1 00:00:18,000 --> 00:00:20,599 Speaker 1: Hello, Welcome to the Credit Edge, a weekly Monkeys podcasts. 2 00:00:20,600 --> 00:00:24,120 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg, and. 3 00:00:24,000 --> 00:00:27,520 Speaker 2: I'm David Haven's, a senior analyst at Bloomberg Intelligence. This week, 4 00:00:27,600 --> 00:00:30,080 Speaker 2: we're delighted to welcome Susie Gibbons, partner and head of 5 00:00:30,120 --> 00:00:32,760 Speaker 2: research at Davidson Kempner. Susie, how are you. 6 00:00:32,960 --> 00:00:34,879 Speaker 3: I'm great, Thank you, thanks very much for having me. 7 00:00:34,960 --> 00:00:38,040 Speaker 2: Well, that's excellent. It's great having you here. Davidson Kempner 8 00:00:38,240 --> 00:00:41,479 Speaker 2: has been around for about forty years and has managed 9 00:00:41,520 --> 00:00:44,880 Speaker 2: assets of about forty billion dollars, so some nice symmetry there. 10 00:00:45,320 --> 00:00:47,800 Speaker 2: There are always a few things going on in the markets, 11 00:00:47,800 --> 00:00:50,680 Speaker 2: but geez, Susie, it's feeling like we're getting to that 12 00:00:50,840 --> 00:00:53,440 Speaker 2: drinking from a fire hose stage again. Tons of questions 13 00:00:53,479 --> 00:00:56,640 Speaker 2: about private credit, resilient spreads in other areas of credit, 14 00:00:57,160 --> 00:00:59,880 Speaker 2: Iran and America clashing over who gets to close off 15 00:00:59,840 --> 00:01:01,920 Speaker 2: the straits of horn Moves and twenty percent of the 16 00:01:01,960 --> 00:01:05,160 Speaker 2: global oil spigot. And I know you've got some interesting 17 00:01:05,160 --> 00:01:08,120 Speaker 2: thoughts on equity versus credit allocations, where to go in 18 00:01:08,160 --> 00:01:10,640 Speaker 2: the private markets. You've had some terrific white papers that 19 00:01:10,640 --> 00:01:11,920 Speaker 2: you've published on your website. 20 00:01:12,040 --> 00:01:12,280 Speaker 3: Thank you. 21 00:01:12,760 --> 00:01:14,560 Speaker 2: We have a ton to talk about and I know 22 00:01:14,600 --> 00:01:16,720 Speaker 2: that James is champing at the bit to get started. 23 00:01:16,959 --> 00:01:18,959 Speaker 1: Thanks Daviy Dan. Great to have you on the show, Susie, 24 00:01:19,000 --> 00:01:21,440 Speaker 1: we do have a lot of questions despite all of 25 00:01:21,480 --> 00:01:24,360 Speaker 1: what you've laid out, David. Credit markets are sailing quite 26 00:01:24,360 --> 00:01:27,080 Speaker 1: calmly through the shot waves from the Iran war, although 27 00:01:27,120 --> 00:01:30,119 Speaker 1: private debt is keeping everyone on edge as the gates 28 00:01:30,200 --> 00:01:33,160 Speaker 1: slammed down on retail funds suffering a wave of redemptions. 29 00:01:33,600 --> 00:01:36,000 Speaker 1: But there's just a ton of liquidity out there. Every 30 00:01:36,040 --> 00:01:38,320 Speaker 1: dip seems to get bought, and investors on this show 31 00:01:38,319 --> 00:01:41,240 Speaker 1: are sounding pretty bullish about the fundamentals and the technicals 32 00:01:41,400 --> 00:01:43,880 Speaker 1: for corporate credit. They assume that the cycle just keeps 33 00:01:43,959 --> 00:01:46,720 Speaker 1: chugging along. But Susie, you're seeing a lot more worrying 34 00:01:47,080 --> 00:01:49,840 Speaker 1: stuff out there, and I'm interested in, you know what, why, 35 00:01:50,200 --> 00:01:52,200 Speaker 1: you know why we're missing that and what's the real 36 00:01:52,240 --> 00:01:53,440 Speaker 1: story under the surface there. 37 00:01:53,720 --> 00:01:56,760 Speaker 3: Sure absolutely happy to share that that was actually one 38 00:01:56,800 --> 00:01:59,400 Speaker 3: of the motivations for the recent white paper that we published, 39 00:02:00,480 --> 00:02:05,840 Speaker 3: Optimizing the Efficient Frontier Opportunistic Credit amid a capital structure reset. 40 00:02:06,240 --> 00:02:08,400 Speaker 3: What we have been seeing is for the past few 41 00:02:08,480 --> 00:02:13,560 Speaker 3: years a delayed problem in leverage credit markets which has 42 00:02:13,560 --> 00:02:16,440 Speaker 3: been building, and so we really wanted to dive into 43 00:02:16,480 --> 00:02:20,360 Speaker 3: the data and describe that. On top of that, we've 44 00:02:20,520 --> 00:02:25,080 Speaker 3: more recently had the issues in software come to the surface. 45 00:02:25,160 --> 00:02:27,640 Speaker 3: That was actually something that we flagged back in a 46 00:02:27,800 --> 00:02:30,959 Speaker 3: twenty twenty four white paper called Tides of Credit. At 47 00:02:30,960 --> 00:02:33,840 Speaker 3: that time, we did not know what AI disruption would 48 00:02:33,840 --> 00:02:37,000 Speaker 3: look like, but we saw a high level of concentration 49 00:02:37,400 --> 00:02:40,360 Speaker 3: in software lending. In the direct lending market at the time, 50 00:02:41,120 --> 00:02:43,920 Speaker 3: it looked like the low twenties percent, and in leverage 51 00:02:43,960 --> 00:02:47,800 Speaker 3: loans it was in the mid teens. And we didn't 52 00:02:47,880 --> 00:02:50,120 Speaker 3: again know what these models would look like, you know, 53 00:02:50,160 --> 00:02:53,240 Speaker 3: fast forward a year later, but with our lending cap on, 54 00:02:53,680 --> 00:02:55,840 Speaker 3: we thought that anytime you have a lot of disruption 55 00:02:56,000 --> 00:02:59,080 Speaker 3: in a sector, as a par lender, that's pretty uncomfortable. 56 00:02:59,600 --> 00:03:02,800 Speaker 3: And so fast forward from the time of that paper 57 00:03:02,960 --> 00:03:07,160 Speaker 3: to this past October of twenty twenty five, I think 58 00:03:07,280 --> 00:03:09,400 Speaker 3: this came to a head in public markets where you 59 00:03:09,480 --> 00:03:14,000 Speaker 3: had very high quality software companies reprice in terms of 60 00:03:14,120 --> 00:03:17,120 Speaker 3: enterprise value multiples and that and we can talk about 61 00:03:17,120 --> 00:03:18,960 Speaker 3: that more and what that means for losses. But that 62 00:03:19,040 --> 00:03:22,240 Speaker 3: really has directed a lot of attention on the leverage 63 00:03:22,280 --> 00:03:26,359 Speaker 3: credit markets. But again, what we found in our research 64 00:03:26,560 --> 00:03:29,680 Speaker 3: is that the problems in leverage credit are broader than software, 65 00:03:29,720 --> 00:03:31,600 Speaker 3: and as I said, they've been building. I think we'll 66 00:03:31,960 --> 00:03:34,560 Speaker 3: talk about the default cycle and how this one is 67 00:03:34,680 --> 00:03:38,960 Speaker 3: very different from past default cycles that we've seen, where 68 00:03:39,040 --> 00:03:40,800 Speaker 3: what we would call moving from a period of soft 69 00:03:40,840 --> 00:03:44,120 Speaker 3: defaults to hard defaults. But the data that we dug 70 00:03:44,160 --> 00:03:47,080 Speaker 3: into suggested that the leverage in the market is actually 71 00:03:47,120 --> 00:03:49,240 Speaker 3: a lot higher than people appreciate, and I think that's 72 00:03:49,280 --> 00:03:50,480 Speaker 3: been masking the problem. 73 00:03:51,480 --> 00:03:54,640 Speaker 2: Yeah, there's it's an interesting topic because I'm the BDC 74 00:03:54,800 --> 00:03:57,320 Speaker 2: guy here and I read about BDC credit, So I 75 00:03:57,360 --> 00:03:59,720 Speaker 2: look at the private bd privately traded BDC is the 76 00:03:59,720 --> 00:04:03,880 Speaker 2: public BDCs, And the data that I look at is 77 00:04:04,000 --> 00:04:06,840 Speaker 2: by definition, historical data. So I'm looking back, you know, 78 00:04:06,840 --> 00:04:09,520 Speaker 2: over the past couple of quarters. But I'm not seeing 79 00:04:10,040 --> 00:04:12,160 Speaker 2: the I shouldn't say. I'm not saying the BDCs are 80 00:04:12,160 --> 00:04:16,360 Speaker 2: not reporting an increase in non accruals. They're not reporting, 81 00:04:16,600 --> 00:04:23,600 Speaker 2: you know, any substantial change in payment in kind income trends. Now, 82 00:04:23,600 --> 00:04:25,560 Speaker 2: there might be something going on below the surface on 83 00:04:25,640 --> 00:04:28,839 Speaker 2: both of those measures. So if I look at BDCs 84 00:04:28,920 --> 00:04:31,920 Speaker 2: and look at BDCs as a public window into sort 85 00:04:31,920 --> 00:04:35,320 Speaker 2: of the private world of direct lending, what are we missing? 