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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the All Thoughts Podcast.

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Speaker 2: I'm Tracy Alloway.

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Speaker 3: And I'm Joe whysant Thal.

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Speaker 2: Joe, do you remember reading headlines like the incredible shrinking

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Speaker 2: stock market?

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Speaker 3: Yes, I forgot about that whole period a lot in

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Speaker 3: the twenty ten's in which there were not a lot

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Speaker 3: of new IPOs companies that were waiting longer in their

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Speaker 3: life cycle to go public. It's kind of crazy, you know.

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Speaker 3: Now you have these multi billion dollar companies that are

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Speaker 3: still private, and then you like look at like, you know,

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Speaker 3: when Microsoft and Apple and all those went public, and

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Speaker 3: it was like no one knew anything about them when

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Speaker 3: they first came out.

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Speaker 2: Yeah, that's true. And I think it's still pretty much

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Speaker 2: an ongoing trend where you do have more companies deciding

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Speaker 2: not to raise public stock at all, so they'll just

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Speaker 2: stay at private forever. They'll tap venture capital or whatever

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Speaker 2: for their funding needs. And obviously the stock market has

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Speaker 2: grown in size in terms of market cap, but maybe

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Speaker 2: not necessarily in terms of absolute available shares. And this

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Speaker 2: has been a sort of ongoing trend and discussion.

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Speaker 3: Totally private financing has just gotten so huge. You know,

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Speaker 3: we talk about private equity and VC and all of

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Speaker 3: this stuff, that there is an incredible amount of money.

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Speaker 3: In fact, the one time when the public market spigot

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Speaker 3: opened like crazy was the SPAC mania, and so many

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Speaker 3: of those companies turned out to be total garbage. So

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Speaker 3: there's obviously some reason why, at least in the stock

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Speaker 3: market side. You know, it's almost like opting to go

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Speaker 3: the public route is almost like a red flag.

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Speaker 2: Oh that's a terrible thought, but you're right.

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Speaker 3: But there seems to be something to that, right, Well,

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Speaker 3: that's what we've seen in the last several years.

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Speaker 2: Okay, what if I told you that a similar trend

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Speaker 2: to the one that has played out in the stock

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Speaker 2: market is now happening in the corporate debt market.

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Speaker 3: We've obviously talked about private credit affair amount on the show,

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Speaker 3: but it had not occurred to me until you just

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Speaker 3: put it that way, the idea that maybe there's some

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Speaker 3: sort of like parallel here about the way in which, yes,

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Speaker 3: the incredible shrinking stock market might at some point reflect

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Speaker 3: maybe we'll talk about the incredible shrinking bond market.

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Speaker 4: One.

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Speaker 2: Yeah, both bonds and loans, right, And I think the

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Speaker 2: way you could maybe summarize what's been going on with

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Speaker 2: the corporate debt market is for a long time, up

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Speaker 2: until relatively recently, we had a lot of companies that

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Speaker 2: were issuing bonds, so selling those two investors, or they

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Speaker 2: were taking out loans from banks, or they were taking

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Speaker 2: out loans that would be intermediated by banks and then

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Speaker 2: sold on to more investors. Those are called leverage loans.

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Speaker 2: And this was kind of what we had seen in

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Speaker 2: the stock market in like the eighties, the nineties, maybe

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Speaker 2: the early two thousands, lots of companies coming to the

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Speaker 2: public market via debt. But now with the rise of

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Speaker 2: private debt again, the clue is kind of in the name.

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Speaker 2: More and more loans and bonds are instead being made

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Speaker 2: by what are known as direct lenders, you know, private equity,

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Speaker 2: this sort of shadow finance group of financial entities, and

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Speaker 2: they're doing more of this, and there's less bonds and

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Speaker 2: loans that are actually being publicly distributed to investors.

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Speaker 3: Right, And we've sort of talked a lot about the

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Speaker 3: why of private credit and various advantages and you know,

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Speaker 3: certain types of companies and industries that maybe banks don't

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Speaker 3: service directly, or maybe some flexibility we haven't really talked

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Speaker 3: about like the consequences or some of the like, all right,

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Speaker 3: what does that then mean about if so much of

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Speaker 3: the credit market goes private like this?

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Speaker 2: Yeah, And this is the thing I find and really

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Speaker 2: interesting because there's so much handwringing about the financial stability

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Speaker 2: concerns of private debt. So is this just a gigantic

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Speaker 2: bubble and everything's going to blow up one day? But

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Speaker 2: there are actually immediate concerns things that are happening right now.

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Speaker 2: So I'm very pleased to say that we have the

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Speaker 2: perfect guests. We are going to be speaking with the

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Speaker 2: authors of a paper called the Credit Markets Go Dark.

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Speaker 2: It's a really great paper. I wrote about it a

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Speaker 2: few weeks ago in the All Loots newsletter, which you

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Speaker 2: should all subscribe to, and we're going to be diving

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Speaker 2: into it in some more detail now. So we're speaking

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Speaker 2: to Jared Elias. He is the Scott C. Collins Professor

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Speaker 2: of Law at Harvard Law School, and his co author

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Speaker 2: Elizabeth Defontine. She is the Carl W. Leo Professor of

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Speaker 2: Law at Duke University School of Law. So, Jared and Elizabeth,

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Speaker 2: thank you so much for coming on All Bots.

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Speaker 4: Thank you so much.

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Speaker 2: So, first of all, how did this get on your

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Speaker 2: radar as law professors? How did this become so thing

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Speaker 2: that you were both interested in doing research on.

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Speaker 5: My research focuses on corporate bankruptcy, and I'm always interested

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Speaker 5: in what's going on in the debt markets because what

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Speaker 5: happens in bankruptcy is really downstream of what's going on

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Speaker 5: in death right. There's constant innovation and depth, and that

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Speaker 5: shows up in innovation and bankruptcy. And something that I

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Speaker 5: kept hearing from ourket participants was increasingly important was private credit,

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Speaker 5: private credit, private credit.

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Speaker 6: And that made me want to learn about it.

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Speaker 5: And what you do and you're the member of a

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Speaker 5: faculty and you want to learn about something is you

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Speaker 5: try to find a way to write about it.

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Speaker 4: So I came at this a little bit differently, which

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Speaker 4: is Jared and I are both recovering big law firm lawyers,

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Speaker 4: So we practiced in this area for a long time

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Speaker 4: before becoming academics. And when I was in practice, it

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Speaker 4: was all private equity all the time, and it was

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Speaker 4: a very exciting time. Lots of transactions, lots of deals,

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Speaker 4: lots of innovation in the financial markets, and one piece

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Speaker 4: of it that was changing really rapidly was the private

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Speaker 4: credit funds. So these you know, the big private equity funds,

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Speaker 4: you know, the bins and TPGs and others. They had

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Speaker 4: these private credit arms that were appearing and getting bigger

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Speaker 4: and bigger and bigger. And I started becoming more of

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Speaker 4: the story, and that to me was very interesting because

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Speaker 4: private what do you behaves in such a unique way,

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Speaker 4: so differently from the rest of the way we're used

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Speaker 4: to big companies operating and so on, And it was

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Speaker 4: really interesting to me to try to figure out why

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Speaker 4: this was happening now on the credit side and what

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Speaker 4: the implications of that would be.

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Speaker 5: Elizabeth and I both left practice around the same time,

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Speaker 5: like right after the financial crisis, and this is one

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Speaker 5: of the real changes that has changed the way that.

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Speaker 6: Corporate finance has done over the past ten years.

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Speaker 5: Like when I started to hear from people about private credit,

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Speaker 5: I realized, I'm on a date. Something new is going on,

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Speaker 5: and I need to get smart on it.

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Speaker 2: Okay, So both of you just set the scene for

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Speaker 2: why you're interested in it, and it sort of reflects

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Speaker 2: our feelings about private credit as well. You know, we

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Speaker 2: hear about this market, you hear things like outstanding private

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Speaker 2: credit is now bigger than the publicly issued market for

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Speaker 2: high yield bonds, which just as a longtime credit reporter,

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Speaker 2: kind of blows my mind that that's the case. But

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Speaker 2: talk to us about what you've seen and observed in

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Speaker 2: terms of the evolution of the credit market. So I

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Speaker 2: mentioned that we're sort of moving away from a lot

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Speaker 2: of these publicly issued or syndicated bonds and loans to

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Speaker 2: something that is much more difficult to keep track of.

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Speaker 2: And I know I said that the private debt market

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Speaker 2: or the private credit market is bigger than publicly issued

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Speaker 2: high yield but that's just going off of like a

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Speaker 2: couple estimates that I've seen, and I'm sure, as you know,

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Speaker 2: having written this paper, the estimates of the size of

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Speaker 2: this market are kind of all over the place.

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Speaker 4: I think that's exactly the message that we one of

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Speaker 4: the messages of this paper, which is that one of

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Speaker 4: the interesting things about the private credit market is that

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Speaker 4: it is so private that the data just isn't there

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Speaker 4: to try to figure out how big the market is,

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Speaker 4: is what's going on with all of these loans. So

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Speaker 4: there are some ways indirect ways of trying to access

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Speaker 4: what's happening, but there's no centralized database that you can

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Speaker 4: look to even to say how big this market is.

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Speaker 4: But in terms of what's going on and what's new,

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Speaker 4: we kind of think of the debt markets as evolving

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Speaker 4: in stages, and so the sort of original granddaddy of

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Speaker 4: the mall was kind of the classic bank loan, where

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Speaker 4: you have a really tight, intense relationship between a company

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Speaker 4: and its relationship bank, and this can go on for

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Speaker 4: decades and you know it's just a single loan, and

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Speaker 4: that's a big piece of their debt puzzle. For the

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Speaker 4: very largest companies, they went totally the other direction and

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Speaker 4: they could issue, of course, corporate bonds in the public

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Speaker 4: bond markets. And then you had this period started in

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Speaker 4: the very late eighties, but more so in really got

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Speaker 4: going in the nineties and especially in the early two thousands,

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Speaker 4: which was the syndicated loan market. So they're what you

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Speaker 4: see is these are in fact still loans, but they

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Speaker 4: are arranged by a big investment bank and they are

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Speaker 4: syndicated out to a really really large set of predators,

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Speaker 4: and then the debt can be traded. So this was

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Speaker 4: sort of a big innovation that you could actually have

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Speaker 4: really diversified portfolios of loans and lots of active trading

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Speaker 4: and loans, and a very large group of creditors, even

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Speaker 4: for what we used to call, you know, senior bank loans.

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Speaker 4: And to this day this market is still called bank

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Speaker 4: debt from that legacy of relationship banking. But then what's

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Speaker 4: so interesting about private credit is that now everything is

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Speaker 4: going in the other direction, which is to say, instead

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Speaker 4: of going for trading markets and diversification and really liquid investments,

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Speaker 4: very large group of creditors, now everything is shrinking and

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Speaker 4: contracting and going private. So that's what private credit really

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Speaker 4: means is now suddenly instead of having a very very

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Speaker 4: large group of creditors for your company, you can, in theory,

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Speaker 4: find one single private credit fund that funds your entire

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Speaker 4: the entire debt.

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Speaker 6: Piece of your capital structure.

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Speaker 4: So you have a single holder, and that holder is

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Speaker 4: a private credit fund, which is usually a private investment fund,

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Speaker 4: and that is a single holder of your debt. So

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Speaker 4: you know, no trading. We'll talk about exceptions to all

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Speaker 4: of the things that I just said at some point,

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Speaker 4: I'm sure, but one single holder of your entire debt,

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Speaker 4: and it's a private holder not subject to bank regulation

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Speaker 4: not subject to any of the usual things that we're

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Speaker 4: seeing in the debt market.

