker 2: So it's a it's a big work out.

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Speaker 3: Yeah, we'll just have to wait for a parlor to

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Speaker 3: deliver and the promise of daily navs for the credit funds.

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Speaker 3: So that's coming. Let's see where and let's see who's follow.

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Speaker 1: Yes, I look forward to that. The other thing that

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Speaker 1: the public liquid markets so called, are pushing back on

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Speaker 1: is the is the kind of value you know, the

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Speaker 1: liquidity premium of going to direct loans private credit versus

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Speaker 1: staying in junk bonds or leverage loans which you can

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Speaker 1: trade and you get, you know, quite a lot of

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Speaker 1: information on the pricing the spread premium between the two.

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Speaker 1: That's that's a much argued topic. What does your survey

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Speaker 1: say on that.

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Speaker 3: Most of the responses are in the range of about

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Speaker 3: three one hundred to one hundred to three hundred basis

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Speaker 3: points in terms of inequity to premium, so the everay

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Speaker 3: somewhere around two hundred. And this is what we typically

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Speaker 3: get from the managers, which this is what we typically

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Speaker 3: kind of see in the market in terms of those funds,

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Speaker 3: and it's been extremely stable at numbers, just stuck there.

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Speaker 1: And the other thing that people are looking close, you know,

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Speaker 1: is fees are they holding up for private credit?

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Speaker 3: Yeah, fees are holding up reasonably well. I think it's

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Speaker 3: sort of been a little bit eroded by the mixshift

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Speaker 3: because there are a lot more insurance as its kind

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Speaker 3: of high quality investment grade assets being originated, they don't

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Speaker 3: carry as much of a fee. They're back to back

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Speaker 3: up then you which is but typically if we look

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Speaker 3: at the product by product, the fees have been very,

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Speaker 3: very stable for the space.

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Speaker 2: Yeah, what we did see which was kind of interesting

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Speaker 2: is with fsk FSKKR, one of the larger public BDCs,

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Speaker 2: it's gotten itself into you know, sort of a little

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Speaker 2: bit of a pickle because it did get downgraded below

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Speaker 2: investment grades. It's a fallen angel right now, and that

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Speaker 2: dramatically increases its funding costs. And that's because they've had

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Speaker 2: some lingering problems in there or you know, credit problems

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Speaker 2: in their portfolios. The manager in this case, one of

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Speaker 2: the affiliates of KKR step back on incentive fees over

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Speaker 2: the next year or so. So that's a way of

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Speaker 2: kind of you know, obviously that reduces the fees, but

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Speaker 2: it also enables the fund to sort of regain a

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Speaker 2: little bit of capital along the way.

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Speaker 1: So private credit isn't going away even through this massive storm,

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Speaker 1: but I'm guessing it just grows more slowly, maybe has

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Speaker 1: more challenges about selling to retail. What was the good

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Speaker 1: news from the survey? Where are the opportunities. What are

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Speaker 1: people most excited about in terms of growth for this market.

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Speaker 3: So in terms of growth, a lot of the action

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Speaker 3: is what you've kind of seen in the few things

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Speaker 3: that I mentioned one opportunistic secondary, all these new things,

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Speaker 3: but more specifically to the survey, so it's the replacement

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Speaker 3: of the fixed in traditional fixed income. There's still demand

378
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Speaker 3: and interest in going private in many areas. One of

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Speaker 3: the areas where we've seen an optic of expectations. So

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Speaker 3: wasn't that back finance, and we keep hearing it being

381
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Speaker 3: a growth area. There's more development happening in that space.

382
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Speaker 3: So if we'll look at the replacement potentially across US

383
00:20:11,160 --> 00:20:15,600
Speaker 3: and Europe, Asia to a very small extent, because now

384
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Speaker 3: it's kind of not happening as quickly relative to the US.