86 00:04:36,880 --> 00:04:39,320 Speaker 3: I think a few things. For one, the issues in 87 00:04:39,440 --> 00:04:43,479 Speaker 3: software are the acute focus, but they're not where the 88 00:04:43,520 --> 00:04:46,320 Speaker 3: defaults are today. If you look at the Fitch Direct 89 00:04:46,400 --> 00:04:49,239 Speaker 3: lending universe, the default rate for software, as an example, 90 00:04:49,360 --> 00:04:51,520 Speaker 3: is one of the lowest default rates. I believe it's 91 00:04:51,560 --> 00:04:52,560 Speaker 3: well under two percent. 92 00:04:52,640 --> 00:04:54,080 Speaker 2: I think healthcare may be the highest. 93 00:04:54,160 --> 00:04:57,760 Speaker 3: Yeah, that's right. Whereas if you just look at fundamental 94 00:04:57,760 --> 00:05:03,280 Speaker 3: credit data. Fortunately, the Krol Stepstone Universe provides pre full 95 00:05:03,320 --> 00:05:06,200 Speaker 3: coverage of all of the direct lending universe in the US, 96 00:05:06,240 --> 00:05:09,200 Speaker 3: and we were able to analyze that data looking at 97 00:05:09,320 --> 00:05:12,920 Speaker 3: leverage above seven times on reported EBITDA and let's get 98 00:05:12,920 --> 00:05:15,719 Speaker 3: to that the difference between reported and adjusted EBITDA, because 99 00:05:15,720 --> 00:05:17,680 Speaker 3: that's a root of the problem here. 100 00:05:18,320 --> 00:05:18,880 Speaker 2: And also we. 101 00:05:18,839 --> 00:05:22,400 Speaker 3: Looked at interest coverage ratios below one and a half times, 102 00:05:22,400 --> 00:05:25,560 Speaker 3: and we found that slicing the market based on those 103 00:05:25,600 --> 00:05:28,320 Speaker 3: parameters suggested that in direct lending and actually also in 104 00:05:28,440 --> 00:05:31,880 Speaker 3: leverage loans, about a third of the market is stressed 105 00:05:32,000 --> 00:05:35,680 Speaker 3: based on just fundamental credit data and in terms of defaults, 106 00:05:35,960 --> 00:05:40,520 Speaker 3: which is obviously something that people pay attention to. You know, 107 00:05:40,560 --> 00:05:42,880 Speaker 3: they've been above five percent in the Fitsch universe, but 108 00:05:43,080 --> 00:05:47,400 Speaker 3: primarily soft defaults, similar to in the leverage loan universe 109 00:05:47,480 --> 00:05:50,240 Speaker 3: the data that Moody's tracks, where we're on year three 110 00:05:50,560 --> 00:05:54,400 Speaker 3: of having defaults above five percent. The reason I think 111 00:05:54,440 --> 00:05:57,280 Speaker 3: that people haven't focused so much on this is that 112 00:05:57,360 --> 00:06:01,240 Speaker 3: it hasn't manifested yet into losses because it's been the 113 00:06:01,320 --> 00:06:05,800 Speaker 3: defaults have largely in direct lending, been picking based on 114 00:06:06,160 --> 00:06:09,719 Speaker 3: non contractual pick so that the issuer has problems after 115 00:06:10,400 --> 00:06:13,559 Speaker 3: the debt is raised, and so that's often a sign 116 00:06:13,640 --> 00:06:16,600 Speaker 3: of in future issues because they can't afford to meet 117 00:06:16,640 --> 00:06:20,040 Speaker 3: their contractual obligations. And in leverage loans, it's been a 118 00:06:20,040 --> 00:06:24,360 Speaker 3: lot of liability management exercises which is not being able 119 00:06:24,360 --> 00:06:27,799 Speaker 3: to address, often a refinancing because there's too much debt. 120 00:06:28,960 --> 00:06:32,320 Speaker 3: Big picture, this all goes back to the broader problem, 121 00:06:32,320 --> 00:06:34,880 Speaker 3: which was a lot of capital structures were formed during 122 00:06:34,920 --> 00:06:38,000 Speaker 3: the low rate period I've call it twenty sixteen to 123 00:06:38,000 --> 00:06:41,600 Speaker 3: twenty twenty two, and with higher rates they just don't 124 00:06:41,640 --> 00:06:44,200 Speaker 3: make sense anymore. Not all capital structures, but there's a 125 00:06:44,200 --> 00:06:48,640 Speaker 3: big enough portion of the market that is fundamentally stressed. 126 00:06:49,120 --> 00:06:51,880 Speaker 2: Yeah, that that causing capital gets to be an issue. 127 00:06:51,920 --> 00:06:54,440 Speaker 2: As you step away from the ZERP zero interest rate, 128 00:06:54,600 --> 00:07:01,360 Speaker 2: you know, sort of phase of the markets beneath, you know, 129 00:07:01,400 --> 00:07:05,160 Speaker 2: sort of are you seeing like these soft defaults. It 130 00:07:05,440 --> 00:07:09,200 Speaker 2: seems like in order for them to transition from soft 131 00:07:09,200 --> 00:07:11,760 Speaker 2: to hard we need a spark. It seems like there's 132 00:07:11,760 --> 00:07:14,640 Speaker 2: no lack of sparks in the in the world these days. 133 00:07:14,680 --> 00:07:16,920 Speaker 2: But we haven't seen that filter through yet. Do you 134 00:07:16,920 --> 00:07:18,560 Speaker 2: think it's going to go slow and then all of 135 00:07:18,600 --> 00:07:21,280 Speaker 2: a sudden pick up and peak. That seems to be 136 00:07:21,360 --> 00:07:23,320 Speaker 2: the traditional way. 137 00:07:23,640 --> 00:07:26,920 Speaker 3: So we we do think that it's starting to pick 138 00:07:27,000 --> 00:07:30,280 Speaker 3: up in terms of now that especially with the Iran war, 139 00:07:30,480 --> 00:07:33,880 Speaker 3: they're in sticky inflation. I think there's a greater level 140 00:07:34,040 --> 00:07:37,680 Speaker 3: of recognition that we're not private equity owners aren't going 141 00:07:37,760 --> 00:07:41,880 Speaker 3: to get saved by lower rates, and so in this 142 00:07:42,240 --> 00:07:46,240 Speaker 3: past three years, understandably they've done what makes sense spot 143 00:07:46,240 --> 00:07:49,240 Speaker 3: time with these capital structures, but I think there's growing 144 00:07:49,320 --> 00:07:53,560 Speaker 3: recognition that there in many instances, there just is not 145 00:07:53,840 --> 00:07:57,400 Speaker 3: a path to equity value, and so it makes sense 146 00:07:57,400 --> 00:07:59,280 Speaker 3: at that point for the owners to hand the keys 147 00:07:59,320 --> 00:08:01,040 Speaker 3: back over to the car editors. And so we are 148 00:08:01,080 --> 00:08:07,960 Speaker 3: starting to see that increasingly, and I think it's likely 149 00:08:08,120 --> 00:08:11,000 Speaker 3: that in addition to that dynamic, we still have this 150 00:08:11,160 --> 00:08:15,120 Speaker 3: delayed problem in terms of just thinking about the repricing 151 00:08:15,200 --> 00:08:18,080 Speaker 3: of enterprise value multiples. Just going back to the software example, 152 00:08:18,240 --> 00:08:20,920 Speaker 3: it doesn't show up today in the stress. Some of 153 00:08:20,960 --> 00:08:23,720 Speaker 3: these companies are still performing, but it's more of a 154 00:08:23,800 --> 00:08:27,400 Speaker 3: question of the future refinancing being very difficult. And just 155 00:08:27,480 --> 00:08:30,520 Speaker 3: to break that down in terms of just simple math, 156 00:08:30,640 --> 00:08:33,480 Speaker 3: if you think about what happened in public markets or 157 00:08:34,200 --> 00:08:36,959 Speaker 3: when a lot of LBO activity was happening in twenty 158 00:08:36,960 --> 00:08:39,800 Speaker 3: twenty one, let's say public software companies were training at 159 00:08:39,800 --> 00:08:43,040 Speaker 3: twenty five times, they were training around let's say twenty 160 00:08:43,080 --> 00:08:47,160 Speaker 3: times in twenty twenty five. Fast forward to today, we're 161 00:08:47,200 --> 00:08:50,040 Speaker 3: looking at high quality companies in the low double digits. 