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Speaker 5: We shouldn't understate just what a radical change this is

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Speaker 5: in debt. So the way that we teach corporate finance

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Speaker 5: and law schools and business schools is that when we

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Speaker 5: had a single lender, it was really bad because that

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Speaker 5: single lender was then exposed to all of the risk

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Speaker 5: of the loan, and that was a bad thing, right,

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Speaker 5: And so we got broadly syndicated debt as a solution

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Speaker 5: to that problem. And that was awesome, right because broadly

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Speaker 5: syndicated debt meant the bankloads could be much bigger. The

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Speaker 5: risk has dispersed over many people, everybody wins, right, And

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Speaker 5: all of a sudden we retreated from that vision to

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Speaker 5: a totally different vision where they spread risk over people

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Speaker 5: by making them investors in a fund, and where you

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Speaker 5: have these funds that can make loans that are, you know,

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Speaker 5: becoming bigger than any kind of loan that any bank

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Speaker 5: could have ever.

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Speaker 6: Made on their own. So it's a total revolution and

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Speaker 6: the way that we think about debt.

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Speaker 5: And now you listen to some of the podcasts, and

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Speaker 5: obviously you know, you guys have had a few of

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Speaker 5: these with people who work in the industry, and they

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Speaker 5: just think, like, of course, a single lender can make

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Speaker 5: big loans and that's great.

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Speaker 6: Well, ten years ago, we didn't think that was the

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Speaker 6: right thing to do.

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Speaker 7: At all, and now all of a sudden, we do.

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Speaker 3: You spell out this evolution of the debt markets and

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Speaker 3: the historical things you're taught in law school about the

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Speaker 3: danger of single lenders. We've talked to people in the

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Speaker 3: industry and they have their explanations for why this particular

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Speaker 3: market has boomed. But from your research, what would you

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Speaker 3: say are the drivers of this or when you talk

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Speaker 3: to people, what problems does the private credit market solve

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Speaker 3: for them.

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Speaker 4: The interesting thing about this is that there's multiple stories

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Speaker 4: going on at the same time. So one is that

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Speaker 4: this is just actually substituting for a lot of the

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Speaker 4: activity that banks did because the banks, ever since the

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Speaker 4: financial crisis, have been really constrained for a lot of reasons. One,

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Speaker 4: they've primarily been constrained because of regulation and sort of

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Speaker 4: regulation designed to discourage them from making risky loans and

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Speaker 4: from you know, to have divestigation in their portfolio and

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Speaker 4: so on, and just their evolving model of doing business

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Speaker 4: that they prefer to be sort of the middleman and

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Speaker 4: get some fees rather than lend directly. All kinds of

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Speaker 4: reasons why banks have retrived from particularly the lower middle market,

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Speaker 4: but also all the way to the largest companies. A

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Speaker 4: second story is just that there's been too much bank regulation.

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Speaker 4: So I'm not going to take a position on whether

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Speaker 4: that's true or not, but that bank regulation is stifling

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Speaker 4: the banks and they can't really lend and so on.

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Speaker 4: A third story is one that we find really interesting

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Speaker 4: and appealing, which is that it may just be that

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Speaker 4: it never really made all that much sense to fund

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Speaker 4: loans using bank deposits that essentially you have a very

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Speaker 4: short term liability which is customer deposits, and very long

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Speaker 4: term assets. So some of these loans, of course, our

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Speaker 4: multi year loans. And that's just a fundamental mismatch that

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Speaker 4: banks have always struggled with and that bank regulation has

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Speaker 4: always struggled with. And this is a really nice, neat

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Speaker 4: solution to that. And the reason it's showing up now

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Speaker 4: is that thanks to sort of loosening of some of

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Speaker 4: the security laws and other things, it's finally the case

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Speaker 4: that you can get these investment funds that are big

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Speaker 4: enough to actually take over the role of banks and

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Speaker 4: for them. You know, the sort of positive side of

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Speaker 4: private credit is that you now have a better match

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Speaker 4: between the sort of funding source, which is you have

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Speaker 4: these big institutional investors putting capital into private credit funds

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Speaker 4: that is locked in for a number of years, and

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Speaker 4: you're matching that really well against the loans that are

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Speaker 4: also a multi year So in some sense it's actually

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Speaker 4: a better fit than banks for financing this type of

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Speaker 4: We'll talk about some of the issues with that and

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Speaker 4: open ended funds and so on. And I think the

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Speaker 4: last part of the story is one that Jared can

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Speaker 4: tell better than I can, which is that it may

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Speaker 4: be actually that if you have creditors that are too dispersed,

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Speaker 4: it becomes inefficient. And that's sort of a different part

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Speaker 4: of the story that Jrek can tell.

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Speaker 5: Yeah, So when you talk to people in this business,

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Speaker 5: and we did a lot of we had a lot

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Speaker 5: of conversations with people in the process and working on

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Speaker 5: this paper, one of the things you hear over and

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Speaker 5: over is that private credit just a better user experience.

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Speaker 5: It's a better user experience at the beginning when the

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Speaker 5: CFO of a company comes in and says I need

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Speaker 5: a loan, and you say, no problem, we can give

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Speaker 5: you one, and like, here's a check a few days later.

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Speaker 5: You know that's not always the process, but you know,

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Speaker 5: people said, you know, we can do that. You're not

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Speaker 5: going to have to go through the credit committee a

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Speaker 5: Bank of America. You're not going to have to go

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Speaker 5: through a loan syndication process, and you're not going to

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Speaker 5: have to like have Bank of America go round looking

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Speaker 5: for investors. Instead, we've got the money, it's sitting in

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Speaker 5: our bank accounts.

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Speaker 6: We're ready to give it to you.

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Speaker 5: And that better user experience kind of also applies to

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Speaker 5: the life cycle of the loan, where you know you

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Speaker 5: have a problem, you run into trouble, you need to

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Speaker 5: get an extension to something, or you need to have

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Speaker 5: a covenant default excused. You call your private credit lender.

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Speaker 5: They're your partner, they're not just your lender. They're there

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Speaker 5: to help you. And you say, hey, I got this problem.

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Speaker 5: You know, well, you help, and the private credit lender

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Speaker 5: is helpful. And the thinking there is that private credit

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Speaker 5: lenders are in the business of originating loans, that's what

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Speaker 5: they do, and holding them to maturity. And one of

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Speaker 5: the ways that they compete with each other is by

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Speaker 5: being good partners when times are bad, and then when

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Speaker 5: times get really bad and need to look at some

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Speaker 5: sort of restructuring, the private credit lender is there to

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Speaker 5: be helpful and they are going to do things like

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Speaker 5: give you longer to run on the loan, to give

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Speaker 5: you a chance to try to turn the business around.

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Speaker 5: And most especially, what they're not going to do is

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Speaker 5: check your loan, chop it into fifteen pieces and sell

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Speaker 5: it to fifteen really nasty hedge funds will then become

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Speaker 5: impossible for you to negotiate with. Right, so you have

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Speaker 5: this kind of user experience feature to private credit that

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Speaker 5: you know everyone in the business. And obviously they have

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Speaker 5: their own selfish motivations for saying this, that we should

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Speaker 5: be a sent skin a little skeptical, but they say,

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Speaker 5: you know, basically, you know, you want to come to

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Speaker 5: us roll like the Apple Store for credit. You know

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Speaker 5: those other values like Bank of America. You know, that's

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Speaker 5: like going to buy something at the used car dealership.

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Speaker 5: You don't want that, right, you want the Apple Store.

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Speaker 5: And there really is something to this idea that they're

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Speaker 5: trying to compete on service.

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Speaker 2: I love the idea of like the user experience, or

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Speaker 2: maybe even the user interface, so you know, I can

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Speaker 2: go to chat GPT, ask a question and get a

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Speaker 2: direct answer really quickly that goes to the heart of

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Speaker 2: whatever I'm asking, versus like do a Google search and

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Speaker 2: then sift through all the results and it takes much

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Speaker 2: longer and there are much more articles to work with,

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Speaker 2: and that sort of thing. Jared, I'm glad you brought

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Speaker 2: up mean hedge funds because this is something I wanted

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Speaker 2: to ask you, which is how much of the booming

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Speaker 2: private debt market or private credit market has to do

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Speaker 2: with recent responses to a recent strategies around bankruptcy and

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Speaker 2: I guess creditor on creditor violence, where you end up

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Speaker 2: having people like fighting over the collateral or the things

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Speaker 2: that are like backing a specific company when it's in bankruptcy.

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Speaker 2: I get the sense that one of the reasons private

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Speaker 2: credit has become such a thing is because people want

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Speaker 2: to be as secured as possible and as high up

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Speaker 2: in the payment or bankruptcy waterfall as they possibly can be.

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Speaker 5: Yeah, So when we went into this research project, I

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Speaker 5: think Elizabeth and I were both kind of hoping that

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Speaker 5: we could tell the following story, and the story would

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Speaker 5: be something like this. Over the twenty tens, you had

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Speaker 5: this deterioration in norms between debtors and creditors where all

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Speaker 5: of a sudden, debtors started doing really nasty things to

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Speaker 5: creditors that they'd never done on a regular basis before,

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Speaker 5: like stealing their collateral, stripping the firm of assets when

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Speaker 5: it became distressed, and all these other things that were

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Speaker 5: just new behaviors that we hadn't seen before, this sort

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Speaker 5: of like hardball, scorched earth bargaining environment that became the

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Speaker 5: story of debtor creditor law.

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Speaker 6: Like the story of debtor creditor law today to a

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Speaker 6: very large extent, is really.

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Speaker 5: Smart people looking for problems and documents so they can

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Speaker 5: take advantage of other investors in the debt. Like that

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Speaker 5: is very much the story at the moment, and it's

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Speaker 5: very strange that wasn't the story ten years ago. That's

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Speaker 5: a story. So I think we went into this really

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Speaker 5: hoping that that story would be the story of private credit.

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Speaker 5: And I think that would be wrong if you were

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Speaker 5: to say that, it would really go too far.

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Speaker 6: I think it's a story of private credit.

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Speaker 5: Is you have this response to what one hedge fund

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Speaker 5: manager described to me as I can't afford anymore to

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Speaker 5: invest in a small loan because unless it's a big loan,

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Speaker 5: I won't be able to pay the legal expenses of

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Speaker 5: defending it while still earning a return, because it's just

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Speaker 5: become so expensive and lintigious to invest in debt. Poof

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Speaker 5: solution private credit. Right, instead of negotiating with multiple lenders,

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Speaker 5: there's one lender. All of the investors who want exposure

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Speaker 5: to fixed income, they give their money to the private

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Speaker 5: credit asset manager.

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Speaker 6: The private credit asset manager.

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Speaker 5: Isn't going to do bad things to some of its

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Speaker 5: fund investors to the detriment of other fund investors, and

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Speaker 5: so all of a sudden, many.

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Speaker 6: Of those tricks allegedly go away.

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Speaker 5: Now the caveat to this is recently we did a

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Speaker 5: company do some sort of you know, hardball debt maneuver,

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Speaker 5: which we weren't expecting to see, but we saw, and

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Speaker 5: some of the reporting around it suggested that we're there's

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Speaker 5: been others too. You know, it's hard to tell because

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Speaker 5: this space, like we've said, is private. We don't know

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Speaker 5: what goes on.