385
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Speaker 3: It's kind of US, Europe and then Asia. It's about

386
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Speaker 3: fifteen percent the expectation for replacement. If we when we

387
00:20:26,520 --> 00:20:29,439
Speaker 3: looked at the asset bag, the expectation right now just

388
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Speaker 3: overcame twenty percent. So it's in a low twenty percent

389
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Speaker 3: expectation much much higher. And if we take these numbers,

390
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Speaker 3: so we think about forty five trillion dollar addressable market

391
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Speaker 3: in the traditional fixed income that can be sort of

392
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Speaker 3: approached by alternative assets, by private credit. In particular, we

393
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Speaker 3: put in fifteen percent of it. It's four trillion dollars

394
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Speaker 3: of assets, and even some blended fee between all these

395
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Speaker 3: strategies and so on, that could be forty plus billion

396
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Speaker 3: dollars of fees up in the pipeline. Again, we're notut

397
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Speaker 3: talking about three years out or five years out. It's

398
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Speaker 3: more like ten fifteen kind of longer term horizon. But

399
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Speaker 3: there's a lot of opportunity there.

400
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Speaker 2: Yeah, And the asset backed deals that are getting done,

401
00:21:12,440 --> 00:21:14,920
Speaker 2: you know, data centers are an example of them. They

402
00:21:15,040 --> 00:21:18,320
Speaker 2: check a lot of boxes for sort of all of

403
00:21:18,359 --> 00:21:22,440
Speaker 2: the all of the parties engaged. It's often insurance companies

404
00:21:22,440 --> 00:21:26,080
Speaker 2: that are that are buying the assets because the bulk

405
00:21:26,119 --> 00:21:29,280
Speaker 2: of the assets that end up being securitized carrie triple

406
00:21:29,320 --> 00:21:32,840
Speaker 2: B ratings. So it works from a regulatory perspective for

407
00:21:32,840 --> 00:21:35,879
Speaker 2: an insurance company and they get an extra one hundred,

408
00:21:35,920 --> 00:21:38,200
Speaker 2: one hundred and fifty or even more basis points of

409
00:21:38,720 --> 00:21:44,639
Speaker 2: spread that for that asset. The companies that are building

410
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Speaker 2: the data centers, you know, Meta or whoever it is,

411
00:21:48,119 --> 00:21:52,240
Speaker 2: rather than using their own cash from day one or

412
00:21:52,280 --> 00:21:56,320
Speaker 2: taking on debt to fund it on their own balance sheet.

413
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Speaker 2: They're able to do it through this asset back structure

414
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Speaker 2: where they agree to a stream of lease payments which

415
00:22:02,800 --> 00:22:07,320
Speaker 2: reduces the leverage impact on the corporate entity. So kind of,

416
00:22:07,920 --> 00:22:10,959
Speaker 2: and then of course the person that ranges that apollo

417
00:22:11,119 --> 00:22:13,959
Speaker 2: or whoever collects a pretty nice feel along the way too.

418
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Speaker 1: And just to be clear, by replacement, we are talking

419
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Speaker 1: about let's say traditional fix income portfolio has some let's

420
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Speaker 1: say junk bonds and some high grade bonds and some

421
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Speaker 1: loans in there, but fifteen percent of that could end

422
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Speaker 1: up going into private credit. Is that right?

423
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Speaker 3: It's a little bit different. It's more of a from

424
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Speaker 3: a nature perspective. Think about an this year who had

425
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Speaker 3: a loan from a bank or who issued the bond.

426
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Speaker 3: They're now trying to diversify the sources, including the asset

427
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Speaker 3: back and so on. So in about fifteen percent of

428
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Speaker 3: the cases, people who usually went to this market can

429
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Speaker 3: turn to the private market for different sorts of solutions.

430
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Speaker 1: Wouldn't they get better execution by publicly syndicating and making

431
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Speaker 1: a you know, as much demand as possible in tension

432
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Speaker 1: between different buyers and all that that would squeeze.

433
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Speaker 3: It is true that might get a better spread in

434
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Speaker 3: the public market, but for example, David just destroyed the

435
00:23:06,480 --> 00:23:13,119
Speaker 3: very bespoke structure for the let's say the data warehouse. Listen. Uh,

436
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Speaker 3: it's something that only you need to work with, like

437
00:23:15,880 --> 00:23:19,520
Speaker 3: one lender or several lenders, something very uniquely and bespoke

438
00:23:19,760 --> 00:23:23,919
Speaker 3: to build for you, versus a syndicated loan. It also

439
00:23:23,920 --> 00:23:27,960
Speaker 3: provides other things, kind of quicker execution. You have one