162 00:08:50,440 --> 00:08:54,240 Speaker 3: And so the implication for a software LBO is if 163 00:08:54,280 --> 00:08:57,679 Speaker 3: you purchase a company let's say at thirteen times EBITDA, 164 00:08:57,679 --> 00:09:00,600 Speaker 3: and you financed it with forty five percent, you know 165 00:09:01,160 --> 00:09:05,280 Speaker 3: LTV first lean and a second lean at going through 166 00:09:05,320 --> 00:09:08,840 Speaker 3: fifty five percent, but you've had you know enterprise value 167 00:09:08,920 --> 00:09:12,559 Speaker 3: multiple rerating let's say from thirteen times to eight times, 168 00:09:13,000 --> 00:09:15,520 Speaker 3: and in many instances, based on the data we have seen, 169 00:09:15,679 --> 00:09:18,800 Speaker 3: EVADAH has not improved. It. It's generally flat to maybe 170 00:09:18,800 --> 00:09:21,240 Speaker 3: a little bit up, but there are fat tails. But 171 00:09:21,320 --> 00:09:24,640 Speaker 3: even in that just average example you're looking and. 172 00:09:24,600 --> 00:09:26,959 Speaker 2: That ebitdah maybe a little fugazy. 173 00:09:26,559 --> 00:09:29,640 Speaker 3: Which was that's absolutely. 174 00:09:29,160 --> 00:09:31,880 Speaker 2: With depreciation and interest added back completely. 175 00:09:32,400 --> 00:09:35,880 Speaker 3: But just in that simplistic example, what started out as 176 00:09:35,920 --> 00:09:39,480 Speaker 3: a first lean LTV of forty five percent is suddenly 177 00:09:40,120 --> 00:09:43,120 Speaker 3: seventy three percent, and that second lean that was at 178 00:09:43,160 --> 00:09:46,120 Speaker 3: fifty five percent is now close to ninety percent, and 179 00:09:46,160 --> 00:09:48,840 Speaker 3: the equity value is down eighty five percent. So that's 180 00:09:48,880 --> 00:09:51,840 Speaker 3: the looming issue. That is not what's coming to a 181 00:09:51,880 --> 00:09:54,520 Speaker 3: head today, and we'll see where it manifest in terms 182 00:09:54,520 --> 00:09:59,200 Speaker 3: of marks. But that I think is something that is 183 00:09:59,280 --> 00:10:00,880 Speaker 3: creating a lot of worry for people. 184 00:10:01,360 --> 00:10:03,000 Speaker 1: But to back up for a second, you're talking about 185 00:10:03,040 --> 00:10:05,360 Speaker 1: third of the market being stressed. I'm wondering how you're 186 00:10:05,440 --> 00:10:07,640 Speaker 1: measuring that and what market we're talking about. Is it 187 00:10:08,040 --> 00:10:10,080 Speaker 1: public leverage loans and high yield bonds that we can 188 00:10:10,080 --> 00:10:12,400 Speaker 1: see or is it broader Sweden and how. 189 00:10:12,360 --> 00:10:17,760 Speaker 3: Much debt absolutely, So what we focused on was the 190 00:10:18,080 --> 00:10:21,080 Speaker 3: public syndicated leverage loan market, which is about one point 191 00:10:21,160 --> 00:10:24,160 Speaker 3: five trillion in the US, and the direct lending market 192 00:10:24,320 --> 00:10:29,560 Speaker 3: in the US, which is slightly smaller. And we did 193 00:10:29,559 --> 00:10:31,560 Speaker 3: not look at the high yield bond market because we 194 00:10:31,559 --> 00:10:34,480 Speaker 3: actually don't think that that's where most of the problems are. 195 00:10:34,760 --> 00:10:38,400 Speaker 3: A lot of times people look to high yield spreads 196 00:10:38,440 --> 00:10:42,400 Speaker 3: as a proxy for leverage credit, and increasingly that's really 197 00:10:42,440 --> 00:10:45,280 Speaker 3: not a helpful place to look. If you just look 198 00:10:45,320 --> 00:10:49,600 Speaker 3: at the quality of high yield, it's increased dramatically over 199 00:10:49,640 --> 00:10:52,840 Speaker 3: the last decade. If you look on a readings basis, 200 00:10:53,360 --> 00:10:55,800 Speaker 3: the high yield bond market is currently close to sixty 201 00:10:55,840 --> 00:10:59,280 Speaker 3: percent double B rated. That's up from about fifty percent 202 00:10:59,320 --> 00:11:02,640 Speaker 3: a decade ago. In contrast, if you look at the 203 00:11:02,720 --> 00:11:06,120 Speaker 3: leverage loan market, it's only twenty five percent double B rated. 204 00:11:06,360 --> 00:11:10,440 Speaker 3: It's primarily B rated. And similarly, if you look at 205 00:11:10,520 --> 00:11:14,520 Speaker 3: the direct lending market based on Fitch's ratings, there's no 206 00:11:14,679 --> 00:11:19,800 Speaker 3: double B exposure and it's even more single B rated 207 00:11:20,360 --> 00:11:24,199 Speaker 3: than the leverage loan market. And so that's where we 208 00:11:24,559 --> 00:11:27,480 Speaker 3: focused on the leverage loan market and the direct lending market, 209 00:11:27,880 --> 00:11:30,200 Speaker 3: and again I said, we got the data from Krol, 210 00:11:30,240 --> 00:11:32,760 Speaker 3: Stepstone's Universe and Octas and what we did was we 211 00:11:32,800 --> 00:11:36,400 Speaker 3: looked at reported EBITDA, which is important because we do 212 00:11:36,480 --> 00:11:38,839 Speaker 3: think that in this period where you've had a flood 213 00:11:38,880 --> 00:11:43,040 Speaker 3: of capital go into private equity and in turn leverage credit, 214 00:11:43,120 --> 00:11:47,280 Speaker 3: you've had loosening of underwriting standards and one of the 215 00:11:47,280 --> 00:11:50,640 Speaker 3: ways that that has manifested is in the way that 216 00:11:51,000 --> 00:11:56,000 Speaker 3: EBITDA gets calculated. And so we had been hearing for 217 00:11:56,880 --> 00:11:59,520 Speaker 3: a while about these low LTVs and direct lending and 218 00:11:59,520 --> 00:12:02,200 Speaker 3: we were scratch our heads because we anecdotally we weren't 219 00:12:02,240 --> 00:12:04,680 Speaker 3: really seeing that. But it was very helpful to get 220 00:12:04,679 --> 00:12:07,520 Speaker 3: the data on new issues in both leverage loans and 221 00:12:07,559 --> 00:12:10,480 Speaker 3: direct lending, what the leverage was on a reported and 222 00:12:10,559 --> 00:12:13,960 Speaker 3: an adjusted EBITDA basis, And what jumped out at us 223 00:12:13,960 --> 00:12:17,360 Speaker 3: is really interesting is the ad backs over the last 224 00:12:17,400 --> 00:12:23,080 Speaker 3: ten years have basically doubled, such that, as I mentioned earlier, 225 00:12:23,320 --> 00:12:27,000 Speaker 3: there's been a masking of leverages. People increasingly use adjusted 226 00:12:27,000 --> 00:12:31,079 Speaker 3: EBITDA as the proxy for leverage in those markets. The 227 00:12:31,960 --> 00:12:34,240 Speaker 3: EBITDA add backs and direct lending amount to close to 228 00:12:34,320 --> 00:12:38,640 Speaker 3: two turns and a little over one vere. Well, it's 229 00:12:38,679 --> 00:12:41,120 Speaker 3: not so much that it's tricks, it's that if you're 230 00:12:41,160 --> 00:12:44,480 Speaker 3: the equity owner, this is your plan to optimize EBITDAH. 231 00:12:44,559 --> 00:12:47,880 Speaker 3: So you have a plan for cost savings for synergies 232 00:12:47,880 --> 00:12:51,240 Speaker 3: from acquisitions and you outline that and that is part 233 00:12:51,280 --> 00:12:53,440 Speaker 3: of your adjusted EBITDA. And I think as there was 234 00:12:53,480 --> 00:12:56,440 Speaker 3: more capital going into the credit market just think about 235 00:12:56,440 --> 00:13:01,000 Speaker 3: direct lending. It grew ninefold over a decade since twenty fifteen, 236 00:13:01,040 --> 00:13:04,480 Speaker 3: so that's a lot of growth. People were very anxious, 237 00:13:04,840 --> 00:13:06,960 Speaker 3: you know, to get put that money to work, especially 238 00:13:07,040 --> 00:13:12,040 Speaker 3: in BBC's and so I think there was more of 239 00:13:12,080 --> 00:13:14,800 Speaker 3: a tolerance for these adjustments because there were so much 240 00:13:14,800 --> 00:13:20,880 Speaker 3: competition to do the deals. And some companies do ultimately 241 00:13:21,559 --> 00:13:25,119 Speaker 3: meet those objectives with the cost cuttings or realize synergies. 