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Speaker 6: So it does seem like the market has learned how

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Speaker 6: to do this kind of aggressive reading of debt documents

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Speaker 6: and to look for ways to borrow incremental money without.

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Speaker 5: The consent of its existing lenders, and do all these

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Speaker 5: other tricks that have become normal. But certainly, if you

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Speaker 5: invest in private credits, you're much you're not being kept

400
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Speaker 5: up at night nearly as much by shenanigans and the

401
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Speaker 5: debt markets as you are if you invest in like

402
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Speaker 5: broadly syndicated.

403
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Speaker 3: Debt, it sounds pretty good to me. Okay, so less

404
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Speaker 3: legal fees, less creditor on credit or violent liability, asset matching,

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Speaker 3: the better user experience. So what's the catch. I don't

406
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Speaker 3: see any problems.

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Speaker 4: One potential problem is, of course these are are in

408
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Speaker 4: some cases absolutely massive loans, and so you do lose

409
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Speaker 4: the diversification benefit. These are very risky investments. I would

410
00:21:08,800 --> 00:21:12,679
Speaker 4: say the private credit structure has a partial solution to

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Speaker 4: that problem, which is that the investors themselves in a

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Speaker 4: private credit fund oftentimes are so massive themselves that they

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00:21:22,040 --> 00:21:25,359
Speaker 4: really don't lose diversification, which is to say, their portfolios

414
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Speaker 4: are so large that they can make this enormous investment

415
00:21:28,600 --> 00:21:31,480
Speaker 4: in one private credit fund. Because that's a tiny piece

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Speaker 4: of their portfolio. So that's one downside of private credit.

417
00:21:35,080 --> 00:21:38,560
Speaker 4: The other, of course, is the absence of trading. So

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00:21:39,720 --> 00:21:43,160
Speaker 4: before you had pretty good signals of what your position

419
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Speaker 4: was worth, there were lots of syndicated loans that had

420
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Speaker 4: pretty active trading, and there were indices tracking all of this.

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Speaker 4: The LSTA provides lots of data on the loan market,

422
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Speaker 4: and of course the bond market, of course, is public

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Speaker 4: in terms of the pricing there. Exit is always going

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Speaker 4: to be a concern in this market, and I don't

425
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Speaker 4: think this market really has been truly tested yet, so

426
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Speaker 4: we'll have to find out. But that illiquidity can be

427
00:22:08,400 --> 00:22:10,880
Speaker 4: an issue depending on what kind of investor you are

428
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Speaker 4: and what your expectation is for getting out of these things.

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Speaker 2: Joe's being facetious by the way. He says he doesn't troll,

430
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Speaker 2: but he trolls.

431
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Speaker 1: You know.

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Speaker 3: I'm saying, there's like a whole you know, you just

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Speaker 3: check go down to listen. It all sounds good.

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Speaker 2: Well, I'll tell you one problem, Joe, which is okay,

435
00:22:26,680 --> 00:22:29,680
Speaker 2: if you look at Boeing, for instance, on the terminal,

436
00:22:29,680 --> 00:22:33,800
Speaker 2: and if you type ddis you see the distribution of

437
00:22:33,840 --> 00:22:38,600
Speaker 2: its bonds maturing that's all based on public info.

438
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Speaker 5: Right.

439
00:22:39,720 --> 00:22:43,640
Speaker 2: If everything becomes private, then we don't have as much

440
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Speaker 2: information about how levered or indebted companies actually are. Sure,

441
00:22:49,400 --> 00:22:49,960
Speaker 2: is that right?

442
00:22:50,359 --> 00:22:54,399
Speaker 4: That is a concern. So you can have concerns both

443
00:22:54,440 --> 00:22:58,080
Speaker 4: for the investors themselves and for sort of the broader

444
00:22:58,359 --> 00:23:01,960
Speaker 4: economy or the broader market. And that's the issue with

445
00:23:01,960 --> 00:23:04,560
Speaker 4: private credit. We have heard a lot from people about

446
00:23:04,640 --> 00:23:08,159
Speaker 4: concerns about the marks that people are carrying these private

447
00:23:08,200 --> 00:23:11,159
Speaker 4: credit loans at, and that they might be entirely stale,

448
00:23:11,240 --> 00:23:14,560
Speaker 4: they might be largely overstated. There's really no way to

449
00:23:14,680 --> 00:23:18,680
Speaker 4: know until you exit that investment. And that's that's exactly

450
00:23:18,720 --> 00:23:20,680
Speaker 4: how it is on the private equity side. That you know,

451
00:23:20,720 --> 00:23:23,600
Speaker 4: if a private equity fund buys a portfolio company, who

452
00:23:23,640 --> 00:23:25,960
Speaker 4: on earth knows what that company is worth until they

453
00:23:25,960 --> 00:23:29,520
Speaker 4: actually finally exit that and there is some misvaluation and

454
00:23:29,560 --> 00:23:32,479
Speaker 4: so on. That's the question is can we have that

455
00:23:32,600 --> 00:23:35,000
Speaker 4: both on the equity side and on the debt side.

456
00:23:35,080 --> 00:23:37,719
Speaker 4: What does that mean for our economy if we are

457
00:23:37,800 --> 00:23:41,800
Speaker 4: suddenly just very liquid for almost all of the companies.

458
00:23:42,119 --> 00:23:44,879
Speaker 5: Yeah, and so something that to think about is the

459
00:23:45,000 --> 00:23:47,800
Speaker 5: broadly syndicated debt world and the high yield world of

460
00:23:47,880 --> 00:23:51,960
Speaker 5: debt in created this benefit for all of us. And

461
00:23:52,000 --> 00:23:54,960
Speaker 5: that benefit was we could follow the trading prices of

462
00:23:55,000 --> 00:23:57,840
Speaker 5: debt and real time and get a sense of where

463
00:23:57,880 --> 00:24:01,000
Speaker 5: are their problems in our economy, what sectors are in trouble.

464
00:24:01,320 --> 00:24:03,760
Speaker 5: Like I think about COVID nineteen, so COVID nineteen hits.

465
00:24:03,760 --> 00:24:06,399
Speaker 5: We're all watching, like, what are the debt prices of

466
00:24:06,440 --> 00:24:09,119
Speaker 5: the big hotel companies telling us about the likelihood these

467
00:24:09,440 --> 00:24:13,159
Speaker 5: those hotel companies go into bankruptcy. Congress and regulators can

468
00:24:13,200 --> 00:24:15,919
Speaker 5: look at those signals and say, okay, we've got to

469
00:24:15,960 --> 00:24:18,320
Speaker 5: do something really special for the airlines, We've got to

470
00:24:18,359 --> 00:24:20,840
Speaker 5: do something really special here. And when the airlines go

471
00:24:20,880 --> 00:24:23,160
Speaker 5: to Congress and say we need something special, they can

472
00:24:23,200 --> 00:24:26,119
Speaker 5: point to their debt prices and say, look what is

473
00:24:26,160 --> 00:24:29,320
Speaker 5: going on regulators, Look what's going on in Congress.

474
00:24:29,320 --> 00:24:30,879
Speaker 6: Our debt is trading down.

475
00:24:30,800 --> 00:24:34,120
Speaker 5: You know, to zero, like please, we need special treatment.

476
00:24:34,600 --> 00:24:38,280
Speaker 5: Investors looking for a deal can say, hmm, the debt

477
00:24:38,359 --> 00:24:41,280
Speaker 5: of this company is trading at a really low level.

478
00:24:41,480 --> 00:24:43,359
Speaker 5: I think I could do really well if I owns

479
00:24:43,359 --> 00:24:45,680
Speaker 5: that asset. I'm going to go make that board and offer.

480
00:24:46,119 --> 00:24:49,640
Speaker 5: And so all of those price signals just disappear from

481
00:24:49,640 --> 00:24:53,159
Speaker 5: the allocation of capital, from policymaking, and I think it

482
00:24:53,280 --> 00:24:54,240
Speaker 5: poses a real.

483
00:24:54,240 --> 00:24:57,040
Speaker 6: Challenge to what are you a really.

484
00:24:57,080 --> 00:25:00,919
Speaker 5: Well functioning set of capital markets to lose those signals?

485
00:25:01,320 --> 00:25:03,920
Speaker 5: I mean, just very selfishly in my own research, something

486
00:25:03,920 --> 00:25:06,919
Speaker 5: that I often run into and I'm trying to decide, okay,

487
00:25:06,960 --> 00:25:09,760
Speaker 5: like how good a job is the bankruptcy system doing well?

488
00:25:09,800 --> 00:25:12,760
Speaker 5: The vast majority of companies that file for bankruptcy leave

489
00:25:12,800 --> 00:25:16,320
Speaker 5: bankruptcy these days as private equity portfolio companies in one

490
00:25:16,400 --> 00:25:19,199
Speaker 5: way or the other, and so you actually can't follow

491
00:25:19,240 --> 00:25:22,480
Speaker 5: them after bankruptcy to figure out, okay, is the bankruptcy

492
00:25:22,480 --> 00:25:25,199
Speaker 5: system doing a good job or reorganizing these companies? If

493
00:25:25,200 --> 00:25:27,439
Speaker 5: there are policy buttons to push in the way the

494
00:25:27,440 --> 00:25:30,000
Speaker 5: system is run, what should we push. We just don't

495
00:25:30,000 --> 00:25:32,159
Speaker 5: see the information, so we don't know. We have to

496
00:25:32,160 --> 00:25:34,560
Speaker 5: make guesses based on a little bit we can see.

497
00:25:34,800 --> 00:25:36,480
Speaker 5: And I think our worry is that that's what a

498
00:25:36,560 --> 00:25:39,160
Speaker 5: lot of policy making in the debt space is going

499
00:25:39,160 --> 00:25:40,480
Speaker 5: to turn into, or we're just going.

500
00:25:40,400 --> 00:25:43,399
Speaker 6: To guess, oh, yeah, that whole industry is funded by

501
00:25:43,400 --> 00:25:44,640
Speaker 6: private credit, how's it doing.

502
00:25:44,680 --> 00:25:45,120
Speaker 4: We have no.

503
00:25:45,160 --> 00:25:48,479
Speaker 2: Idea do you imagine there'd be a knock on effect

504
00:25:48,640 --> 00:25:51,919
Speaker 2: to stock valuation as well. If you have a company

505
00:25:51,960 --> 00:25:55,760
Speaker 2: that maybe still has publicly traded stock, but all of

506
00:25:55,800 --> 00:25:59,040
Speaker 2: its debt financing comes from I don't know, a business

507
00:25:59,040 --> 00:26:02,119
Speaker 2: development company or private equity or something like that, it

508
00:26:02,200 --> 00:26:05,040
Speaker 2: must be hard for the equity investors to make a

509
00:26:05,119 --> 00:26:08,560
Speaker 2: realistic or accurate assumption about the health of the company

510
00:26:08,600 --> 00:26:10,440
Speaker 2: too without that debt knowledge.