440
00:23:28,000 --> 00:23:32,960
Speaker 3: on one negotiations and if anything goes different with the loan,

441
00:23:33,080 --> 00:23:36,200
Speaker 3: especially like AI and everything else. Everybody's talking about trillions

442
00:23:36,200 --> 00:23:39,080
Speaker 3: dollars of capex, but it's still kind of unproving and

443
00:23:39,160 --> 00:23:41,560
Speaker 3: we don't know how it's going to work. So if

444
00:23:41,960 --> 00:23:45,640
Speaker 3: anytime in the future you need some sort of renegotiations,

445
00:23:45,720 --> 00:23:48,840
Speaker 3: some term structure and change, if you took that loan

446
00:23:48,880 --> 00:23:51,720
Speaker 3: from a bank and the bank syndicated it, it's very

447
00:23:51,760 --> 00:23:55,080
Speaker 3: difficult to renegotiate the terms of the loans. If you

448
00:23:55,080 --> 00:23:59,560
Speaker 3: have a bilateral kind of workthrough with the particular lender,

449
00:24:00,280 --> 00:24:03,120
Speaker 3: then that's much easier to adjust to change in the environment.

450
00:24:03,440 --> 00:24:06,080
Speaker 2: And James, you'd also asked about about sort of the

451
00:24:07,080 --> 00:24:13,040
Speaker 2: growth outlook, and you know maybe what might be surprised there,

452
00:24:13,160 --> 00:24:15,560
Speaker 2: or maybe not a surprise. But you know, we've been

453
00:24:15,560 --> 00:24:19,480
Speaker 2: through four iterations of this this survey, and one of

454
00:24:19,480 --> 00:24:22,679
Speaker 2: the questions that we've asked each time is you know

455
00:24:22,760 --> 00:24:25,760
Speaker 2: to what extent you know? What you know? Can you

456
00:24:25,840 --> 00:24:28,760
Speaker 2: put put numbers on what your growth expectations are over

457
00:24:28,800 --> 00:24:32,320
Speaker 2: the next five years. And in each of the four

458
00:24:32,400 --> 00:24:35,600
Speaker 2: surveys that we got back, about ninety percent of the

459
00:24:35,640 --> 00:24:38,200
Speaker 2: people or actually say only about ten percent of the

460
00:24:38,240 --> 00:24:44,760
Speaker 2: people saw growth of ten percent or more annually. That

461
00:24:44,840 --> 00:24:48,200
Speaker 2: number is kind of held steady, so you know, most

462
00:24:48,200 --> 00:24:50,960
Speaker 2: people see growth in the in the five to ten

463
00:24:51,040 --> 00:24:55,360
Speaker 2: percent range. That's forty seven percent of respondents came back

464
00:24:55,359 --> 00:24:58,640
Speaker 2: looking at forty at five to ten percent growth. That's

465
00:24:58,720 --> 00:25:02,600
Speaker 2: up one percent from the REVIU survey. It's up five

466
00:25:02,640 --> 00:25:05,760
Speaker 2: percent from our first survey. It's down slightly from our

467
00:25:05,840 --> 00:25:09,959
Speaker 2: second survey. So the growth of expectations haven't changed dramatically,

468
00:25:10,040 --> 00:25:13,040
Speaker 2: even though this survey went out kind of when things

469
00:25:13,040 --> 00:25:14,240
Speaker 2: felt the worst.

470
00:25:14,600 --> 00:25:16,360
Speaker 1: But it is a market that was growing at much

471
00:25:16,400 --> 00:25:17,239
Speaker 1: higher rates, isn't it.

472
00:25:18,440 --> 00:25:22,439
Speaker 2: So the the direct lending side of the market was

473
00:25:22,440 --> 00:25:24,400
Speaker 2: growing in a much higher rate. Yeah, if you sort

474
00:25:24,400 --> 00:25:27,040
Speaker 2: of think in terms of private credit overall, it's a

475
00:25:27,119 --> 00:25:29,720
Speaker 2: larger ecosystem than just direct lending.