242 00:13:25,400 --> 00:13:28,240 Speaker 3: The problem is not all companies do. It often depends 243 00:13:28,280 --> 00:13:33,400 Speaker 3: on management teams and execution plans. And actually SMP Global 244 00:13:33,440 --> 00:13:35,760 Speaker 3: came out with a report in February based on eight 245 00:13:35,840 --> 00:13:40,640 Speaker 3: years of data and they found that in the vast 246 00:13:40,640 --> 00:13:44,160 Speaker 3: majority of cases, management teams actually don't come up with 247 00:13:45,160 --> 00:13:48,760 Speaker 3: meeting those adjustments in terms of realized YBIT. And it's 248 00:13:49,559 --> 00:13:53,800 Speaker 3: basically over leverage is overstated based on their study, and 249 00:13:53,880 --> 00:13:55,959 Speaker 3: a lot of the problems reside in the single B 250 00:13:56,520 --> 00:13:59,560 Speaker 3: part of the market, which again is where most of 251 00:14:00,080 --> 00:14:02,000 Speaker 3: credits are in leverage loans and direct lending. 252 00:14:02,440 --> 00:14:05,240 Speaker 1: Again to the point of size, I mean, if we 253 00:14:05,320 --> 00:14:07,559 Speaker 1: talking about a trillion dollars here of stressed debt. 254 00:14:08,040 --> 00:14:11,359 Speaker 3: Oh yes, so basically we when we did this analysis 255 00:14:11,400 --> 00:14:13,000 Speaker 3: of a third of the market. I should have made 256 00:14:13,040 --> 00:14:16,280 Speaker 3: that point earlier. That equates to seven hundred and seventy billion, 257 00:14:16,960 --> 00:14:20,520 Speaker 3: which is a huge number in percentage terms, it's actually 258 00:14:20,800 --> 00:14:23,440 Speaker 3: double what it was back at the end of twenty nineteen, 259 00:14:24,040 --> 00:14:27,000 Speaker 3: and in dollar terms, it's three times the amount because 260 00:14:27,000 --> 00:14:29,440 Speaker 3: of that growth of the market that I mentioned, which 261 00:14:29,480 --> 00:14:31,920 Speaker 3: jumped out at us when we looked at this again, 262 00:14:31,960 --> 00:14:33,960 Speaker 3: that number is just in the US seven hundred and 263 00:14:34,000 --> 00:14:37,320 Speaker 3: seventy billion. That if you compare that to the global 264 00:14:37,440 --> 00:14:42,080 Speaker 3: opportunistic capital that exists based on PREQUIN data of six 265 00:14:42,200 --> 00:14:46,120 Speaker 3: hundred and forty billion, that's a big amount of problems 266 00:14:46,160 --> 00:14:49,400 Speaker 3: potentially coming. Again, not all of this is coming to 267 00:14:49,440 --> 00:14:55,400 Speaker 3: the surface today, but it's you know, it's likely owned 268 00:14:55,480 --> 00:14:59,360 Speaker 3: by or the debt I should say it is owned 269 00:14:59,360 --> 00:15:02,320 Speaker 3: by lendersuit don't ultimately want to own these companies on 270 00:15:02,360 --> 00:15:05,040 Speaker 3: the back end or deal with their restructuring or roll 271 00:15:05,080 --> 00:15:07,680 Speaker 3: their sleeves up and kind of fix the underlying problems. 272 00:15:07,720 --> 00:15:10,600 Speaker 3: And so we do think increasingly there will be opportunities 273 00:15:10,640 --> 00:15:15,440 Speaker 3: for opportunistic credit investors who have those resources and who 274 00:15:15,440 --> 00:15:19,760 Speaker 3: are focused on, you know, that type of investment to 275 00:15:19,840 --> 00:15:23,280 Speaker 3: increasingly purchase debt at a discount effectively from the direct 276 00:15:23,320 --> 00:15:26,320 Speaker 3: lending universe, which we really haven't seen in material volume 277 00:15:26,320 --> 00:15:26,640 Speaker 3: to date. 278 00:15:26,800 --> 00:15:28,520 Speaker 1: But to make that cool that it is actually stressed. 279 00:15:28,560 --> 00:15:29,880 Speaker 1: What are you looking at? Is is it a loan 280 00:15:29,960 --> 00:15:32,520 Speaker 1: price of let's say, eighty cents on the dollar? Is 281 00:15:32,560 --> 00:15:35,560 Speaker 1: it again with direct lending? How you even seeing what 282 00:15:35,640 --> 00:15:38,160 Speaker 1: it should be actually you know, worth in terms of you. 283 00:15:38,160 --> 00:15:40,760 Speaker 3: Know the proxim Yeah, so know what, we just use 284 00:15:40,840 --> 00:15:45,200 Speaker 3: the fundamental credit metrics of leverage over seven times and 285 00:15:45,280 --> 00:15:49,040 Speaker 3: interest coverage ratios below one and a half times, and 286 00:15:49,440 --> 00:15:52,320 Speaker 3: using the ladder is what showed us. It's a third 287 00:15:52,320 --> 00:15:55,240 Speaker 3: of the market in both cases. It actually can be 288 00:15:55,320 --> 00:15:57,320 Speaker 3: higher if you if you just use the leverage over 289 00:15:57,400 --> 00:16:00,120 Speaker 3: seven times for some of the markets it looks like 290 00:16:00,160 --> 00:16:04,040 Speaker 3: forty percent. But overall, we thought the third it was 291 00:16:04,040 --> 00:16:07,040 Speaker 3: was a very reasonable proxy based on just again fundamental 292 00:16:07,040 --> 00:16:08,280 Speaker 3: credit underwriting. 293 00:16:08,080 --> 00:16:11,000 Speaker 1: Because the market sorry, clearly isn't showing that right. I mean, 294 00:16:11,120 --> 00:16:13,760 Speaker 1: is that just a matter of technicals on the public 295 00:16:13,760 --> 00:16:17,120 Speaker 1: side there's too much demand for enough net new supply 296 00:16:17,440 --> 00:16:19,800 Speaker 1: and on the private side that people aren't actually marking 297 00:16:19,840 --> 00:16:21,680 Speaker 1: this stuff properly, or I mean, what's why is there 298 00:16:21,720 --> 00:16:24,560 Speaker 1: such a disconnect between what we can see from market 299 00:16:24,640 --> 00:16:27,600 Speaker 1: levels and what you're seeing in terms of you know, fundamental. 300 00:16:27,080 --> 00:16:28,960 Speaker 3: Metrics you just mentioned, Well, I think in direct lending 301 00:16:29,000 --> 00:16:32,480 Speaker 3: it's an opaque market, so it's you don't know necessarily 302 00:16:32,520 --> 00:16:34,800 Speaker 3: what all the marks are, although increasingly people are looking 303 00:16:34,800 --> 00:16:37,440 Speaker 3: to the BDCs to see how how how those marks 304 00:16:37,480 --> 00:16:38,160 Speaker 3: are showing up. 305 00:16:38,200 --> 00:16:38,920 Speaker 2: Yeah, good luck with that. 306 00:16:39,760 --> 00:16:43,400 Speaker 3: In terms of leverage loans, you know that that market 307 00:16:43,480 --> 00:16:48,200 Speaker 3: definitely does price and risk. Software is the latest example. 308 00:16:48,280 --> 00:16:52,480 Speaker 3: I mean, you've had significant moves and loans from par 309 00:16:53,480 --> 00:16:58,480 Speaker 3: downward over over the last couple months. And I think 310 00:16:58,520 --> 00:17:01,120 Speaker 3: the question is beyond software, you know, is there more 311 00:17:01,120 --> 00:17:03,160 Speaker 3: of a tolerance in the lever's lane market for other 312 00:17:03,160 --> 00:17:07,520 Speaker 3: sectors that have high leverage? It varies across sector. There's 313 00:17:07,560 --> 00:17:10,440 Speaker 3: a lot of dispersion in the market. But if again, 314 00:17:10,480 --> 00:17:14,760 Speaker 3: if you just look at the reported EBITDAH leverage over 315 00:17:14,840 --> 00:17:17,639 Speaker 3: seven times, it's a huge portion of the market. 316 00:17:18,040 --> 00:17:20,320 Speaker 2: So just sticking with software because we've mentioned it a 317 00:17:20,320 --> 00:17:23,560 Speaker 2: couple of times now and there seem to be maybe 318 00:17:23,600 --> 00:17:26,280 Speaker 2: not a wide range of opinions, but there's there're different 319 00:17:26,320 --> 00:17:29,360 Speaker 2: opinions about it, and they're different opinions about the how 320 00:17:29,640 --> 00:17:33,320 Speaker 2: concerned people should be. So when we talk about software 321 00:17:33,560 --> 00:17:38,160 Speaker 2: in the private capital system, debt and equity, are we 322 00:17:38,600 --> 00:17:44,280 Speaker 2: talking about problems where we're going to see the equity 323 00:17:44,359 --> 00:17:48,920 Speaker 2: side of the private market feel all of the pain? 324 00:17:49,040 --> 00:17:50,879 Speaker 2: Is it going to you know, cut through to the 325 00:17:50,920 --> 00:17:55,520 Speaker 2: debt side, do you think? And I realized that these 326 00:17:55,640 --> 00:18:01,080 Speaker 2: these software tech firms, not all of them are vulnera AI, 327 00:18:01,160 --> 00:18:04,040 Speaker 2: but AI is obviously an existential threat for some and 328 00:18:04,960 --> 00:18:07,080 Speaker 2: it seems to me that the fundamentals are part of 329 00:18:07,080 --> 00:18:08,920 Speaker 2: the story. The bigger part of the story is really 330 00:18:08,960 --> 00:18:10,440 Speaker 2: the enterprise valuations. 