Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: A deal between P and C Financial Services Group and
Speaker 2: the TCW Group on partnering to develop to deliver excuse me,
Speaker 2: private credit solutions to middle market companies private credit.
Speaker 3: There's a lot going on.
Speaker 2: Continues to be great to be talking again, the Katie Coach,
Speaker 2: CEO of the global asset assement from TCW, which manages
Speaker 2: approximately two hundred billion in client assets. You've been busy,
Speaker 2: Thanks for having me on.
Speaker 3: Yes, tell us about this deal with D and C. Yeah, sure,
Speaker 3: we're just by background.
Speaker 1: You mentioned TCW as a two hundred billion dollar global
Speaker 1: asset manager. We were an early entrance of private credit
Speaker 1: that is led for us by the extraordinarily talented Rick Miller,
Speaker 1: our CIO of private credit. A twenty three year track
Speaker 1: record in that asset class of conservative lending that's allowed
Speaker 1: us to outperform with a low loss ratio. And we're
Speaker 1: really proud to be partnering with PNC, which is the
Speaker 1: course one of the leading US financialists tuitions. They're ranked
Speaker 1: forth and middle market lending. They have an extraordinarily talented
Speaker 1: and tenured management team, a strong balance sheet, and great
Speaker 1: client relationships. And this has been a partnership. Just to
Speaker 1: answer a question how it came about. It's actually fifteen
Speaker 1: years in the making, so we've worked together very closely
Speaker 1: for a long period of time. Over that period, we've
Speaker 1: done forty co financings.
Speaker 3: And it is also true that they.
Speaker 1: Are number one fun finance partner, which means that actually
Speaker 1: PMC had to underwrite TCW and our capabilities in order
Speaker 1: to provide leverage to our fund.
Speaker 3: So this is a very very.
Speaker 1: Strong partnership, and I wanted to just end Carol by
Speaker 1: saying that there are This is different than other partnerships
Speaker 1: that have been announced, and this strong relationship we have
Speaker 1: with each other has allowed us to create something really
Speaker 1: differentiated for three quick reasons. The first is that it's
Speaker 1: very middle market focused, so we're going to target loans
Speaker 1: to companies with about fifteen to seventy five billion at Evada.
Speaker 3: The second is.
Speaker 1: That it's a shared investment approach, so we're both putting
Speaker 1: in investors.
Speaker 3: To this partnership.
Speaker 1: We're going to work together on the underwriting and the origination.
Speaker 1: Of course, it will be shared by Rick, and that's
Speaker 1: because we have a shared credit culture of conservative lending
Speaker 1: that allows us to do to share the investment approach,
Speaker 1: and then finally it's shared economics. We're targeting two and
Speaker 1: a half billion dollars of equity this year, and it
Speaker 1: will be strong contributions both from PNC and from TCW
Speaker 1: and our affiliate, so that economic alignment aligns our interests
Speaker 1: with PMC and also of course with our clients.
Speaker 3: So Katie targeting two and a half billion, how big
Speaker 3: could this partnership get them?
Speaker 1: We think this partnership could expand significantly over time, and
Speaker 1: that's important because private credit managers and banks. We think
Speaker 1: those partnerships with US and others will continue because banks
Speaker 1: are under some regulatory pressure and private credit managers they
Speaker 1: have the capital to allocate and to lend, and banks
Speaker 1: have great origination capabilities, and those two things are going
Speaker 1: to have to cooperate so we can continue to put
Speaker 1: credit out into.
Speaker 3: The US market.
Speaker 1: Significantly mean But I'm not going to give you the
Speaker 1: exact billions of dollars, but i will say the double
Speaker 1: from the initial two and a half or many times
Speaker 1: actually for our credit alternative platform broadly, we've already doubled
Speaker 1: the aum of that platform over the next couple of years,
Speaker 1: and we're expecting it to be many multiples over that,
Speaker 1: and this is going to play a very important role
Speaker 1: in the growth of TCW's alternative credit platform.
Speaker 4: Carol mentioned at the start that you've been busy. Another
Speaker 4: I guess deal, if you will, was a conversion of
Speaker 4: two mutual funds SOTS yes in the AI space. Talk
Speaker 4: a little bit about why you sure well.
Speaker 1: First of all, mutual funds in general, we think that
Speaker 1: they have a place.
Speaker 3: We'll continue to have.
Speaker 1: A place in the market, very important part of our business,
Speaker 1: very big part of teas, and we'll continue to be
Speaker 1: a relevant vehicle. It is also true that clients are
Speaker 1: looking at the exchange traded fund vehicle because of the liquidity,
Speaker 1: the tax efficiency, and the transparency and ease of trading
Speaker 1: of those vehicles. And so we are going to convert
Speaker 1: several funds and launch new ets. We did want an AI.
Speaker 1: I do want to emphasize I am a believer.
Speaker 3: In generative AI.
Speaker 1: We have been managing AI strategies for seven years.
Speaker 3: So this isn't something we just.
Speaker 1: Launched because chat GBT is cool. It's we saw that
Speaker 1: transformative technology almost a decade ago and launched a strategy
Speaker 1: on that. We're investing in the technology enablers of AI,
Speaker 1: and also the companies that will best.
Speaker 4: And I'm curious is what is a portfolio of AI
Speaker 4: Sazi sakes? Because if you ask someone else that question,
Speaker 4: they would just say, well, in video, maybe Microsoft that
Speaker 4: that's in I.