511
00:26:10,760 --> 00:26:14,240
Speaker 4: Certainly the equity markets and the debt markets inform one another,

512
00:26:14,480 --> 00:26:18,040
Speaker 4: and so yes, the stockholders are constantly looking to see

513
00:26:18,040 --> 00:26:20,080
Speaker 4: what's going on in the credit markets for signals and

514
00:26:20,160 --> 00:26:23,080
Speaker 4: vice versa. And I would say, actually, the one that

515
00:26:23,160 --> 00:26:25,960
Speaker 4: worries us more sort of the opposite, where you have

516
00:26:26,040 --> 00:26:29,919
Speaker 4: a lot of privately owned companies, so either they're venture

517
00:26:29,920 --> 00:26:33,359
Speaker 4: capital funded or their private equity owned, but they still

518
00:26:33,480 --> 00:26:37,840
Speaker 4: have today a public debt piece, either fully public in

519
00:26:37,920 --> 00:26:40,200
Speaker 4: terms bonds or something like that, or even high yield

520
00:26:40,240 --> 00:26:42,959
Speaker 4: bonds which were a bit of a hybrid or syndicated

521
00:26:43,000 --> 00:26:46,439
Speaker 4: loans that at least have those trading prices. If now

522
00:26:46,680 --> 00:26:49,639
Speaker 4: their debt becomes private as well, if they go the

523
00:26:49,680 --> 00:26:53,399
Speaker 4: private credit route, that's the concern that then you lose

524
00:26:53,520 --> 00:26:56,520
Speaker 4: really all information about this company that is used to

525
00:26:56,520 --> 00:26:59,920
Speaker 4: be visible to investors, to regulators, to the broader public.

526
00:27:00,840 --> 00:27:04,199
Speaker 3: You know, I'd never really thought about the question of, like,

527
00:27:04,560 --> 00:27:09,199
Speaker 3: how are we measuring the efficacy of existing bankruptcy law

528
00:27:09,280 --> 00:27:12,240
Speaker 3: or how are we measuring how well the courts are doing?

529
00:27:12,359 --> 00:27:15,080
Speaker 3: So I guess a two part question would be like,

530
00:27:15,640 --> 00:27:19,360
Speaker 3: as professors, as academics, how do you think about assessing

531
00:27:19,920 --> 00:27:24,200
Speaker 3: the success of the existing bankruptcy regime? And then how

532
00:27:24,280 --> 00:27:30,159
Speaker 3: does a private credit versus tradable instruments, how do you

533
00:27:30,240 --> 00:27:34,240
Speaker 3: anticipate it or how is it already changing how a

534
00:27:34,280 --> 00:27:35,840
Speaker 3: bankruptcy process might look.

535
00:27:36,280 --> 00:27:40,400
Speaker 6: Sure, so bankruptcy success is somewhat hard to measure. There's

536
00:27:40,400 --> 00:27:41,439
Speaker 6: not one way to do it.

537
00:27:41,560 --> 00:27:44,919
Speaker 5: The definition I make the best is is the bankruptcy

538
00:27:44,920 --> 00:27:48,360
Speaker 5: system misallocating assets? Is it producing companies that come out

539
00:27:48,359 --> 00:27:51,080
Speaker 5: and they're thriving, or is it taking companies that are

540
00:27:51,080 --> 00:27:55,240
Speaker 5: struggling pre bankruptcy and then they continue to struggle after bankruptcy? Right,

541
00:27:55,280 --> 00:27:58,320
Speaker 5: So there's a real bias in the system towards reorganization,

542
00:27:58,800 --> 00:28:01,840
Speaker 5: which always makes you work that the system isn't liquidating

543
00:28:01,920 --> 00:28:04,280
Speaker 5: companies that are bad companies. And what I mean by

544
00:28:04,320 --> 00:28:07,000
Speaker 5: that is Let's say that I work for some company

545
00:28:07,040 --> 00:28:09,560
Speaker 5: that's not doing well. They have a bad business, bad idea,

546
00:28:10,359 --> 00:28:13,120
Speaker 5: it can't be fixed. Well, I might be best off

547
00:28:13,160 --> 00:28:16,080
Speaker 5: if that company dies. It's going to be terrible for

548
00:28:16,119 --> 00:28:18,120
Speaker 5: me to be unemployed, but then I'll find new work

549
00:28:18,160 --> 00:28:20,360
Speaker 5: and maybe now I will be at a company that's

550
00:28:20,440 --> 00:28:23,399
Speaker 5: growing where my skills can help it grow. So what

551
00:28:23,520 --> 00:28:27,199
Speaker 5: you want is a bankruptcy system that reallocates assets efficiently.

552
00:28:27,720 --> 00:28:30,040
Speaker 6: And the worry is that, you know the bankruptcy system

553
00:28:30,080 --> 00:28:31,159
Speaker 6: doesn't always do that.

554
00:28:31,359 --> 00:28:33,320
Speaker 5: But there's really no way to know that about our

555
00:28:33,359 --> 00:28:36,840
Speaker 5: current bankruptcy system because we just don't see enough companies

556
00:28:36,880 --> 00:28:39,320
Speaker 5: come out that with public equity or will be able

557
00:28:39,400 --> 00:28:42,160
Speaker 5: to learn a lot about how they're doing. To go

558
00:28:42,200 --> 00:28:45,280
Speaker 5: to the question of like, how does private credit change bankruptcy,

559
00:28:45,400 --> 00:28:48,600
Speaker 5: a simple answer is that, you know, we no longer

560
00:28:48,680 --> 00:28:51,720
Speaker 5: have this trading market for the debts of companies that

561
00:28:51,760 --> 00:28:54,760
Speaker 5: are in trouble or are in Chapter eleven. So judges

562
00:28:54,760 --> 00:28:57,400
Speaker 5: have counted on being able to run the bankruptcy system

563
00:28:57,480 --> 00:29:01,280
Speaker 5: assuming that whoever the smartest and most capable investor who

564
00:29:01,320 --> 00:29:04,800
Speaker 5: really understood how to reorganize that company, that person's in

565
00:29:04,800 --> 00:29:08,240
Speaker 5: the room right, because that person bought the debt of

566
00:29:08,400 --> 00:29:09,600
Speaker 5: other investors who.

567
00:29:09,440 --> 00:29:11,800
Speaker 6: Weren't too smart and capable. At least, this is the theory.

568
00:29:12,240 --> 00:29:15,360
Speaker 5: And so when the banks stand up and say, hey, judge,

569
00:29:15,400 --> 00:29:17,360
Speaker 5: here's how we think this company should be organize.

570
00:29:17,480 --> 00:29:19,440
Speaker 6: It should be sold, it should be liquidated, it.

571
00:29:19,440 --> 00:29:22,800
Speaker 5: Should be organized, whatever it is, the judge says, okay, like,

572
00:29:22,880 --> 00:29:25,840
Speaker 5: you probably know what you're doing because I can count

573
00:29:25,840 --> 00:29:27,720
Speaker 5: on the fact that if somebody had a better idea,

574
00:29:27,760 --> 00:29:30,440
Speaker 5: they'd come and buy your claims. But that just goes away,

575
00:29:30,520 --> 00:29:33,000
Speaker 5: right because we no longer have trading in the same way,

576
00:29:33,520 --> 00:29:35,000
Speaker 5: So the judge is going to have to do a

577
00:29:35,000 --> 00:29:38,080
Speaker 5: lot more to make sure that assets are properly marketed.

578
00:29:38,480 --> 00:29:41,680
Speaker 5: You also won't have rating agencies covering these companies on

579
00:29:41,720 --> 00:29:44,000
Speaker 5: a lead up to bankruptcy, right, So you're just going

580
00:29:44,120 --> 00:29:46,680
Speaker 5: to many more companies filing for bankruptcy that the world

581
00:29:46,720 --> 00:29:50,080
Speaker 5: knows less about, right, And like the bankruptcy system is

582
00:29:50,120 --> 00:29:52,600
Speaker 5: assumed that a company with syndicated debts, the world knows

583
00:29:52,600 --> 00:29:54,920
Speaker 5: a lot about this company. A lot of that's going

584
00:29:55,000 --> 00:29:57,280
Speaker 5: to change, and you know that's something that I think

585
00:29:57,360 --> 00:29:58,280
Speaker 5: judges are going to have to.

586
00:29:58,240 --> 00:29:58,880
Speaker 6: Adapt to.

587
00:30:14,880 --> 00:30:17,640
Speaker 2: Just to play devil's advocate first. A second, I think

588
00:30:17,640 --> 00:30:19,960
Speaker 2: this is something you actually deal with in the paper,

589
00:30:20,000 --> 00:30:22,360
Speaker 2: But one of the things you hear from people in

590
00:30:22,440 --> 00:30:26,120
Speaker 2: the private credit industry is that, oh, well, if you're

591
00:30:26,160 --> 00:30:31,560
Speaker 2: getting funding from a private entity, maybe a single lender

592
00:30:31,720 --> 00:30:35,640
Speaker 2: or maybe a club of lenders, but it's a smaller

593
00:30:35,640 --> 00:30:38,840
Speaker 2: group than you would have in the public market, maybe

594
00:30:38,880 --> 00:30:43,200
Speaker 2: there's greater potential for working out your issues if you

595
00:30:43,320 --> 00:30:46,800
Speaker 2: get into trouble, so you can renegotiate your debt with

596
00:30:46,840 --> 00:30:50,000
Speaker 2: a smaller group of creditors, and maybe they know your

597
00:30:50,040 --> 00:30:53,760
Speaker 2: business better than like, you know, a big fund that

598
00:30:53,880 --> 00:30:57,120
Speaker 2: is buying pieces of all these different types of bonds

599
00:30:57,200 --> 00:31:00,479
Speaker 2: and things like that. What's your response to that argument,

600
00:31:00,560 --> 00:31:04,040
Speaker 2: this idea that well, private credit actually allows you to

601
00:31:04,360 --> 00:31:07,720
Speaker 2: have more room for workouts or maybe even stave off

602
00:31:07,800 --> 00:31:09,000
Speaker 2: bankruptcy for longer.

603
00:31:09,800 --> 00:31:13,240
Speaker 5: So I guess my answer is that that all sounds great,

604
00:31:13,400 --> 00:31:16,120
Speaker 5: but it'll depend and it's hard to really understand which

605
00:31:16,160 --> 00:31:18,520
Speaker 5: way any of these sort of course is cut.

606
00:31:18,800 --> 00:31:20,680
Speaker 6: The one thing that's clearcuts.

607
00:31:20,120 --> 00:31:23,160
Speaker 5: That's important is we're losing, you know, the claims trading market,

608
00:31:23,320 --> 00:31:25,160
Speaker 5: like that's just going to look a lot different like

609
00:31:25,200 --> 00:31:28,240
Speaker 5: the active market. And the claims of Chapter eleven debtors

610
00:31:28,240 --> 00:31:31,000
Speaker 5: when that debtor is a private credit funded firm. But

611
00:31:31,120 --> 00:31:33,080
Speaker 5: you know, as to the question of well, you know,

612
00:31:33,880 --> 00:31:37,560
Speaker 5: aren't these private credit lenders smarter, more versatile, more nimble,

613
00:31:37,680 --> 00:31:40,800
Speaker 5: able to commit capital, and won't that be good for companies?

614
00:31:40,920 --> 00:31:42,880
Speaker 6: You know, at the end, it depends. So something you

615
00:31:42,960 --> 00:31:44,240
Speaker 6: worry about is.

616
00:31:44,200 --> 00:31:47,280
Speaker 5: Well, maybe private credit lenders will have incentives not to

617
00:31:47,360 --> 00:31:50,120
Speaker 5: adjust their marks on their books and instead just to

618
00:31:50,120 --> 00:31:53,000
Speaker 5: do amend and extends and just keep loans going when

619
00:31:53,000 --> 00:31:55,800
Speaker 5: the company really needed to liquidate or should have filed

620
00:31:55,840 --> 00:31:58,800
Speaker 5: for bankruptcy sooner. You know, think about how different the

621
00:31:58,880 --> 00:32:01,480
Speaker 5: GM bankruptcy would have in had they filed for bankruptcy

622
00:32:01,480 --> 00:32:04,320
Speaker 5: in like two thousand and five versus two thousand and nine,

623
00:32:04,360 --> 00:32:07,000
Speaker 5: when their business had already erode in so much so

624
00:32:07,040 --> 00:32:11,400
Speaker 5: we think of that erosion as something that limits reorganization options.