331 00:18:10,880 --> 00:18:14,520 Speaker 3: Absolutely, and I do think performance will be uneven. There 332 00:18:14,560 --> 00:18:19,320 Speaker 3: will be some companies that are strong, that are software companies, 333 00:18:19,320 --> 00:18:22,880 Speaker 3: and there will be winners and losers. But I do 334 00:18:22,960 --> 00:18:28,280 Speaker 3: think that where there are problems that emerge, people will 335 00:18:28,320 --> 00:18:32,360 Speaker 3: be probably surprised by the losses being higher than anticipated. 336 00:18:32,800 --> 00:18:36,520 Speaker 3: And I think that's because people often look to prior 337 00:18:36,600 --> 00:18:41,639 Speaker 3: cycles to inform current cycles, and this cycle is fundamentally different. 338 00:18:42,080 --> 00:18:48,080 Speaker 3: That's because the starting leverage is higher than prior credit cycles. Again, 339 00:18:48,119 --> 00:18:51,480 Speaker 3: that trend that we've seen of leverage ticking up over time, 340 00:18:51,560 --> 00:18:54,240 Speaker 3: valuations in private equity have gone up over time with 341 00:18:54,320 --> 00:18:57,480 Speaker 3: the flood of capital. So I think it's a more 342 00:18:57,520 --> 00:19:01,360 Speaker 3: fragile starting place. And as a said, it's been a 343 00:19:01,359 --> 00:19:04,000 Speaker 3: already we're on your three of this soft default cycle 344 00:19:05,240 --> 00:19:09,280 Speaker 3: in the leverage loan market, and that's been delaying problems 345 00:19:09,320 --> 00:19:14,240 Speaker 3: but not solving problems often. There's actually an interesting Harvard 346 00:19:14,280 --> 00:19:18,040 Speaker 3: Law School study that came out this earlier this year 347 00:19:18,080 --> 00:19:22,480 Speaker 3: called Liability Management's Limited Runway, and it shows how studying 348 00:19:22,480 --> 00:19:26,720 Speaker 3: eighty nine non pro rata lemis over the last decade, 349 00:19:26,960 --> 00:19:29,280 Speaker 3: ninety three percent of the time the companies end up 350 00:19:29,280 --> 00:19:32,680 Speaker 3: as a repeat defaulter, and it's about a little over 351 00:19:32,720 --> 00:19:35,159 Speaker 3: seventy percent of the time that's in the form of 352 00:19:35,200 --> 00:19:40,280 Speaker 3: a bankruptcy. So again, this problem of hasn't really been 353 00:19:40,280 --> 00:19:44,400 Speaker 3: addressed yet fundamentally in terms of fixing the underlying companies. 354 00:19:44,440 --> 00:19:46,800 Speaker 3: And often the fix really is the capital structure, too 355 00:19:46,840 --> 00:19:49,920 Speaker 3: much debt. Back to the point of the capital structures 356 00:19:49,920 --> 00:19:52,520 Speaker 3: were created during the low rate period. When I say that, 357 00:19:52,560 --> 00:19:55,080 Speaker 3: I think the losses will be higher. Again, that's the 358 00:19:55,119 --> 00:19:59,520 Speaker 3: starting leverage, and we're seeing it where there are hard 359 00:19:59,520 --> 00:20:02,359 Speaker 3: to fault. We have seen a steady trend in the 360 00:20:02,400 --> 00:20:06,240 Speaker 3: leverage loan market of lower recoveries. If you look back 361 00:20:06,800 --> 00:20:09,520 Speaker 3: ten years ago, the average recovery and the leverage loan 362 00:20:09,520 --> 00:20:12,159 Speaker 3: market would have been closer to sixty cents. In twenty 363 00:20:12,200 --> 00:20:14,479 Speaker 3: twenty five, it was thirty six cents, and that's just 364 00:20:14,520 --> 00:20:17,919 Speaker 3: been a steady move down. We have no reason to 365 00:20:17,960 --> 00:20:21,360 Speaker 3: think in the direct lending market that the recoveries will 366 00:20:21,400 --> 00:20:25,840 Speaker 3: be any better. If anything, the leverage is higher in 367 00:20:25,880 --> 00:20:31,320 Speaker 3: that market, the data suggests. And also it skews smaller 368 00:20:31,359 --> 00:20:33,919 Speaker 3: in terms of companies. And we think in this environment, 369 00:20:34,040 --> 00:20:37,399 Speaker 3: with this macro environment, where you have a lot of 370 00:20:38,760 --> 00:20:46,040 Speaker 3: technological disruption, risk, high rates, uncertainty coming in all directions, 371 00:20:46,320 --> 00:20:49,919 Speaker 3: their benefits to scale and smaller companies really are I 372 00:20:49,920 --> 00:20:51,600 Speaker 3: think more challenged in the current. 373 00:20:51,520 --> 00:20:53,399 Speaker 2: Macro Yeah, I mean, in this case, it seems to 374 00:20:53,480 --> 00:20:56,280 Speaker 2: be not really a matter. I mean, financial engineering obviously 375 00:20:56,359 --> 00:20:59,040 Speaker 2: plays a role in all of this as you lay out, 376 00:20:59,119 --> 00:21:02,400 Speaker 2: but to software tech space, it seems to be there's 377 00:21:02,520 --> 00:21:05,480 Speaker 2: there's a real disruptor, you know, sort of coming from 378 00:21:05,480 --> 00:21:07,480 Speaker 2: the from the outside. And I think that what people 379 00:21:07,480 --> 00:21:11,800 Speaker 2: are trying to figure out is, you know, which of 380 00:21:11,840 --> 00:21:15,680 Speaker 2: these firms or what proportion of these firms have real 381 00:21:15,720 --> 00:21:19,080 Speaker 2: cash flows, have real contracts, you know, have real sources 382 00:21:19,119 --> 00:21:22,720 Speaker 2: to repay debt, and which ones might just end up 383 00:21:22,720 --> 00:21:25,840 Speaker 2: being donuts because they're going to be you know, made obsolete. 384 00:21:26,840 --> 00:21:27,879 Speaker 2: I guess we're all trying figure out. 385 00:21:27,960 --> 00:21:30,280 Speaker 3: Yeah, right, I mean, and the public equity markets are 386 00:21:30,359 --> 00:21:32,240 Speaker 3: trying to figure it out as well. So we've seen 387 00:21:32,440 --> 00:21:36,200 Speaker 3: extremely high levels of single stock volatility in the public 388 00:21:36,280 --> 00:21:41,119 Speaker 3: markets and high levels of sector dispersion, all due to 389 00:21:41,320 --> 00:21:43,400 Speaker 3: this uncertainty of how this is going to play out. 390 00:21:43,600 --> 00:21:45,000 Speaker 1: What do you expect the default rates to be there 391 00:21:45,040 --> 00:21:45,600 Speaker 1: in software? 392 00:21:46,720 --> 00:21:49,360 Speaker 3: Oh, I'm not going to weigh in specifically on software, 393 00:21:49,440 --> 00:21:52,560 Speaker 3: but we think that software within direct lending, let's say, 394 00:21:52,640 --> 00:21:55,760 Speaker 3: is roughly thirty percent of the market if you use 395 00:21:55,800 --> 00:22:01,320 Speaker 3: the broader industry classifications. Sometimes a software company that let's say, 396 00:22:01,359 --> 00:22:05,439 Speaker 3: provide software to an industrial segment gets tagged as industrial, 397 00:22:05,520 --> 00:22:10,920 Speaker 3: but the broader industry definitions suggest over thirty percent. So 398 00:22:11,640 --> 00:22:15,679 Speaker 3: we think, you know, for some instances, these companies that 399 00:22:15,760 --> 00:22:19,400 Speaker 3: just have single products and therefore a lot of there's 400 00:22:19,400 --> 00:22:22,480 Speaker 3: a lot of risk because they're not diversified. It's all 401 00:22:22,520 --> 00:22:25,879 Speaker 3: going to depend on the nature of your product and 402 00:22:25,880 --> 00:22:29,000 Speaker 3: how critical it is and how how much of a 403 00:22:29,040 --> 00:22:31,560 Speaker 3: moat you truly have. You know, that's really for our 404 00:22:31,600 --> 00:22:35,200 Speaker 3: software analysts to figure out. They've been sifting through, and 405 00:22:35,720 --> 00:22:38,000 Speaker 3: you know, we do think there could be opportunities for sure, 406 00:22:38,080 --> 00:22:43,280 Speaker 3: but big picture, I think where there are issues there 407 00:22:43,320 --> 00:22:46,400 Speaker 3: recoveries could be as you said, you know, very very low. 408 00:22:46,520 --> 00:22:50,200 Speaker 3: Because these companies don't have hard assets. It's really always 409 00:22:50,240 --> 00:22:53,080 Speaker 3: been about the stickiness of the customers. And to the 410 00:22:53,119 --> 00:22:55,520 Speaker 3: extent that that's called into question, that's going to be 411 00:22:55,520 --> 00:22:57,800 Speaker 3: a big problem at David's encomenteror I can say one 412 00:22:57,800 --> 00:23:01,240 Speaker 3: reason that we did avoid and flag the software issue 413 00:23:01,320 --> 00:23:02,600 Speaker 3: is just because at the end of the day, we 414 00:23:02,640 --> 00:23:06,359 Speaker 3: are value oriented investors, very focused on downside protection. So 415 00:23:06,480 --> 00:23:10,119 Speaker 3: by definition, we tend to focus more on hard asset lending, 416 00:23:11,680 --> 00:23:15,040 Speaker 3: and when you have multiple sources of recovery from the 417 00:23:15,040 --> 00:23:18,000 Speaker 3: hard assets and also the cash flow from your business 418 00:23:17,760 --> 00:23:20,359 Speaker 3: that tends to bode better in a restructuring. 419 00:23:20,840 --> 00:23:23,280 Speaker 1: How common will a zero be do you think in 420 00:23:23,320 --> 00:23:24,600 Speaker 1: self for a zero recovery. 421 00:23:25,160 --> 00:23:28,159 Speaker 3: I don't want to make a prediction on that. I 422 00:23:28,160 --> 00:23:29,959 Speaker 3: hope for everybody that's not the case. But I do 423 00:23:30,000 --> 00:23:32,920 Speaker 3: think that if a business is disrupted, you could easily 424 00:23:32,960 --> 00:23:35,200 Speaker 3: have scenarios where more businesses go. 425 00:23:35,280 --> 00:23:42,520 Speaker 2: To basset companies for sure. Yeah. Yeah, sort of moving 426 00:23:42,680 --> 00:23:47,360 Speaker 2: back out from sort of a single industry. In one 427 00:23:47,359 --> 00:23:49,080 Speaker 2: of the reports that you wrote, I think the most 428 00:23:49,119 --> 00:23:53,200 Speaker 2: recent one about optimization, you wrote something interesting, we remain 429 00:23:53,280 --> 00:23:56,439 Speaker 2: in the early innings of a capital restructure event talking 430 00:23:56,440 --> 00:24:01,199 Speaker 2: about private equity portfolios. Maybe can expand on this a 431 00:24:01,200 --> 00:24:01,880 Speaker 2: little bit more. 432 00:24:02,160 --> 00:24:05,880 Speaker 3: Yeah, So there's been all this attention on private quit 433 00:24:06,040 --> 00:24:08,800 Speaker 3: which inning, yes, I think we're in the very, very 434 00:24:08,800 --> 00:24:12,439 Speaker 3: early innings. So much of the focus has been about 435 00:24:12,520 --> 00:24:16,280 Speaker 3: the lending side, and we really focused in our paper 436 00:24:16,359 --> 00:24:20,240 Speaker 3: also on the private equity side, where the owners of 437 00:24:20,280 --> 00:24:23,119 Speaker 3: these deals. Because we think we're in the early innings 438 00:24:23,119 --> 00:24:27,680 Speaker 3: of this what we call private equity dislocation, we wanted 439 00:24:27,760 --> 00:24:31,879 Speaker 3: to better understand the issues there in private equity, and 440 00:24:31,880 --> 00:24:36,000 Speaker 3: so we actually looked at fund performance globally and in 441 00:24:36,040 --> 00:24:40,239 Speaker 3: the US basically since the end of twenty fifteen, so 442 00:24:40,280 --> 00:24:43,440 Speaker 3: from twenty sixteen onward, and we found that twenty one 443 00:24:43,520 --> 00:24:48,159 Speaker 3: percent of the global private equity universe is below their 444 00:24:48,200 --> 00:24:52,680 Speaker 3: hurdle rate of eight percent, and in the US it's 445 00:24:52,720 --> 00:24:55,520 Speaker 3: actually twenty seven percent. So it really is more of 446 00:24:55,560 --> 00:24:59,760 Speaker 3: a US problem, this underperformance, and so we really dug 447 00:24:59,800 --> 00:25:02,479 Speaker 3: in that made sense based on the other metrics we 448 00:25:02,480 --> 00:25:03,200 Speaker 3: were seeing. 449 00:25:02,960 --> 00:25:06,560 Speaker 2: But that sounds somewhat surprising. Is that a supply issue? 450 00:25:07,320 --> 00:25:09,800 Speaker 3: Well, so if you think about private equity in the US, 451 00:25:09,880 --> 00:25:14,199 Speaker 3: absolutely in GDP terms, it equates to seventeen percent in 452 00:25:14,240 --> 00:25:16,920 Speaker 3: the US versus let's say Europe, which is the second 453 00:25:16,960 --> 00:25:21,560 Speaker 3: biggest market, it's just six percent, so dramatically bigger market here. 454 00:25:22,119 --> 00:25:26,600 Speaker 3: In terms of leveraged credit, in the US, the investor 455 00:25:26,680 --> 00:25:30,840 Speaker 3: owned a leverage credit market is twelve percent of GDP, 456 00:25:31,119 --> 00:25:34,000 Speaker 3: whereas in Europe it's just five percent. That's because a 457 00:25:34,040 --> 00:25:37,840 Speaker 3: lot more of the corporate debt in Europe's is provided 458 00:25:37,880 --> 00:25:41,800 Speaker 3: by banks, and so that's a different discussion we can 459 00:25:41,840 --> 00:25:45,120 Speaker 3: have on how this cycle is somewhat unique to the US. 460 00:25:45,160 --> 00:25:49,080 Speaker 3: But there are other interesting aspects of Europe related to 461 00:25:49,119 --> 00:25:54,000 Speaker 3: the bank market that keep us busy. But in terms 462 00:25:54,080 --> 00:25:57,520 Speaker 3: of the private equity problem, it's been showing up really 463 00:25:57,560 --> 00:26:01,560 Speaker 3: in the in the lack of distributions. We focused in 464 00:26:01,600 --> 00:26:06,480 Speaker 3: our report on the quantum of net asset value that's 465 00:26:06,600 --> 00:26:09,800 Speaker 3: aged over seven years and found that it doubled over 466 00:26:09,840 --> 00:26:12,640 Speaker 3: the last five years in the US to just over 467 00:26:12,680 --> 00:26:16,280 Speaker 3: a trillion. What's interesting about that is most of that 468 00:26:16,480 --> 00:26:18,679 Speaker 3: growth is actually a function of the growth of the 469 00:26:18,720 --> 00:26:22,760 Speaker 3: private equity industry itself. It's only twenty percent of that 470 00:26:22,800 --> 00:26:27,600 Speaker 3: growth is coming from the delayed distributions. That problem really 471 00:26:27,640 --> 00:26:30,440 Speaker 3: started with the twenty sixteen vintage. That's the first one 472 00:26:30,440 --> 00:26:33,639 Speaker 3: that when we look back at the distribution curve in 473 00:26:33,720 --> 00:26:36,280 Speaker 3: private equity, that was the first one to get off course, 474 00:26:36,800 --> 00:26:39,520 Speaker 3: and it's only gotten worse since then. If we fast 475 00:26:39,560 --> 00:26:42,680 Speaker 3: forward to twenty thirty, we see this number, the seven 476 00:26:42,760 --> 00:26:47,680 Speaker 3: year nav in private equity doubling again to over two trillion, 477 00:26:48,160 --> 00:26:50,800 Speaker 3: and at that point half of the growth is due 478 00:26:50,800 --> 00:26:55,160 Speaker 3: to the distributions falling behind. So that's kind of related 479 00:26:55,200 --> 00:26:57,119 Speaker 3: to this issue that we talked about with the soft 480 00:26:57,119 --> 00:27:01,840 Speaker 3: defaults and the buying time, the delayed recognition of the 481 00:27:01,840 --> 00:27:04,480 Speaker 3: problem I mean, understandably the owners have wanted to see 482 00:27:04,520 --> 00:27:06,800 Speaker 3: if the capital structures could work, but it's been hard 483 00:27:06,880 --> 00:27:10,240 Speaker 3: to sell assets, it's been hard to refinance assets. And 484 00:27:10,359 --> 00:27:12,800 Speaker 3: the most obvious way that's been showing up is in 485 00:27:12,840 --> 00:27:17,480 Speaker 3: the distributions coming down and the NAV, the aged NAV 486 00:27:17,560 --> 00:27:18,679 Speaker 3: over seven years growing. 