Speaker 3: Assume this is war we have some of those in there.
Speaker 1: So these companies that are driving the technology of AI,
Speaker 1: but then also the companies that are the beneficiary and
Speaker 1: what it's actively managed and.
Speaker 3: It's relatively focused.
Speaker 1: And so what we're going to do is ship the
Speaker 1: shape of the portfolio as that narrative of AI changes
Speaker 1: over time. I do just want to say one thing
Speaker 1: because I think it's important to be balanced on these issues.
Speaker 1: I do believe in the transformative potential of AI, but
Speaker 1: it is a story that's going to play out over
Speaker 1: the very long term. And so a vehicle this is
Speaker 1: appropriate for people who can take that long horizon. And
Speaker 1: this is said a lot, but I think it's a
Speaker 1: very good reminder. The Internet was also an incredibly transformational technology,
Speaker 1: but that didn't happen in year one, in year two,
Speaker 1: and it took twenty years. But if you stuck with
Speaker 1: that narrative for a couple of decades, and many of
Speaker 1: our clients have that type of durability of capital. It
Speaker 1: was one of the greatest wealth creation opportunities in the
Speaker 1: US economy, and so we are excited about it, but
Speaker 1: balanced in telling people this is a great vehicle.
Speaker 3: Be active, be selective.
Speaker 1: Which we are be with a manager that can evolve
Speaker 1: with the narrative, but also be long.
Speaker 2: Hey, it's a time as you know of our investment narrative.
Speaker 2: Just generally speaking, take the big broad macro Katie, what
Speaker 2: are you seeing right now?
Speaker 3: How would you describe the environment? I would say that
Speaker 3: we are.
Speaker 1: Long dispersion, the idea of dispersion across all of our portfolios.
Speaker 1: It's really hard to predict this in short increments. But
Speaker 1: what I would say to you, whether it's private credit
Speaker 1: or it's public credit, we think that the spreads and
Speaker 1: I'm going to talk about public because it's just a
Speaker 1: little easier to point to valuations which are at record
Speaker 1: tights in credit markets in their post global financial.
Speaker 3: Crisis history, at record heights. That valuation is inconsistent.
Speaker 1: With some of the obvious challenges that we have in
Speaker 1: this economy, regardless of whether or not we get a recession.
Speaker 1: Let's take the scenario where we muddle forward and have
Speaker 1: some type of soft landing, but rates we all believe
Speaker 1: will stay elevated because inflation is still pressure. That could
Speaker 1: create a credit event right when rates are this high
Speaker 1: and these companies, we're already starting to see stress in
Speaker 1: certain parts of the credit market not priced into credit spreads.
Speaker 1: So in our liquid portfolios where we do take macro views,
Speaker 1: which is in the core plus space. Remember that's people's
Speaker 1: retirement money, so we're managing that for their retirement assets
Speaker 1: over many decades.
Speaker 3: We're conservatively positioned.
Speaker 1: We're overweight agency mbs, which is carrying over the index,
Speaker 1: and we're being very patient and eventually this is going
Speaker 1: to break, and when it does, we'll lean into those
Speaker 1: specific credit opportunities. If, on the other hand, I just
Speaker 1: we do get the recession, then we're going to have
Speaker 1: a credit event anyway, in both public or private markets,
Speaker 1: and that will create dispersion.
Speaker 2: Are you suspicious that the default rate is in something
Speaker 2: different than what it is today?
Speaker 3: So this is a good point.
Speaker 1: Default rates are actually where we would expect them to
Speaker 1: be in the traditional levered loan market. They're low and
Speaker 1: actually went down in the first quarter. In the private
Speaker 1: credit market, And I'm glad you asked that, because we
Speaker 1: think that's really masking some serious liquidity challenges in the
Speaker 1: private credit market. And what we and you so the
Speaker 1: ouguest question is is why why is this happening? Well,
Speaker 1: I would ask first, why is there stress? The reason
Speaker 1: that we think there's actual stress that's not showing in
Speaker 1: default rates yet is because from twenty nineteen to twenty two,
Speaker 1: these capital structures were highly levered with the view that
Speaker 1: rates would stay zero forever, right, and that didn't happen,
Speaker 1: And now masks taken over and they're under pressure. Now,
Speaker 1: why haven't the defaults gone up? My answer to you
Speaker 1: on that is that if you look at last year,
Speaker 1: the amendments of these loans were three to four times normal,
Speaker 1: and we don't generally amend loans when things are going well,
Speaker 1: So this cannot be extended forever, and eventually those default
Speaker 1: rates will rise. I'm going to end with just bring
Speaker 1: it back to dispersion. If you look at the last
Speaker 1: fifteen years in the private credit world, the dispersion between
Speaker 1: the top and bottom quartile manager is about fifteen basis points.
Speaker 3: This is not high dispersion.
Speaker 1: That number could ten x or more over the next
Speaker 1: couple of years as these defaults rates rise, and that's
Speaker 1: why you obviously want to be with a manager like
Speaker 1: TCW that does conservative lending diligence, very high levels of diligence,
Speaker 1: very significant underwriting, and we feel really great about how
Speaker 1: we're going to manage this environment for our clients.
Speaker 4: All Right, Katie, we have to leave it there.
Speaker 3: Great to talk, Thank you so much for you take
Speaker 3: it time for us.
Speaker 4: Katie Kacha. Of course, elites at TCW, I'll take a
Speaker 4: time to talk with us here on the milk and
Speaker 4: stage