625
00:32:11,960 --> 00:32:15,840
Speaker 5: And it's not necessarily obvious how private credit interacts with that,

626
00:32:16,480 --> 00:32:19,960
Speaker 5: because private credit lenders have their own incentives, and maybe

627
00:32:19,960 --> 00:32:22,320
Speaker 5: their incentives are to say, look, you know, we make

628
00:32:22,440 --> 00:32:26,080
Speaker 5: loans to sponsor backed companies, and if the sponsor wants

629
00:32:26,120 --> 00:32:28,480
Speaker 5: to continue, we're going to keep doing that. Because we

630
00:32:28,520 --> 00:32:31,400
Speaker 5: really want to participate in their next deals, or they

631
00:32:31,440 --> 00:32:33,760
Speaker 5: could say, like, let's pull the plug on these things earlier.

632
00:32:33,800 --> 00:32:36,160
Speaker 5: So something that I've heard from lawyers working in the

633
00:32:36,200 --> 00:32:39,520
Speaker 5: space is that when private credit lenders replace like your

634
00:32:39,560 --> 00:32:43,080
Speaker 5: mid market banks, like your citizens and that kind of bank,

635
00:32:43,320 --> 00:32:45,160
Speaker 5: when you have like a private credit lender with a

636
00:32:45,200 --> 00:32:47,280
Speaker 5: thirty million dollar loan that might have been done by

637
00:32:47,280 --> 00:32:50,480
Speaker 5: a syndicate of two regional banks, the private credit lenders

638
00:32:50,480 --> 00:32:54,200
Speaker 5: are much more aggressive and much more willing to pull

639
00:32:54,240 --> 00:32:56,360
Speaker 5: the plug on the company and to own the asset

640
00:32:57,440 --> 00:33:00,200
Speaker 5: then that bank might have been. But the world's look

641
00:33:00,280 --> 00:33:03,120
Speaker 5: very different for larger companies, where private credit lenders might

642
00:33:03,160 --> 00:33:06,480
Speaker 5: be easier for companies to do workouts with. So it's

643
00:33:06,520 --> 00:33:09,640
Speaker 5: really hard to tell, but I'm certainly a bit skeptical

644
00:33:09,880 --> 00:33:13,640
Speaker 5: the idea that all of this is uni directional and

645
00:33:13,680 --> 00:33:16,640
Speaker 5: the private credit is just better in every way for everything.

646
00:33:16,680 --> 00:33:19,320
Speaker 5: It's different, and there'll be different pros and cons and

647
00:33:19,360 --> 00:33:21,600
Speaker 5: we'll learn more about them, and the law will adapt

648
00:33:21,640 --> 00:33:23,960
Speaker 5: and hopefully deal with some of the ways in which

649
00:33:24,000 --> 00:33:27,600
Speaker 5: the incentives of private credit lenders distort bankruptcy outcomes.

650
00:33:28,120 --> 00:33:31,160
Speaker 2: Since you mentioned GM, could you maybe talk about another

651
00:33:31,320 --> 00:33:35,800
Speaker 2: specific example of a liquidation kind of playing out a

652
00:33:35,840 --> 00:33:39,200
Speaker 2: bit late as you describe it, I'm still I'm still

653
00:33:39,200 --> 00:33:42,440
Speaker 2: salty over the collapse of Red Lobster, which you mention

654
00:33:42,760 --> 00:33:44,880
Speaker 2: in your paper. So could you talk a little bit

655
00:33:44,880 --> 00:33:47,240
Speaker 2: about that one and what it tells us about private credit?

656
00:33:47,800 --> 00:33:51,440
Speaker 5: Sure, So, something that has been the case over the

657
00:33:51,480 --> 00:33:55,080
Speaker 5: past few years is you've had private equity owned restaurants

658
00:33:55,120 --> 00:33:58,400
Speaker 5: and retailers that just ended up doing quick liquidations after

659
00:33:58,520 --> 00:34:02,600
Speaker 5: stalling for a very long time. Red Lobster is really interesting.

660
00:34:02,680 --> 00:34:06,040
Speaker 5: Red Lobster have been struggling for a little while, and

661
00:34:06,080 --> 00:34:09,960
Speaker 5: then it's Fortress Investment Group, which was its private credit lender,

662
00:34:10,400 --> 00:34:13,839
Speaker 5: came in and took over the company and basically just

663
00:34:13,960 --> 00:34:15,400
Speaker 5: owned the asset very quickly.

664
00:34:15,960 --> 00:34:17,640
Speaker 6: And something that is so.

665
00:34:17,800 --> 00:34:22,759
Speaker 5: Interesting about that is that traditionally, you know, other lenders

666
00:34:22,840 --> 00:34:26,239
Speaker 5: would have been a lot more cautious about doing that,

667
00:34:27,160 --> 00:34:29,759
Speaker 5: because other lenders are very cognizant of what we called

668
00:34:29,840 --> 00:34:33,640
Speaker 5: lender liability and this line of law that suggests that

669
00:34:33,760 --> 00:34:36,239
Speaker 5: you shouldn't if you're a lender played too much of

670
00:34:36,280 --> 00:34:39,200
Speaker 5: a role in business decisions of companies that you lend to.

671
00:34:39,760 --> 00:34:41,879
Speaker 6: And like there's an example of like a private.

672
00:34:41,600 --> 00:34:45,600
Speaker 5: Credit lender just behaving in this really aggressive way, which

673
00:34:45,920 --> 00:34:49,239
Speaker 5: you know is interesting. Again, it's hard to tell exactly

674
00:34:49,719 --> 00:34:52,399
Speaker 5: what's going to happen, but certainly that example doesn't fit

675
00:34:52,440 --> 00:34:54,800
Speaker 5: well with the story of well, you know, the private

676
00:34:54,840 --> 00:34:57,600
Speaker 5: credit lender is just like the banker, and you know

677
00:34:58,120 --> 00:35:00,000
Speaker 5: it's your corner bank in nineteen twenty five.

678
00:35:00,320 --> 00:35:02,000
Speaker 6: Who's going to work with you on your farm?

679
00:35:02,600 --> 00:35:04,359
Speaker 5: You know, the answer is maybe some of the time

680
00:35:04,440 --> 00:35:06,480
Speaker 5: that's the story, but other of the time you're dealing

681
00:35:06,480 --> 00:35:10,200
Speaker 5: with a very sophisticated party who may have different incentives

682
00:35:10,280 --> 00:35:12,960
Speaker 5: and be worried about different things than traditional bank lenders

683
00:35:13,160 --> 00:35:15,720
Speaker 5: or investors in the broadly syndicated market.

684
00:35:15,960 --> 00:35:18,720
Speaker 2: Jared, the other thing you just mentioned was the idea

685
00:35:18,840 --> 00:35:23,359
Speaker 2: of bankruptcy law adapting to private credit. So it's a

686
00:35:23,400 --> 00:35:27,360
Speaker 2: growing market, it's becoming more of a thing. Certainly in

687
00:35:27,400 --> 00:35:32,160
Speaker 2: the bankruptcy process. Law doesn't necessarily have the best history

688
00:35:32,239 --> 00:35:36,640
Speaker 2: of adapting quickly and efficiently to new situations. But is

689
00:35:36,680 --> 00:35:39,439
Speaker 2: there a possibility that in the future you could see

690
00:35:39,440 --> 00:35:43,000
Speaker 2: bankruptcy law start to change to take into account more

691
00:35:43,040 --> 00:35:45,160
Speaker 2: of these new players in the way the market actually

692
00:35:45,160 --> 00:35:45,640
Speaker 2: works now.

693
00:35:46,120 --> 00:35:48,720
Speaker 5: I do think that will happen. I think bankruptcy judges

694
00:35:48,719 --> 00:35:52,200
Speaker 5: are very sophisticated and they've proven very very worthy over

695
00:35:52,239 --> 00:35:56,240
Speaker 5: time of adapting to lots of changes in credit markets, securitization,

696
00:35:56,480 --> 00:35:59,359
Speaker 5: syndicated lending, claims trading like you sort of name it,

697
00:35:59,480 --> 00:35:59,719
Speaker 5: like the.

698
00:35:59,719 --> 00:36:02,640
Speaker 6: Law eventually adapts. So here, you know, one.

699
00:36:02,480 --> 00:36:06,840
Speaker 5: Could imagine judges being stronger advocates for the company. You

700
00:36:06,840 --> 00:36:11,399
Speaker 5: could imagine judges being stronger advocates for employees, slowing down

701
00:36:11,480 --> 00:36:14,719
Speaker 5: bankruptcy processes to make sure that whoever's going to own

702
00:36:14,760 --> 00:36:17,320
Speaker 5: this asset. On the other side, they're the right person

703
00:36:17,360 --> 00:36:19,160
Speaker 5: to own it's mindful of the fact that there isn't

704
00:36:19,200 --> 00:36:19,880
Speaker 5: claims trading.

705
00:36:20,360 --> 00:36:21,680
Speaker 6: So those are all ways in.

706
00:36:21,600 --> 00:36:24,480
Speaker 5: Which I can easily see judges sort of stepping in

707
00:36:24,560 --> 00:36:27,319
Speaker 5: and saying, something new is happening in credit and we're

708
00:36:27,320 --> 00:36:30,040
Speaker 5: going to be a part of, you know, helping with

709
00:36:30,200 --> 00:36:32,400
Speaker 5: some of the problems it creates, which is what judges

710
00:36:32,440 --> 00:36:33,160
Speaker 5: have always done.

711
00:36:34,080 --> 00:36:36,320
Speaker 4: I should add that, you know, there's a couple of

712
00:36:36,360 --> 00:36:39,480
Speaker 4: different questions. One is what happens once you're in bankruptcy,

713
00:36:39,480 --> 00:36:41,640
Speaker 4: which is what we've been talking about. But another question

714
00:36:41,800 --> 00:36:46,319
Speaker 4: is who actually enters bankruptcy and in what condition, and

715
00:36:46,360 --> 00:36:49,759
Speaker 4: so one you know, open question is are we going

716
00:36:49,840 --> 00:36:53,640
Speaker 4: to see potentially fewer bankruptcies because with private credit it should,

717
00:36:53,680 --> 00:36:56,399
Speaker 4: in theory be a little bit easier to renegotiate dead

718
00:36:56,400 --> 00:36:58,360
Speaker 4: and so on with your creditor, So you could it

719
00:36:58,400 --> 00:37:00,000
Speaker 4: could be the case that we have a lot fewer

720
00:37:00,040 --> 00:37:03,239
Speaker 4: bankruptcy is more out of court restructurings. But it could

721
00:37:03,280 --> 00:37:06,200
Speaker 4: also be that once you do reach bankruptcy, if you

722
00:37:06,280 --> 00:37:08,960
Speaker 4: go to private credit route, you're likely to be in

723
00:37:09,120 --> 00:37:13,400
Speaker 4: far worse condition than other bankrupt companies because we just

724
00:37:13,440 --> 00:37:16,799
Speaker 4: don't have this visibility into the company's valuation and there's

725
00:37:17,040 --> 00:37:20,280
Speaker 4: an ability to kind of keep things going, keep things going,

726
00:37:20,440 --> 00:37:23,160
Speaker 4: and you could in fact have a wave of zombie

727
00:37:23,160 --> 00:37:26,000
Speaker 4: companies by the time that they enter into bankruptcy. And

728
00:37:26,320 --> 00:37:29,239
Speaker 4: that of course is the question. So just to get

729
00:37:29,280 --> 00:37:31,960
Speaker 4: contentious and get everyone mad at me, some of the

730
00:37:32,000 --> 00:37:34,239
Speaker 4: concerns that we've had on the equity side, again we

731
00:37:34,320 --> 00:37:37,239
Speaker 4: think could play out on the credit side. So you know,

732
00:37:37,280 --> 00:37:39,560
Speaker 4: I think people are well aware than on the venture

733
00:37:39,560 --> 00:37:43,640
Speaker 4: capital side. There have been a lot of misvaluation, so

734
00:37:43,760 --> 00:37:47,279
Speaker 4: a lot of cases where what people thought was a

735
00:37:47,320 --> 00:37:51,680
Speaker 4: successful company really wasn't or it was engaged in fraudulent

736
00:37:51,760 --> 00:37:53,640
Speaker 4: or legal activity, and so on and so on. The

737
00:37:53,680 --> 00:37:57,000
Speaker 4: sort of list there is quite long. The common theme

738
00:37:57,200 --> 00:38:01,800
Speaker 4: is we are less certain about valuation in the private markets.

