WEBVTT - TCW CEO Katie Koch Talks Private Credit

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>A deal between P and C Financial Services Group and

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<v Speaker 2>the TCW Group on partnering to develop to deliver excuse me,

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<v Speaker 2>private credit solutions to middle market companies private credit.

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<v Speaker 3>There's a lot going on.

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<v Speaker 2>Continues to be great to be talking again, the Katie Coach,

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<v Speaker 2>CEO of the global asset assement from TCW, which manages

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<v Speaker 2>approximately two hundred billion in client assets. You've been busy,

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<v Speaker 2>Thanks for having me on.

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<v Speaker 3>Yes, tell us about this deal with D and C. Yeah, sure,

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<v Speaker 3>we're just by background.

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<v Speaker 1>You mentioned TCW as a two hundred billion dollar global

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<v Speaker 1>asset manager. We were an early entrance of private credit

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<v Speaker 1>that is led for us by the extraordinarily talented Rick Miller,

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<v Speaker 1>our CIO of private credit. A twenty three year track

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<v Speaker 1>record in that asset class of conservative lending that's allowed

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<v Speaker 1>us to outperform with a low loss ratio. And we're

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<v Speaker 1>really proud to be partnering with PNC, which is the

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<v Speaker 1>course one of the leading US financialists tuitions. They're ranked

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<v Speaker 1>forth and middle market lending. They have an extraordinarily talented

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<v Speaker 1>and tenured management team, a strong balance sheet, and great

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<v Speaker 1>client relationships. And this has been a partnership. Just to

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<v Speaker 1>answer a question how it came about. It's actually fifteen

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<v Speaker 1>years in the making, so we've worked together very closely

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<v Speaker 1>for a long period of time. Over that period, we've

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<v Speaker 1>done forty co financings.

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<v Speaker 3>And it is also true that they.

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<v Speaker 1>Are number one fun finance partner, which means that actually

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<v Speaker 1>PMC had to underwrite TCW and our capabilities in order

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<v Speaker 1>to provide leverage to our fund.

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<v Speaker 3>So this is a very very.

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<v Speaker 1>Strong partnership, and I wanted to just end Carol by

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<v Speaker 1>saying that there are This is different than other partnerships

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<v Speaker 1>that have been announced, and this strong relationship we have

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<v Speaker 1>with each other has allowed us to create something really

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<v Speaker 1>differentiated for three quick reasons. The first is that it's

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<v Speaker 1>very middle market focused, so we're going to target loans

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<v Speaker 1>to companies with about fifteen to seventy five billion at Evada.

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<v Speaker 3>The second is.

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<v Speaker 1>That it's a shared investment approach, so we're both putting

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<v Speaker 1>in investors.

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<v Speaker 3>To this partnership.

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<v Speaker 1>We're going to work together on the underwriting and the origination.

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<v Speaker 1>Of course, it will be shared by Rick, and that's

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<v Speaker 1>because we have a shared credit culture of conservative lending

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<v Speaker 1>that allows us to do to share the investment approach,

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<v Speaker 1>and then finally it's shared economics. We're targeting two and

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<v Speaker 1>a half billion dollars of equity this year, and it

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<v Speaker 1>will be strong contributions both from PNC and from TCW

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<v Speaker 1>and our affiliate, so that economic alignment aligns our interests

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<v Speaker 1>with PMC and also of course with our clients.

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<v Speaker 3>So Katie targeting two and a half billion, how big

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<v Speaker 3>could this partnership get them?

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<v Speaker 1>We think this partnership could expand significantly over time, and

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<v Speaker 1>that's important because private credit managers and banks. We think

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<v Speaker 1>those partnerships with US and others will continue because banks

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<v Speaker 1>are under some regulatory pressure and private credit managers they

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<v Speaker 1>have the capital to allocate and to lend, and banks

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<v Speaker 1>have great origination capabilities, and those two things are going

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<v Speaker 1>to have to cooperate so we can continue to put

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<v Speaker 1>credit out into.

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<v Speaker 3>The US market.