487 00:27:19,280 --> 00:27:21,199 Speaker 2: I mean, it kind of seems like each of the 488 00:27:21,240 --> 00:27:24,439 Speaker 2: past three or four years, a lot of the some 489 00:27:24,480 --> 00:27:26,120 Speaker 2: of the news stories at the beginning of the year 490 00:27:26,200 --> 00:27:28,160 Speaker 2: or some of the outlooks, you are kind of like, well, 491 00:27:28,200 --> 00:27:29,840 Speaker 2: this is the year that M and A is really 492 00:27:29,880 --> 00:27:32,119 Speaker 2: going to take off, and you know, it's been busy, 493 00:27:32,200 --> 00:27:33,399 Speaker 2: but not it's. 494 00:27:33,240 --> 00:27:36,040 Speaker 3: Actually been very busy. So we have a merger arbitrage 495 00:27:36,520 --> 00:27:40,320 Speaker 3: business and it's focused on public deals and it's been 496 00:27:40,440 --> 00:27:43,600 Speaker 3: very busy. Actually, like Q one volumes picking up. It's 497 00:27:43,640 --> 00:27:46,119 Speaker 3: just not the private equity activity. It's been busy, but 498 00:27:46,160 --> 00:27:50,000 Speaker 3: in terms of the larger M and A deals that 499 00:27:50,440 --> 00:27:52,920 Speaker 3: has picked up, and it really started last year. 500 00:27:53,840 --> 00:27:57,000 Speaker 1: Where is the trouble living private equity by sect to 501 00:27:57,119 --> 00:28:01,080 Speaker 1: my country my vintage. Is there any patent or particular 502 00:28:01,200 --> 00:28:02,359 Speaker 1: focus for the stress. 503 00:28:02,840 --> 00:28:07,840 Speaker 3: Well, Interestingly, most of the activity the last few years 504 00:28:07,880 --> 00:28:11,680 Speaker 3: has been in software based on the deal Loogic data 505 00:28:11,720 --> 00:28:14,480 Speaker 3: about thirty to forty percent of the activity. So that's 506 00:28:14,520 --> 00:28:18,640 Speaker 3: the future problem, and that differs by fund. There are 507 00:28:18,640 --> 00:28:21,520 Speaker 3: some funds of very little software exposure, there are some 508 00:28:21,640 --> 00:28:24,639 Speaker 3: with a lot, so that's going to be uneven. But 509 00:28:24,720 --> 00:28:27,480 Speaker 3: as I said, the problems in what we look at 510 00:28:27,560 --> 00:28:32,320 Speaker 3: leverage credit they transcend sectors because again it goes back 511 00:28:32,359 --> 00:28:37,160 Speaker 3: to this issue of higher rates. A lot of companies 512 00:28:37,680 --> 00:28:40,000 Speaker 3: were bought when you had a zero interest rate environment. 513 00:28:40,000 --> 00:28:42,000 Speaker 3: You could put debt on. That made sense at the time, 514 00:28:42,000 --> 00:28:44,959 Speaker 3: and it doesn't make sense today. So it's not often 515 00:28:45,480 --> 00:28:48,560 Speaker 3: also that these are bad companies. A lot of times 516 00:28:48,560 --> 00:28:50,880 Speaker 3: they can be fundamentally good companies. They just don't have 517 00:28:51,680 --> 00:28:54,920 Speaker 3: the right capital structure, and that for us is the opportunity, 518 00:28:55,360 --> 00:28:57,440 Speaker 3: especially if you couple it with the fact that the 519 00:28:57,480 --> 00:29:01,360 Speaker 3: owners maybe the last few years haven't really been that 520 00:29:01,440 --> 00:29:04,200 Speaker 3: focused on those companies that maybe don't have equity value 521 00:29:04,200 --> 00:29:05,880 Speaker 3: because they have too much debt. And so there's a 522 00:29:05,880 --> 00:29:08,920 Speaker 3: lot of low hanging fruit on the other side of 523 00:29:08,920 --> 00:29:13,120 Speaker 3: a restructuring, where in some instances it's not even that difficult. 524 00:29:13,160 --> 00:29:15,400 Speaker 3: It just takes the focus to make some changes to 525 00:29:15,440 --> 00:29:19,240 Speaker 3: optimize these businesses, but understandably, you know, some of them 526 00:29:19,240 --> 00:29:20,320 Speaker 3: we think have been neglected. 527 00:29:20,800 --> 00:29:23,280 Speaker 1: At the same time, earnings of weakening are they Are 528 00:29:23,280 --> 00:29:26,560 Speaker 1: you seeing signs of that as well as the interest 529 00:29:26,600 --> 00:29:27,239 Speaker 1: costs going up? 530 00:29:27,600 --> 00:29:30,440 Speaker 3: Well, it's very mixed again across sectors, and I think 531 00:29:30,440 --> 00:29:33,600 Speaker 3: that that we're seeing that in the equity markets as well. 532 00:29:33,720 --> 00:29:36,400 Speaker 3: It's very within a sector. You can have winners and losers. 533 00:29:36,440 --> 00:29:40,120 Speaker 3: A lot depends on management and business plans, so I 534 00:29:40,160 --> 00:29:42,440 Speaker 3: wouldn't generalize. I would say there are certain sectors, for 535 00:29:42,480 --> 00:29:46,160 Speaker 3: sure where more of the problems have been accumulating. But 536 00:29:46,320 --> 00:29:49,880 Speaker 3: the issue of the higher rates affects all companies. 537 00:29:49,560 --> 00:29:51,520 Speaker 1: Right, So it talk to us about the play here 538 00:29:51,520 --> 00:29:53,400 Speaker 1: because a lot of people it just sounds terrible and 539 00:29:53,600 --> 00:29:56,240 Speaker 1: you know it's going to be a disaster, everything falling apart. 540 00:29:56,360 --> 00:29:58,880 Speaker 1: But you're talking about companies that are actually sound. They 541 00:29:58,960 --> 00:30:02,400 Speaker 1: just got a bad structure. You have ability to do 542 00:30:02,480 --> 00:30:03,960 Speaker 1: what and how do you do it? 543 00:30:04,320 --> 00:30:08,560 Speaker 2: And maybe on that point, we're talking about opportunistic credit now, right, yes, yeah, 544 00:30:08,600 --> 00:30:12,880 Speaker 2: so maybe maybe not everybody listening is completely in tune 545 00:30:12,920 --> 00:30:15,080 Speaker 2: with exactly what that is. So we could level set 546 00:30:15,200 --> 00:30:17,600 Speaker 2: sort of give your description of what it is and 547 00:30:17,680 --> 00:30:19,520 Speaker 2: as James says, the opportunity set. 548 00:30:19,320 --> 00:30:25,840 Speaker 3: There absolutely, so opportunistic credit really spans everything from stressed credit, 549 00:30:26,480 --> 00:30:33,000 Speaker 3: stressed performing credit, to restructurings, liquidations, litigations. So it's broad 550 00:30:33,720 --> 00:30:37,480 Speaker 3: and actually that sometimes is what makes it difficult for 551 00:30:37,520 --> 00:30:40,520 Speaker 3: allocators to allocate to it because it doesn't fit neatly 552 00:30:40,560 --> 00:30:43,080 Speaker 3: in a box. You can start out, let's say, is 553 00:30:43,480 --> 00:30:46,600 Speaker 3: the debt in a capital structure, but you take it 554 00:30:46,600 --> 00:30:48,680 Speaker 3: through restructuring and you end up with a combination of 555 00:30:48,720 --> 00:30:52,920 Speaker 3: debt and equity, so it is by definition flexible capital. 556 00:30:54,040 --> 00:30:58,280 Speaker 3: We think this environment in the US certainly seems like 557 00:30:58,320 --> 00:31:01,160 Speaker 3: it will be more interesting for opportunistic credit. You know 558 00:31:01,200 --> 00:31:04,840 Speaker 3: what's interesting for US is we're very global. Actually about 559 00:31:04,840 --> 00:31:08,320 Speaker 3: half of our capital is outside the US, and so 560 00:31:08,360 --> 00:31:11,160 Speaker 3: we don't need this cycle to come for there to 561 00:31:11,200 --> 00:31:13,880 Speaker 3: be plenty to do. We do think being global is 562 00:31:13,880 --> 00:31:17,600 Speaker 3: helpful because there are different cycles at different times across 563 00:31:17,640 --> 00:31:21,600 Speaker 3: the world. But we can't ignore what's coming because, as 564 00:31:21,600 --> 00:31:24,120 Speaker 3: I said, it's been building and it hasn't really fundamentally 565 00:31:24,200 --> 00:31:25,960 Speaker 3: been addressed yet. So we did want to dig into 566 00:31:26,040 --> 00:31:29,280 Speaker 3: the data. But as I said, that this can involve 567 00:31:30,120 --> 00:31:33,960 Speaker 3: purchasing debt in the leverage land market at a discount. 