739
00:38:01,920 --> 00:38:04,040
Speaker 4: That's just sort of corporate finance one oh one. When

740
00:38:04,040 --> 00:38:06,719
Speaker 4: you have less information and less trading, we can be

741
00:38:06,840 --> 00:38:09,560
Speaker 4: less confident in the valuations. And again now we're going

742
00:38:09,600 --> 00:38:11,759
Speaker 4: to see that on the credit side, and it's going

743
00:38:11,800 --> 00:38:14,480
Speaker 4: to be especially acute for companies that are private, on

744
00:38:14,560 --> 00:38:16,480
Speaker 4: both the equity side and the debt side.

745
00:38:16,560 --> 00:38:19,760
Speaker 3: Yeah, I was really intrigued by the callback to GM,

746
00:38:19,840 --> 00:38:22,160
Speaker 3: which I had, you know, so long ago I'd sort

747
00:38:22,160 --> 00:38:24,200
Speaker 3: of forgotten about. But I do remember that in the

748
00:38:24,239 --> 00:38:28,719
Speaker 3: mid two thousands, even well before the financial crisis, there

749
00:38:28,760 --> 00:38:32,120
Speaker 3: were really serious concerns about, you know, the health of

750
00:38:32,160 --> 00:38:35,640
Speaker 3: the company and whether it was already heading for insolvency

751
00:38:36,040 --> 00:38:39,359
Speaker 3: for various reasons. Can you talk a little bit more

752
00:38:39,440 --> 00:38:43,480
Speaker 3: about this idea, this notion that you just talked about,

753
00:38:43,520 --> 00:38:45,880
Speaker 3: which is that you know, the incentive is from the

754
00:38:45,960 --> 00:38:50,359
Speaker 3: private credit fund standpoint to extend and pretend I could imagine,

755
00:38:50,440 --> 00:38:53,520
Speaker 3: for example that a private credit fund, you know, just

756
00:38:53,560 --> 00:38:57,680
Speaker 3: for reputational purposes, would not want a high profile or

757
00:38:57,719 --> 00:39:02,239
Speaker 3: any profile bankruptcy among their investment to the point where

758
00:39:02,280 --> 00:39:06,319
Speaker 3: they make purposefully bad bets. Yes, extending this loan is

759
00:39:06,440 --> 00:39:09,800
Speaker 3: going to be a money loser or not a money maker,

760
00:39:10,120 --> 00:39:12,080
Speaker 3: but it's better than having the headline of one of

761
00:39:12,080 --> 00:39:15,120
Speaker 3: our portfolio companies go bankruptcy. And so you sort of

762
00:39:15,160 --> 00:39:18,279
Speaker 3: push that further on. And then also maybe as part

763
00:39:18,280 --> 00:39:21,959
Speaker 3: of that, like in your conversations, is the flexibility real,

764
00:39:22,040 --> 00:39:23,920
Speaker 3: Because again you talk to people in the industry and

765
00:39:23,960 --> 00:39:25,600
Speaker 3: they're like, Oh, it's so great, we work with our

766
00:39:25,680 --> 00:39:29,160
Speaker 3: lender and they can modify the loans or they understand

767
00:39:29,200 --> 00:39:32,800
Speaker 3: our condition. Does it play out in practice that the

768
00:39:32,840 --> 00:39:36,239
Speaker 3: borrowers in the private credit market do get that sort

769
00:39:36,280 --> 00:39:38,799
Speaker 3: of additional flexibility to start with.

770
00:39:38,719 --> 00:39:39,319
Speaker 6: Their first point?

771
00:39:39,440 --> 00:39:43,360
Speaker 5: Yeah, So you absolutely worry in the world of corporations

772
00:39:43,400 --> 00:39:45,799
Speaker 5: that it could be as simple as vanity on the

773
00:39:45,800 --> 00:39:46,680
Speaker 5: part of the CEO.

774
00:39:46,840 --> 00:39:48,919
Speaker 6: They just don't want to file for bankruptcy, they don't

775
00:39:48,960 --> 00:39:49,759
Speaker 6: want to restructure.

776
00:39:50,360 --> 00:39:55,359
Speaker 5: Another recent example Seers, which filed for bankruptcy maybe eight

777
00:39:55,440 --> 00:39:58,880
Speaker 5: years ago or something like that. Seers limped along for

778
00:39:58,960 --> 00:40:01,520
Speaker 5: many years, you know, one of the great American retailers,

779
00:40:01,520 --> 00:40:03,640
Speaker 5: selling store after store, and it.

780
00:40:03,600 --> 00:40:05,080
Speaker 6: Became this miserable experience.

781
00:40:05,120 --> 00:40:07,520
Speaker 5: I don't know if you shocked at Sears recently, but

782
00:40:07,920 --> 00:40:09,040
Speaker 5: I remember, up to.

783
00:40:08,960 --> 00:40:12,800
Speaker 2: Bankruptcy, my dad always used to park by Sears because

784
00:40:12,800 --> 00:40:15,239
Speaker 2: he always said that's where it was empty and there

785
00:40:15,280 --> 00:40:18,680
Speaker 2: were available spots. I was always a strategy.

786
00:40:19,280 --> 00:40:22,480
Speaker 5: Yeah, I hope you shorted them when you heard that.

787
00:40:24,400 --> 00:40:26,279
Speaker 6: But if you went to a Sears like in the

788
00:40:26,360 --> 00:40:29,920
Speaker 6: leadup to bankruptcy, which you would have discovered was empty shelves, like,

789
00:40:29,960 --> 00:40:31,200
Speaker 6: it was a bad experience.

790
00:40:31,800 --> 00:40:34,920
Speaker 5: And that's what happens when companies take too long to

791
00:40:34,960 --> 00:40:39,120
Speaker 5: file for bankruptcy. They need capital, they try limping along

792
00:40:39,640 --> 00:40:42,600
Speaker 5: and it hurts everybody. So imagine you worked for Sears

793
00:40:42,680 --> 00:40:45,839
Speaker 5: during that period. Your career was stunted by the fact

794
00:40:45,840 --> 00:40:47,800
Speaker 5: that you're stuck there and I'm not going to promote

795
00:40:47,800 --> 00:40:51,239
Speaker 5: people into management, and they're not giving people bonuses, and

796
00:40:51,239 --> 00:40:53,319
Speaker 5: there are no growth opportunities, like there are all these

797
00:40:53,360 --> 00:40:56,040
Speaker 5: ways in which it's bad, and so, like you said,

798
00:40:56,080 --> 00:40:58,480
Speaker 5: the worry is that private credit companies are going your

799
00:40:58,480 --> 00:41:01,920
Speaker 5: private credit backed firms because their lenders will want to

800
00:41:01,960 --> 00:41:06,120
Speaker 5: be more agreeable, they may wait longer to reorganize than

801
00:41:06,120 --> 00:41:07,239
Speaker 5: they would have otherwise.

802
00:41:07,680 --> 00:41:09,080
Speaker 6: You know, whether or not that's true.

803
00:41:09,239 --> 00:41:10,960
Speaker 5: Who knows, And like, one of the things that is

804
00:41:11,000 --> 00:41:13,560
Speaker 5: important to emphasize is that all of the fears we

805
00:41:13,640 --> 00:41:16,279
Speaker 5: have about private credit, they all may be true in

806
00:41:16,280 --> 00:41:19,120
Speaker 5: individual cases, just like when you know the people you've

807
00:41:19,120 --> 00:41:20,960
Speaker 5: had on your show who work in the business, how

808
00:41:20,960 --> 00:41:23,919
Speaker 5: you've upgrade it is, And like you know when God

809
00:41:24,000 --> 00:41:26,160
Speaker 5: stopped on the seventh day after creating the world, he

810
00:41:26,320 --> 00:41:30,160
Speaker 5: then created private credit because we needed loans from investment

811
00:41:30,200 --> 00:41:31,879
Speaker 5: funds in order for the world to be a more

812
00:41:31,920 --> 00:41:32,600
Speaker 5: perfect place.

813
00:41:33,080 --> 00:41:35,279
Speaker 6: Those people are right to some of the time. The

814
00:41:35,400 --> 00:41:37,399
Speaker 6: question is, well, what does it look like when we're

815
00:41:37,440 --> 00:41:38,000
Speaker 6: not all right?

816
00:41:38,160 --> 00:41:40,640
Speaker 5: And that really remains to be seen. I think we're

817
00:41:40,640 --> 00:41:43,160
Speaker 5: at the very early stage of an important shift in

818
00:41:43,200 --> 00:41:47,600
Speaker 5: corporate finance whose implications are hard to truly understand. And

819
00:41:47,800 --> 00:41:49,680
Speaker 5: the worry at the stage is that, like in our

820
00:41:49,719 --> 00:41:53,319
Speaker 5: incomplete understanding and our incomplete narratives, that we make bad

821
00:41:53,360 --> 00:41:56,319
Speaker 5: policy decisions, like we create regulations that aren't needed, or

822
00:41:56,520 --> 00:41:59,839
Speaker 5: we miss the opportunity to create regulations.

823
00:41:59,320 --> 00:41:59,920
Speaker 6: That are needed.

824
00:42:00,640 --> 00:42:04,120
Speaker 5: You do hear in this space that there is flexibility

825
00:42:04,160 --> 00:42:06,439
Speaker 5: and that lenders are helpful, and that that that does

826
00:42:06,480 --> 00:42:09,040
Speaker 5: seem to be the dynamic at least for some borrowers

827
00:42:09,440 --> 00:42:12,600
Speaker 5: at least some of the time. But again, what's generalizing,

828
00:42:13,040 --> 00:42:15,040
Speaker 5: you know, that's as a social scientist, that's always the

829
00:42:15,160 --> 00:42:17,200
Speaker 5: question you want to know, is you know, if you

830
00:42:17,280 --> 00:42:19,439
Speaker 5: hear about this one story, you know, you hear about

831
00:42:19,440 --> 00:42:22,680
Speaker 5: the plural site example that I mentioned earlier, where you're

832
00:42:22,719 --> 00:42:25,319
Speaker 5: like a private credit backed company where the lenders are

833
00:42:25,360 --> 00:42:29,359
Speaker 5: doing liability management stuff. You have this very aggressive these

834
00:42:29,360 --> 00:42:31,240
Speaker 5: aggressive debt market transactions.