476
00:25:30,359 --> 00:25:32,159
Speaker 1: I want to finish up by asking you whether this

477
00:25:32,200 --> 00:25:35,320
Speaker 1: thing still works for retail? What kind of read did

478
00:25:35,320 --> 00:25:37,760
Speaker 1: you get on that, because that seems to be the

479
00:25:37,760 --> 00:25:40,159
Speaker 1: one that a lot of big firms like Apollo pin

480
00:25:40,240 --> 00:25:42,359
Speaker 1: their hopes on, you know, reaching this you know, multi

481
00:25:42,359 --> 00:25:45,520
Speaker 1: trillion dollar part of four to one K money in

482
00:25:45,560 --> 00:25:48,000
Speaker 1: this country, but then also elsewhere in the world. It

483
00:25:48,240 --> 00:25:51,679
Speaker 1: would seem to make sense that you can, you know,

484
00:25:52,160 --> 00:25:54,200
Speaker 1: use this for your retirement and just put it away

485
00:25:54,200 --> 00:25:56,359
Speaker 1: and come back in twenty years. But does it still

486
00:25:56,359 --> 00:25:59,959
Speaker 1: work for retail given the problems that we're facing with BDC.

487
00:26:00,680 --> 00:26:04,840
Speaker 3: It should. It probably needs retail, probably needs a better education.

488
00:26:05,560 --> 00:26:08,240
Speaker 3: Maybe those things should not be called similar liquid but

489
00:26:08,280 --> 00:26:12,840
Speaker 3: should be called something else. But essentially, if you think

490
00:26:12,880 --> 00:26:16,160
Speaker 3: of the alternative assets and retail portfolios, and globally we're

491
00:26:16,160 --> 00:26:20,159
Speaker 3: talking about one hundred trillion dollars of some estimates much higher,

492
00:26:20,840 --> 00:26:24,479
Speaker 3: and it's low single digits, So there is still a

493
00:26:24,520 --> 00:26:28,000
Speaker 3: way to allocate to those in terms of the four

494
00:26:28,000 --> 00:26:30,320
Speaker 3: to one K plans in the US. So the defined

495
00:26:30,320 --> 00:26:34,040
Speaker 3: contribution over the thirteen fourteen trillion dollars of assets out there.

496
00:26:35,520 --> 00:26:38,000
Speaker 3: It does make sense exactly as you describe, and the

497
00:26:38,080 --> 00:26:41,840
Speaker 3: Department of Labor just put out some letters for comment

498
00:26:42,000 --> 00:26:47,040
Speaker 3: in terms of trying to get a legal protections for

499
00:26:47,119 --> 00:26:51,359
Speaker 3: the fiduciary responsibility. So those actually can be going into

500
00:26:51,359 --> 00:26:54,320
Speaker 3: those ponds. But yes, liquidity is always going to be

501
00:26:54,320 --> 00:26:57,200
Speaker 3: a concern, so it would have to be somewhat limited portion,

502
00:26:57,400 --> 00:27:00,639
Speaker 3: and the high fees is definitely going to be always

503
00:27:00,680 --> 00:27:04,520
Speaker 3: cook part of the conversation. But logically there should be

504
00:27:04,520 --> 00:27:07,840
Speaker 3: a proportion of those assets in the retail portfollowers.

505
00:27:07,920 --> 00:27:10,080
Speaker 2: Yeah, and it seems like there probably needs to be

506
00:27:10,119 --> 00:27:13,920
Speaker 2: some you know, obviously some heightened disclosure changes in the disclosure.

507
00:27:13,960 --> 00:27:15,439
Speaker 2: But if you look at the if you look at

508
00:27:15,440 --> 00:27:19,320
Speaker 2: the performance of of you know, sort of retail oriented

509
00:27:19,359 --> 00:27:22,280
Speaker 2: private credit over the past ten years or so, it's

510
00:27:22,320 --> 00:27:27,000
Speaker 2: been relatively low volatility and it's been relatively high returns.

511
00:27:27,040 --> 00:27:29,840
Speaker 2: So the track record has been has been quite good. Obviously,

512
00:27:29,880 --> 00:27:33,240
Speaker 2: that doesn't predict the future in every case, but the

513
00:27:33,320 --> 00:27:35,080
Speaker 2: track record's been good.

514
00:27:35,480 --> 00:27:37,680
Speaker 1: And the survey results would suggest that this big storm

515
00:27:37,680 --> 00:27:39,800
Speaker 1: we've been through will blow over and you know, private

516
00:27:39,800 --> 00:27:42,160
Speaker 1: credit will emerge. The other side and start to grow again.