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<v Speaker 1>Significantly mean But I'm not going to give you the

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<v Speaker 1>exact billions of dollars, but i will say the double

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<v Speaker 1>from the initial two and a half or many times

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<v Speaker 1>actually for our credit alternative platform broadly, we've already doubled

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<v Speaker 1>the aum of that platform over the next couple of years,

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<v Speaker 1>and we're expecting it to be many multiples over that,

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<v Speaker 1>and this is going to play a very important role

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<v Speaker 1>in the growth of TCW's alternative credit platform.

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<v Speaker 4>Carol mentioned at the start that you've been busy. Another

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<v Speaker 4>I guess deal, if you will, was a conversion of

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<v Speaker 4>two mutual funds SOTS yes in the AI space. Talk

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<v Speaker 4>a little bit about why you sure well.

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<v Speaker 1>First of all, mutual funds in general, we think that

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<v Speaker 1>they have a place.

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<v Speaker 3>We'll continue to have.

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<v Speaker 1>A place in the market, very important part of our business,

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<v Speaker 1>very big part of teas, and we'll continue to be

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<v Speaker 1>a relevant vehicle. It is also true that clients are

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<v Speaker 1>looking at the exchange traded fund vehicle because of the liquidity,

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<v Speaker 1>the tax efficiency, and the transparency and ease of trading

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<v Speaker 1>of those vehicles. And so we are going to convert

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<v Speaker 1>several funds and launch new ets. We did want an AI.

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<v Speaker 1>I do want to emphasize I am a believer.

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<v Speaker 3>In generative AI.

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<v Speaker 1>We have been managing AI strategies for seven years.

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<v Speaker 3>So this isn't something we just.

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<v Speaker 1>Launched because chat GBT is cool. It's we saw that

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<v Speaker 1>transformative technology almost a decade ago and launched a strategy

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<v Speaker 1>on that. We're investing in the technology enablers of AI,

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<v Speaker 1>and also the companies that will best.

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<v Speaker 4>And I'm curious is what is a portfolio of AI

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<v Speaker 4>Sazi sakes? Because if you ask someone else that question,

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<v Speaker 4>they would just say, well, in video, maybe Microsoft that

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<v Speaker 4>that's in I.

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<v Speaker 3>Assume this is war we have some of those in there.

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<v Speaker 1>So these companies that are driving the technology of AI,

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<v Speaker 1>but then also the companies that are the beneficiary and

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<v Speaker 1>what it's actively managed and.

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<v Speaker 3>It's relatively focused.

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<v Speaker 1>And so what we're going to do is ship the

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<v Speaker 1>shape of the portfolio as that narrative of AI changes

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<v Speaker 1>over time. I do just want to say one thing

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<v Speaker 1>because I think it's important to be balanced on these issues.

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<v Speaker 1>I do believe in the transformative potential of AI, but

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<v Speaker 1>it is a story that's going to play out over

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<v Speaker 1>the very long term. And so a vehicle this is

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<v Speaker 1>appropriate for people who can take that long horizon. And

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<v Speaker 1>this is said a lot, but I think it's a

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<v Speaker 1>very good reminder. The Internet was also an incredibly transformational technology,

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<v Speaker 1>but that didn't happen in year one, in year two,

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<v Speaker 1>and it took twenty years. But if you stuck with

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<v Speaker 1>that narrative for a couple of decades, and many of

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<v Speaker 1>our clients have that type of durability of capital. It

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<v Speaker 1>was one of the greatest wealth creation opportunities in the

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<v Speaker 1>US economy, and so we are excited about it, but

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<v Speaker 1>balanced in telling people this is a great vehicle.

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<v Speaker 3>Be active, be selective.

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<v Speaker 1>Which we are be with a manager that can evolve

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<v Speaker 1>with the narrative, but also be long.

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<v Speaker 2>Hey, it's a time as you know of our investment narrative.

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<v Speaker 2>Just generally speaking, take the big broad macro Katie, what

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<v Speaker 2>are you seeing right now?

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<v Speaker 3>How would you describe the environment? I would say that

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<v Speaker 3>we are.

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<v Speaker 1>Long dispersion, the idea of dispersion across all of our portfolios.