835
00:42:31,680 --> 00:42:33,880
Speaker 6: So you know, is that representative of something?

836
00:42:34,080 --> 00:42:37,760
Speaker 5: It's hard to know and a real challenge to knowledge

837
00:42:37,760 --> 00:42:40,080
Speaker 5: creation in this context is we don't even know how

838
00:42:40,080 --> 00:42:43,920
Speaker 5: big the market is. We're missing basic statistics. When Elizabeth

839
00:42:43,960 --> 00:42:46,319
Speaker 5: and I started this research project, we were looking for

840
00:42:46,440 --> 00:42:49,880
Speaker 5: commercial resources to learn how big this market is. And

841
00:42:49,960 --> 00:42:52,000
Speaker 5: what we found is that when we interrogated each of

842
00:42:52,040 --> 00:42:55,400
Speaker 5: the sources that are commonly cited you, we didn't have

843
00:42:55,400 --> 00:42:58,880
Speaker 5: any confidence that we were capturing something real. Like you know,

844
00:42:58,880 --> 00:43:01,279
Speaker 5: if you follow the trajector of this, it's something real.

845
00:43:01,360 --> 00:43:04,200
Speaker 5: We know it's been getting bigger. How big has it gotten?

846
00:43:04,440 --> 00:43:06,279
Speaker 5: I don't think anybody really knows.

847
00:43:06,800 --> 00:43:11,000
Speaker 2: You anticipated. My next question, which is the number you

848
00:43:11,239 --> 00:43:15,280
Speaker 2: cite in the paper is one point five trillion dollars,

849
00:43:15,840 --> 00:43:18,600
Speaker 2: So how did you end up with that specific number.

850
00:43:18,360 --> 00:43:20,920
Speaker 4: In the end, I think actually what we did was

851
00:43:21,160 --> 00:43:25,000
Speaker 4: choose the most conservative one. So there's so much disagreement here,

852
00:43:25,040 --> 00:43:27,600
Speaker 4: we figured, all right, I think everyone's going to believe

853
00:43:27,680 --> 00:43:30,160
Speaker 4: us with the sort of lowest number that's getting thrown

854
00:43:30,200 --> 00:43:34,440
Speaker 4: around right now, but again, could be significantly bigger than that.

855
00:43:34,800 --> 00:43:37,719
Speaker 5: Yeah, And again a big challenge here is that if

856
00:43:37,760 --> 00:43:40,319
Speaker 5: you talk to people in this business, a lot of

857
00:43:40,320 --> 00:43:42,440
Speaker 5: them will how you private credit is brand new, Like,

858
00:43:42,480 --> 00:43:45,319
Speaker 5: that's not true. Investment funds have been originating loans, you know,

859
00:43:45,400 --> 00:43:47,279
Speaker 5: for a very long time. Like, this is not a

860
00:43:47,280 --> 00:43:50,040
Speaker 5: new thing. What's new is the size and the scale.

861
00:43:50,560 --> 00:43:53,160
Speaker 5: And given that, like it's not even clear like exactly

862
00:43:53,280 --> 00:43:54,760
Speaker 5: who is a private credit lender?

863
00:43:54,800 --> 00:43:55,520
Speaker 6: What does that mean?

864
00:43:56,200 --> 00:44:00,200
Speaker 5: These sort of basic definitional questions. There's not agreement with

865
00:44:00,280 --> 00:44:03,200
Speaker 5: syndicated lending. You could say, okay, there's a handful of

866
00:44:03,200 --> 00:44:07,120
Speaker 5: money market banks they run this similar process for these

867
00:44:07,160 --> 00:44:08,960
Speaker 5: broadly syndicated loans.

868
00:44:09,160 --> 00:44:11,880
Speaker 6: And all of that. That's a thing in the financial market.

869
00:44:11,880 --> 00:44:13,680
Speaker 5: It's like here, I don't even know, like if you

870
00:44:13,719 --> 00:44:17,160
Speaker 5: were to ask, well, how big is it? Well, there

871
00:44:17,160 --> 00:44:20,520
Speaker 5: are investment funds out there that'll make loans to corporations.

872
00:44:20,560 --> 00:44:23,680
Speaker 5: Are they doing something called private credit? Well, on the

873
00:44:23,680 --> 00:44:26,200
Speaker 5: fundraising side, I'm sure that the answer right now is yes,

874
00:44:26,280 --> 00:44:28,400
Speaker 5: because allocators launch exposure.

875
00:44:27,960 --> 00:44:30,959
Speaker 6: To this asset class. But apart from that, it's really

876
00:44:31,000 --> 00:44:31,720
Speaker 6: hard to tell.

877
00:44:32,120 --> 00:44:34,760
Speaker 2: So just to press on this point, and once again

878
00:44:34,840 --> 00:44:38,640
Speaker 2: you've anticipated my next question, but what does it mean

879
00:44:38,920 --> 00:44:43,520
Speaker 2: if debt is issued by an investment fund or an

880
00:44:43,520 --> 00:44:48,640
Speaker 2: investment firm versus say a bank or a traditional buyer

881
00:44:48,840 --> 00:44:52,440
Speaker 2: of a syndicated loan or a publicly issued bond or

882
00:44:52,520 --> 00:44:56,680
Speaker 2: something like that. Are there specific concerns depending on the

883
00:44:56,800 --> 00:44:59,760
Speaker 2: type of lender that is involved in these deals.

884
00:45:00,560 --> 00:45:02,680
Speaker 4: To take the last part first, I would say yes,

885
00:45:02,760 --> 00:45:05,920
Speaker 4: there are clear differences. So if you believe that incentives matter,

886
00:45:06,640 --> 00:45:09,239
Speaker 4: and I think we all do, then we can look

887
00:45:09,280 --> 00:45:12,160
Speaker 4: at each of these different types of funding structures, figure

888
00:45:12,200 --> 00:45:15,240
Speaker 4: out what the incentives are of the parties, and trace

889
00:45:15,320 --> 00:45:18,399
Speaker 4: through what we think the implications are. So in terms

890
00:45:18,440 --> 00:45:21,080
Speaker 4: of what the differences are, I think the easy cases

891
00:45:21,160 --> 00:45:24,000
Speaker 4: are the extreme ones. So if you think of sort

892
00:45:24,000 --> 00:45:28,240
Speaker 4: of a bank, that is an institution that is funding

893
00:45:28,320 --> 00:45:31,719
Speaker 4: loans basically with customer deposits, and that is subject to

894
00:45:32,120 --> 00:45:37,480
Speaker 4: very heavy regulation as a bank credit funds. If they

895
00:45:37,520 --> 00:45:39,880
Speaker 4: really are a private investment fund, that's sort of a

896
00:45:40,000 --> 00:45:43,799
Speaker 4: very different model. That is poled capital from a big

897
00:45:43,880 --> 00:45:48,320
Speaker 4: of typically large institutional investors, and they are usually closed

898
00:45:48,400 --> 00:45:51,600
Speaker 4: end funds, so the capital is locked in for at

899
00:45:51,680 --> 00:45:55,840
Speaker 4: least ten years, and they take that money, that equity

900
00:45:56,000 --> 00:45:58,920
Speaker 4: that provided by those investors, they might borrow from a

901
00:45:58,960 --> 00:46:00,880
Speaker 4: bank on top of that, and they use that to

902
00:46:00,880 --> 00:46:05,080
Speaker 4: go make loans. And the regulation of private investment funds

903
00:46:05,200 --> 00:46:10,480
Speaker 4: is relatively speaking, incredibly light. Right, every investment fund manager

904
00:46:10,520 --> 00:46:12,239
Speaker 4: is going to say, no, no, we're subject to all

905
00:46:12,280 --> 00:46:15,440
Speaker 4: this regulation. Sure, there is some regulation, but compared to

906
00:46:15,560 --> 00:46:19,719
Speaker 4: everything else, like banks or like investment funds that take

907
00:46:19,760 --> 00:46:23,319
Speaker 4: retail investment, the regulation is very very light. So those

908
00:46:23,360 --> 00:46:25,799
Speaker 4: are sort of some easy extremes in terms of what

909
00:46:25,840 --> 00:46:29,600
Speaker 4: you see, and then to follow through what the incentives

910
00:46:29,640 --> 00:46:34,080
Speaker 4: are of private investment funds for them, there's multiple things

911
00:46:34,120 --> 00:46:36,680
Speaker 4: going on. So one question is where are they in

912
00:46:36,719 --> 00:46:39,480
Speaker 4: their life cycle. So if they are at a point

913
00:46:39,560 --> 00:46:42,799
Speaker 4: where they're trying to fund raise for their next fund,

914
00:46:43,760 --> 00:46:47,080
Speaker 4: just as you mentioned earlier, they are really not going

915
00:46:47,160 --> 00:46:50,640
Speaker 4: to want to recognize a big loss and so that's

916
00:46:50,680 --> 00:46:53,120
Speaker 4: where their incentives are probably the worst in terms of

917
00:46:53,600 --> 00:46:57,440
Speaker 4: trying to keep an investment going, to not send something

918
00:46:57,480 --> 00:47:00,480
Speaker 4: into bankruptcy, to not have the bad head lines and

919
00:47:00,520 --> 00:47:04,680
Speaker 4: so on. That's one potential worry. Another is when you're

920
00:47:04,719 --> 00:47:07,520
Speaker 4: reaching the end of the fund's life and so there

921
00:47:07,719 --> 00:47:10,520
Speaker 4: they might actually be forced to sell things when they

922
00:47:10,560 --> 00:47:12,960
Speaker 4: are not quite at an optimal time to do that.

923
00:47:13,239 --> 00:47:15,040
Speaker 4: Those are some of the questions that you have with

924
00:47:15,360 --> 00:47:18,680
Speaker 4: private investment funds. The other big differences in terms of

925
00:47:18,719 --> 00:47:21,960
Speaker 4: the incentives of the managers. So you have the classic

926
00:47:22,040 --> 00:47:24,200
Speaker 4: private equity style compensation structure.

927
00:47:24,280 --> 00:47:25,560
Speaker 6: You have a management.

928
00:47:25,160 --> 00:47:27,120
Speaker 4: Fee, so that means the bigger you are, the more

929
00:47:27,160 --> 00:47:29,719
Speaker 4: money you make. But especially what you have is a

930
00:47:29,760 --> 00:47:33,080
Speaker 4: performance fee, and that is really you know, it's just

931
00:47:33,160 --> 00:47:35,640
Speaker 4: like a stock option. It's you get all the upside,

932
00:47:35,960 --> 00:47:38,040
Speaker 4: you bear none of the downside. So that's what really

933
00:47:38,120 --> 00:47:40,399
Speaker 4: encourages them to hit for the fences and so on.

934
00:47:41,080 --> 00:47:45,359
Speaker 4: And there's many, many, many academic studies looking at again

935
00:47:45,480 --> 00:47:48,960
Speaker 4: private equity and showing that the way the carry is

936
00:47:49,320 --> 00:47:53,120
Speaker 4: set up, that carried interest, that performance fee, that drives

937
00:47:53,160 --> 00:47:57,000
Speaker 4: behavior of private equity funds. They try to recognize winners

938
00:47:57,080 --> 00:48:00,319
Speaker 4: quickly hold on to losers longer. You're going to see

939
00:48:00,360 --> 00:48:02,360
Speaker 4: a lot of that same stuff on the credit side.