517
00:27:42,200 --> 00:27:44,040
Speaker 1: But are there any things out there that kind of

518
00:27:44,040 --> 00:27:45,639
Speaker 1: worry you at this point that you think, you know,

519
00:27:45,680 --> 00:27:47,320
Speaker 1: we should be paying more attention to In terms of

520
00:27:47,320 --> 00:27:48,160
Speaker 1: the risks.

521
00:27:48,280 --> 00:27:51,320
Speaker 2: I think that I've I've always thought that the biggest

522
00:27:51,400 --> 00:27:57,399
Speaker 2: risk facing leveraged middle market companies is the economy. There

523
00:27:57,440 --> 00:27:59,840
Speaker 2: are other risks out there, like the impact of AI

524
00:28:00,080 --> 00:28:03,320
Speaker 2: on software and things like that, but I think that

525
00:28:03,400 --> 00:28:06,879
Speaker 2: you really need to watch the economy right now. I

526
00:28:06,920 --> 00:28:09,800
Speaker 2: think that the consensus forecasts that we have not we have,

527
00:28:09,960 --> 00:28:13,159
Speaker 2: but the consensus that we have put together here at

528
00:28:13,160 --> 00:28:16,760
Speaker 2: Bloomberg shows about a thirty percent probability of recession over

529
00:28:16,800 --> 00:28:18,639
Speaker 2: the next year in the United States and two percent

530
00:28:18,720 --> 00:28:22,639
Speaker 2: GDP growth in twenty twenty six in twenty twenty seven.

531
00:28:22,720 --> 00:28:27,080
Speaker 2: And if that holds true, then I wouldn't expect a

532
00:28:27,080 --> 00:28:28,880
Speaker 2: tremendous amount of credit deterioration.

533
00:28:29,160 --> 00:28:30,280
Speaker 1: Fully worried about anything.

534
00:28:30,359 --> 00:28:33,040
Speaker 3: I don't worry about the headlines. You didn't mention obviously

535
00:28:33,119 --> 00:28:35,600
Speaker 3: that they're probably going to have another quarter of those,

536
00:28:35,680 --> 00:28:38,280
Speaker 3: maybe a few quarters, right So things are going to

537
00:28:38,600 --> 00:28:40,880
Speaker 3: keep coming back, and the headlines are still going to

538
00:28:40,880 --> 00:28:43,640
Speaker 3: be negative. Focused on the very small portion of the market,

539
00:28:44,200 --> 00:28:47,400
Speaker 3: so it's sort of becoming slightly infectious and weigh and

540
00:28:47,480 --> 00:28:51,560
Speaker 3: on the wealth side of the business. So it's again

541
00:28:51,720 --> 00:28:54,080
Speaker 3: I wouldn't I wouldn't ignore it completely as not being

542
00:28:54,120 --> 00:28:56,480
Speaker 3: at risk, and I think the survey acknowledged that as well.

543
00:28:56,560 --> 00:28:59,720
Speaker 1: Great stuff, David Havens and Pool Gilberg, Tuva ACE Analysts,

544
00:29:00,000 --> 00:29:01,480
Speaker 1: Berg Intelligence, many thanks for being on.

545
00:29:01,440 --> 00:29:03,360
Speaker 2: The Credit Edge being with you, James.

546
00:29:03,480 --> 00:29:05,880
Speaker 1: For more credit market analysis and insight, read all of

547
00:29:05,960 --> 00:29:09,320
Speaker 1: David and Paul's great work on the Bloomberg Terminal. Bloomberg

548
00:29:09,360 --> 00:29:11,960
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549
00:29:12,000 --> 00:29:15,480
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550
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552
00:29:22,680 --> 00:29:25,040
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553
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Speaker 1: us a review, tell your friends, or email me directly

556
00:29:34,680 --> 00:29:38,320
Speaker 1: at jcromb eight at Bloomberg dot net. I'm James Crombie.

557
00:29:38,360 --> 00:29:40,160
Speaker 1: It's been a pleasure having you join us again. Next

558
00:29:40,160 --> 00:29:47,200
Speaker 1: week on the credit edge,