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<v Speaker 1>It's really hard to predict this in short increments. But

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<v Speaker 1>what I would say to you, whether it's private credit

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<v Speaker 1>or it's public credit, we think that the spreads and

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<v Speaker 1>I'm going to talk about public because it's just a

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<v Speaker 1>little easier to point to valuations which are at record

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<v Speaker 1>tights in credit markets in their post global financial.

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<v Speaker 3>Crisis history, at record heights. That valuation is inconsistent.

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<v Speaker 1>With some of the obvious challenges that we have in

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<v Speaker 1>this economy, regardless of whether or not we get a recession.

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<v Speaker 1>Let's take the scenario where we muddle forward and have

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<v Speaker 1>some type of soft landing, but rates we all believe

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<v Speaker 1>will stay elevated because inflation is still pressure. That could

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<v Speaker 1>create a credit event right when rates are this high

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<v Speaker 1>and these companies, we're already starting to see stress in

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<v Speaker 1>certain parts of the credit market not priced into credit spreads.

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<v Speaker 1>So in our liquid portfolios where we do take macro views,

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<v Speaker 1>which is in the core plus space. Remember that's people's

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<v Speaker 1>retirement money, so we're managing that for their retirement assets

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<v Speaker 1>over many decades.

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<v Speaker 3>We're conservatively positioned.

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<v Speaker 1>We're overweight agency mbs, which is carrying over the index,

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<v Speaker 1>and we're being very patient and eventually this is going

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<v Speaker 1>to break, and when it does, we'll lean into those

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<v Speaker 1>specific credit opportunities. If, on the other hand, I just

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<v Speaker 1>we do get the recession, then we're going to have

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<v Speaker 1>a credit event anyway, in both public or private markets,

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<v Speaker 1>and that will create dispersion.

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<v Speaker 2>Are you suspicious that the default rate is in something

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<v Speaker 2>different than what it is today?

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<v Speaker 3>So this is a good point.

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<v Speaker 1>Default rates are actually where we would expect them to

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<v Speaker 1>be in the traditional levered loan market. They're low and

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<v Speaker 1>actually went down in the first quarter. In the private

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<v Speaker 1>credit market, And I'm glad you asked that, because we

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<v Speaker 1>think that's really masking some serious liquidity challenges in the

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<v Speaker 1>private credit market. And what we and you so the

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<v Speaker 1>ouguest question is is why why is this happening? Well,

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<v Speaker 1>I would ask first, why is there stress? The reason

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<v Speaker 1>that we think there's actual stress that's not showing in

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<v Speaker 1>default rates yet is because from twenty nineteen to twenty two,

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<v Speaker 1>these capital structures were highly levered with the view that

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<v Speaker 1>rates would stay zero forever, right, and that didn't happen,

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<v Speaker 1>And now masks taken over and they're under pressure. Now,

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<v Speaker 1>why haven't the defaults gone up? My answer to you

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<v Speaker 1>on that is that if you look at last year,

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<v Speaker 1>the amendments of these loans were three to four times normal,

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<v Speaker 1>and we don't generally amend loans when things are going well,

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<v Speaker 1>So this cannot be extended forever, and eventually those default

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<v Speaker 1>rates will rise. I'm going to end with just bring

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<v Speaker 1>it back to dispersion. If you look at the last

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<v Speaker 1>fifteen years in the private credit world, the dispersion between

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<v Speaker 1>the top and bottom quartile manager is about fifteen basis points.

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<v Speaker 3>This is not high dispersion.

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<v Speaker 1>That number could ten x or more over the next

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<v Speaker 1>couple of years as these defaults rates rise, and that's

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<v Speaker 1>why you obviously want to be with a manager like

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<v Speaker 1>TCW that does conservative lending diligence, very high levels of diligence,

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<v Speaker 1>very significant underwriting, and we feel really great about how

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<v Speaker 1>we're going to manage this environment for our clients.

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<v Speaker 4>All Right, Katie, we have to leave it there.

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<v Speaker 3>Great to talk, Thank you so much for you take

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<v Speaker 3>it time for us.

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<v Speaker 4>Katie Kacha. Of course, elites at TCW, I'll take a

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<v Speaker 4>time to talk with us here on the milk and

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<v Speaker 4>stage