940
00:48:02,520 --> 00:48:06,680
Speaker 2: All right, Elizabeth, I love that you mentioned Authoughts's unofficial tagline,

941
00:48:06,680 --> 00:48:09,759
Speaker 2: which is incentives Matter. So we kind of came full

942
00:48:09,800 --> 00:48:13,520
Speaker 2: circle on that conversation. That was a fantastic overview of

943
00:48:14,200 --> 00:48:16,600
Speaker 2: the impact of private credit and also some of the

944
00:48:16,640 --> 00:48:20,080
Speaker 2: incentives that might be driving it. So Jared and Elizabeth,

945
00:48:20,120 --> 00:48:21,760
Speaker 2: thank you so much for coming on all thoughts.

946
00:48:22,400 --> 00:48:22,960
Speaker 6: It was great.

947
00:48:22,960 --> 00:48:24,560
Speaker 3: Thank you, Thank you so much much.

948
00:48:37,560 --> 00:48:37,799
Speaker 6: Joe.

949
00:48:37,800 --> 00:48:41,680
Speaker 2: I thought that conversation was fascinating. And I know we've

950
00:48:41,719 --> 00:48:44,440
Speaker 2: said this on a number of episodes by now, but

951
00:48:44,920 --> 00:48:47,680
Speaker 2: to some extent, the rise of private credit is what

952
00:48:47,960 --> 00:48:51,040
Speaker 2: regulators wanted, yes, for two thousand and eight, right, you know,

953
00:48:51,160 --> 00:48:56,440
Speaker 2: regulatory capital rules were engineered for this specific outcome, getting

954
00:48:56,520 --> 00:48:59,799
Speaker 2: risky loans off of bank balance sheets, pushing them on

955
00:49:00,080 --> 00:49:05,839
Speaker 2: to less regulated or even unregulated financial intermediaries where if

956
00:49:05,880 --> 00:49:08,799
Speaker 2: they failed it wouldn't be such a massive problem. But

957
00:49:09,719 --> 00:49:12,560
Speaker 2: I think you can say like two things, and Elizabeth

958
00:49:12,600 --> 00:49:16,239
Speaker 2: brought up this point, but one, the size and the

959
00:49:16,280 --> 00:49:19,600
Speaker 2: speed of the market's growth kind of matters here, right,

960
00:49:19,760 --> 00:49:23,800
Speaker 2: So yes, maybe you want some non bank financial entities

961
00:49:23,840 --> 00:49:27,239
Speaker 2: to be making loans, But if they do so on

962
00:49:27,320 --> 00:49:29,719
Speaker 2: a particular scale, or if they do so in a

963
00:49:29,760 --> 00:49:33,120
Speaker 2: way where a huge amount of credit in the American

964
00:49:33,320 --> 00:49:37,320
Speaker 2: economy ends up being concentrated on like a very large

965
00:49:37,440 --> 00:49:40,520
Speaker 2: investors balance sheet, and they end up owning the entire

966
00:49:40,680 --> 00:49:44,319
Speaker 2: capital stack of a company, basically the equity and the debt,

967
00:49:45,080 --> 00:49:48,000
Speaker 2: that could be problematic. And then the second thing is

968
00:49:48,520 --> 00:49:52,319
Speaker 2: I cannot imagine that when bank regulators were making some

969
00:49:52,440 --> 00:49:55,239
Speaker 2: of these rules post two thousand and eight that they

970
00:49:55,239 --> 00:49:59,719
Speaker 2: were necessarily thinking of the bankruptcy implications or like the

971
00:50:00,000 --> 00:50:05,040
Speaker 2: informational disadvantages of not having a claims trading process totally.

972
00:50:05,239 --> 00:50:06,759
Speaker 3: So first of all, I just want to say I

973
00:50:06,800 --> 00:50:09,520
Speaker 3: wasn't trolling when I said it sounded great, because there

974
00:50:09,520 --> 00:50:12,960
Speaker 3: were a number of things that from their perspective you

975
00:50:13,000 --> 00:50:16,880
Speaker 3: could see the appeal. So the idea of maybe this

976
00:50:17,000 --> 00:50:20,359
Speaker 3: is a better liability asset match than taking short term

977
00:50:20,400 --> 00:50:23,480
Speaker 3: deposits and made long term loans. The fact that the

978
00:50:23,560 --> 00:50:26,000
Speaker 3: user experience from the perspective.

979
00:50:25,440 --> 00:50:27,720
Speaker 6: Of the borrower, you go to the.

980
00:50:27,280 --> 00:50:30,600
Speaker 3: Fund and they can move a lot faster. That makes

981
00:50:30,600 --> 00:50:32,640
Speaker 3: a lot of sense to me. The fact that there

982
00:50:32,719 --> 00:50:36,600
Speaker 3: is less, as you put it, creditor on creditor violence,

983
00:50:37,080 --> 00:50:39,919
Speaker 3: such that the game is not all about who can

984
00:50:39,960 --> 00:50:43,440
Speaker 3: read you know, who finds something in the fine print

985
00:50:43,719 --> 00:50:47,279
Speaker 3: somewhere so that they can induce a bankruptcy and that

986
00:50:47,320 --> 00:50:49,840
Speaker 3: they can like, you know, get this claim on the

987
00:50:49,920 --> 00:50:53,280
Speaker 3: collateral that another entity can't. So it does really seem

988
00:50:53,360 --> 00:50:57,600
Speaker 3: like there are some very obvious reasons why this market

989
00:50:57,680 --> 00:51:01,480
Speaker 3: is appealing. Not to mention the point that you just made,

990
00:51:01,520 --> 00:51:03,640
Speaker 3: which is that, like, this is kind of what we

991
00:51:03,680 --> 00:51:07,080
Speaker 3: want from a financial stability perspective, that all of these

992
00:51:07,600 --> 00:51:11,280
Speaker 3: loans are not in the hands of you know, entities

993
00:51:11,320 --> 00:51:15,239
Speaker 3: that also have people's safe deposits. That being said, you know,

994
00:51:15,320 --> 00:51:18,120
Speaker 3: one of the things that I the arguments, you know,

995
00:51:18,160 --> 00:51:22,080
Speaker 3: there's obviously the lack of information and the lack of clarity,

996
00:51:22,120 --> 00:51:25,880
Speaker 3: and that's interesting from multiple perspectives, but also this idea

997
00:51:25,960 --> 00:51:29,200
Speaker 3: of like, well the sort of zombie company phenomenon, which

998
00:51:29,239 --> 00:51:32,040
Speaker 3: is that if you sort of declare bankruptcy at the

999
00:51:32,120 --> 00:51:36,480
Speaker 3: right time, there's still some sort of potentially turnaroundable company

1000
00:51:36,480 --> 00:51:39,160
Speaker 3: by the time it hits bankruptcy court. But if you

1001
00:51:39,239 --> 00:51:41,759
Speaker 3: wait too long and then it hits bankruptcy court, and

1002
00:51:41,800 --> 00:51:45,759
Speaker 3: then there's really nothing. I think that argument. You know,

1003
00:51:45,800 --> 00:51:48,759
Speaker 3: it's early, right, we haven't seen a ton of bankruptcies yet,

1004
00:51:48,800 --> 00:51:52,200
Speaker 3: we haven't had a downturn yet since this market really boomed.

1005
00:51:52,719 --> 00:51:55,359
Speaker 3: But that strikes me as something where while you could

1006
00:51:55,440 --> 00:51:59,360
Speaker 3: really get serious like degradation of the quality of assets

1007
00:51:59,360 --> 00:52:01,040
Speaker 3: that come into Yeah, and.

1008
00:52:01,040 --> 00:52:05,280
Speaker 2: I thought the Sears example was both harsh and powerful,

1009
00:52:06,440 --> 00:52:08,719
Speaker 2: but it is true. And you do see that in

1010
00:52:08,760 --> 00:52:12,120
Speaker 2: the discourse around zombie companies, this idea that like, well, okay,

1011
00:52:12,239 --> 00:52:14,720
Speaker 2: if a company is just kind of limping along because

1012
00:52:14,760 --> 00:52:17,800
Speaker 2: it's big creditor doesn't want to have to take a loss,

1013
00:52:17,920 --> 00:52:19,520
Speaker 2: or it doesn't want to have to issue a press

1014
00:52:19,560 --> 00:52:22,960
Speaker 2: release saying one of its portfolio companies has gone bankrupt,

1015
00:52:23,160 --> 00:52:26,959
Speaker 2: that has real world implications for the people who work

1016
00:52:27,000 --> 00:52:29,520
Speaker 2: at the company or at Sears who can't get a

1017
00:52:29,600 --> 00:52:32,920
Speaker 2: promotion and are just working in a gosh, I'm just

1018
00:52:32,960 --> 00:52:35,759
Speaker 2: imagining walking through the emptcerieses of the world now just

1019
00:52:35,840 --> 00:52:38,319
Speaker 2: have a really like depressing retail experience.

1020
00:52:38,760 --> 00:52:39,160
Speaker 3: Totally.

1021
00:52:39,239 --> 00:52:41,160
Speaker 2: All right, shall we leave it there, Let's leave it there.

1022
00:52:41,280 --> 00:52:44,120
Speaker 2: This has been another episode of the All Thoughts podcast.

1023
00:52:44,200 --> 00:52:47,480
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.

1024
00:52:47,360 --> 00:52:49,799
Speaker 3: And I'm Jill Wisenth though you can follow me at

1025
00:52:49,840 --> 00:52:54,920
Speaker 3: the Stalwart. Follow our guests Jared Elias, He's at Jared Elias.

1026
00:52:55,000 --> 00:52:58,040
Speaker 3: It doesn't appear that Elizabeth is on Twitter, so that's

1027
00:52:58,080 --> 00:53:00,720
Speaker 3: wise for her, but go check out her recent Follow

1028
00:53:00,760 --> 00:53:04,520
Speaker 3: our producers Carmen Rodriguez at carman Erman dash Ol Bennett

1029
00:53:04,520 --> 00:53:07,520
Speaker 3: at Dashbot and Kilbrooks at Kilbrooks. And thank you to

1030
00:53:07,560 --> 00:53:10,840
Speaker 3: our producer Moses Ondem. For more Oddlots content, go to

1031
00:53:10,840 --> 00:53:13,640
Speaker 3: Bloomberg dot com slash odd Lots, where we have transcripts

1032
00:53:13,640 --> 00:53:16,560
Speaker 3: of blog and a newsletter and you can chat about

1033
00:53:16,600 --> 00:53:18,759
Speaker 3: all of these topics twenty four to seven in our

1034
00:53:18,840 --> 00:53:21,840
Speaker 3: discord Discord dot gg slash Outlots.

1035
00:53:22,360 --> 00:53:24,759
Speaker 2: And if you enjoy Odd Lots, if you like it

1036
00:53:24,840 --> 00:53:28,080
Speaker 2: when we dive deep into the implications of the rise

1037
00:53:28,120 --> 00:53:30,960
Speaker 2: of private credit, then please leave us a positive review

1038
00:53:31,080 --> 00:53:34,600
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1039
00:53:34,640 --> 00:53:37,600
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1040
00:53:37,680 --> 00:53:40,640
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1041
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1042
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1043
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1044
00:54:06,640 --> 00:54:15,759
Speaker 4: In e.