568 00:31:34,600 --> 00:31:37,480 Speaker 3: Sometimes it's performing debt and it re rates to par 569 00:31:37,640 --> 00:31:40,240 Speaker 3: and that's your return is your coupon plus the points 570 00:31:40,280 --> 00:31:46,120 Speaker 3: of accretion. Sometimes it's through restructuring. Where you're underwriting suggests 571 00:31:46,160 --> 00:31:49,520 Speaker 3: that this business has a lot of upside. It's maybe 572 00:31:49,880 --> 00:31:52,880 Speaker 3: that some of the issues are cyclical versus secular. So 573 00:31:52,920 --> 00:31:56,720 Speaker 3: we look for that in deep fundamental underwriting. And I 574 00:31:56,720 --> 00:31:59,440 Speaker 3: think what's interesting, as I mentioned, is in this cycle, 575 00:31:59,480 --> 00:32:02,280 Speaker 3: we think in increasingly that direct lending market will start 576 00:32:02,280 --> 00:32:04,600 Speaker 3: to open up because a lot of those lenders aren't 577 00:32:04,600 --> 00:32:08,360 Speaker 3: going to want to shepherd companies through restructurings. They don't 578 00:32:08,400 --> 00:32:11,640 Speaker 3: have the operational teams in house. We have that, We 579 00:32:11,680 --> 00:32:14,600 Speaker 3: have people who have a lot of experience in restructurings, 580 00:32:15,560 --> 00:32:20,160 Speaker 3: operational execution. We have external teams we work with, and 581 00:32:20,200 --> 00:32:22,880 Speaker 3: so this is something we've been doing for now over 582 00:32:22,960 --> 00:32:26,000 Speaker 3: forty years, and we could do it at different regions, 583 00:32:26,040 --> 00:32:29,160 Speaker 3: but we just think in the US it's increasingly likely 584 00:32:29,200 --> 00:32:31,560 Speaker 3: that this opportunity will increase. 585 00:32:31,680 --> 00:32:33,800 Speaker 1: But I'm wondering what kind of opportunities When you talk 586 00:32:33,800 --> 00:32:36,480 Speaker 1: about discount, how discounted is this debt in the market 587 00:32:36,520 --> 00:32:36,880 Speaker 1: right now? 588 00:32:37,040 --> 00:32:41,680 Speaker 3: It can completely arrange. There are situations where maybe the 589 00:32:41,720 --> 00:32:44,560 Speaker 3: company is over levered, but it might not be an 590 00:32:44,720 --> 00:32:48,080 Speaker 3: enormous discount, right. It can really depend on the capital structure, 591 00:32:48,120 --> 00:32:51,240 Speaker 3: so I wouldn't put one number on it. Even in 592 00:32:51,240 --> 00:32:54,160 Speaker 3: the leverage loan market, we're seeing a very broad distribution 593 00:32:54,280 --> 00:32:58,440 Speaker 3: of training prices, so it really is company specific for us. 594 00:32:58,480 --> 00:33:01,360 Speaker 3: It's all about that where your careering the business on 595 00:33:01,400 --> 00:33:04,320 Speaker 3: an enterprise value basis, through the purchase of the debt 596 00:33:04,640 --> 00:33:07,960 Speaker 3: and where you think EBITDA is going. And that's where 597 00:33:07,960 --> 00:33:11,440 Speaker 3: I think the adjusted EBITDAH point becomes interesting. It makes 598 00:33:11,440 --> 00:33:14,280 Speaker 3: sense that if you're the owner of a business, you're 599 00:33:14,280 --> 00:33:16,040 Speaker 3: thinking about what you can do with EBITDA, how it 600 00:33:16,080 --> 00:33:18,600 Speaker 3: could be optimized. As the creditor, you always want to think, 601 00:33:18,640 --> 00:33:20,840 Speaker 3: what can I hang my hat on? Is like really 602 00:33:20,880 --> 00:33:24,760 Speaker 3: solid ebitdah, Right, So it's a different Through restructuring with 603 00:33:24,840 --> 00:33:28,680 Speaker 3: the equity, you get the benefit of that unlimited equity upside. 604 00:33:28,720 --> 00:33:32,360 Speaker 3: So it's a different risk return profile. Is a litter 605 00:33:32,400 --> 00:33:33,280 Speaker 3: being captive. 606 00:33:33,320 --> 00:33:35,280 Speaker 1: As you mentioned returns though, I mean you also do 607 00:33:35,400 --> 00:33:38,000 Speaker 1: need to make a return in a quite tricky you know, 608 00:33:38,120 --> 00:33:42,480 Speaker 1: macro environment. That is, you know better than comparables out there, 609 00:33:43,240 --> 00:33:47,280 Speaker 1: and I'm wondering what your what your expectations are for returns, 610 00:33:48,320 --> 00:33:50,800 Speaker 1: you know, in this kind of business, in this environment 611 00:33:50,840 --> 00:33:53,040 Speaker 1: that only looks like it's going to get more difficult. 612 00:33:53,280 --> 00:33:57,320 Speaker 3: Well, that might be a good segue to our optimization exercise, actually, 613 00:33:57,400 --> 00:33:59,760 Speaker 3: if that's okay, because we looked at the asset class 614 00:34:00,040 --> 00:34:04,520 Speaker 3: portunistic credit more broadly as part of this paper. Again, 615 00:34:04,720 --> 00:34:07,880 Speaker 3: returns are going to span across companies, but we looked 616 00:34:08,000 --> 00:34:11,319 Speaker 3: for that exercise. We basically we saw this growing opportunity 617 00:34:11,360 --> 00:34:15,160 Speaker 3: and we wanted to explain to allocators really what opportunistic 618 00:34:15,200 --> 00:34:17,759 Speaker 3: credit both is and what it can do in a portfolio. 619 00:34:17,880 --> 00:34:21,960 Speaker 3: We looked at Cambridge private asset market data going back 620 00:34:21,960 --> 00:34:26,239 Speaker 3: to nineteen ninety for opportunistic credit for private equity, for 621 00:34:26,320 --> 00:34:30,480 Speaker 3: real estate, for infrastructure, and we saw, I mean, the 622 00:34:30,840 --> 00:34:34,840 Speaker 3: historical returns for opportunistic credit are roughly nine percent over 623 00:34:35,880 --> 00:34:38,320 Speaker 3: the risk free short term risk free so over cash 624 00:34:38,560 --> 00:34:42,520 Speaker 3: meta fees versus in private equity you're at about twelve 625 00:34:42,600 --> 00:34:48,080 Speaker 3: percent historically. To run this optimization analysis, what we had 626 00:34:48,080 --> 00:34:52,880 Speaker 3: to do is what's called d smoothing the volatility, and 627 00:34:52,920 --> 00:34:56,320 Speaker 3: that goes to the points about marks a lot of times, 628 00:34:56,800 --> 00:34:59,560 Speaker 3: you know, you get the published returns in private equity, 629 00:34:59,560 --> 00:35:02,120 Speaker 3: which don't around much because the marks are marked to 630 00:35:02,200 --> 00:35:06,000 Speaker 3: model versus mark to market. So to compare private market 631 00:35:06,040 --> 00:35:08,880 Speaker 3: asset classes and the role they can play in an 632 00:35:08,880 --> 00:35:13,200 Speaker 3: optimization portfolio. When taking the public sleeve into account, which 633 00:35:13,200 --> 00:35:15,440 Speaker 3: in our analysis we said the public sleeve was seventy 634 00:35:15,440 --> 00:35:21,640 Speaker 3: percent sixty percent public equities, forty percent fixed income, we 635 00:35:21,719 --> 00:35:25,080 Speaker 3: needed to see what the volatilities are on an equal 636 00:35:25,120 --> 00:35:29,120 Speaker 3: playing field. And what we found through this desmoothing exercise 637 00:35:29,200 --> 00:35:32,880 Speaker 3: was that actually published private equity volatility of ten percent 638 00:35:32,960 --> 00:35:35,520 Speaker 3: really is more like twenty percent. And that makes sense 639 00:35:35,560 --> 00:35:38,920 Speaker 3: when you think about the strategy. It's levered equities. How 640 00:35:38,920 --> 00:35:43,239 Speaker 3: do you d smooth Oh that's a long explanation. We 641 00:35:43,320 --> 00:35:46,480 Speaker 3: have a whole appendix on it. But the method that 642 00:35:46,520 --> 00:35:49,759 Speaker 3: we chose was actually using a public market proxy. So 643 00:35:49,840 --> 00:35:53,960 Speaker 3: we filtered public equities also going back to nineteen ninety 644 00:35:53,960 --> 00:35:56,640 Speaker 3: that fit the parameters of what are typical private equity 645 00:35:56,680 --> 00:36:04,280 Speaker 3: investments based on industry type, cash flow, margins, size, et cetera. 646 00:36:04,480 --> 00:36:06,560 Speaker 3: And we found a whole universe, and then we compared 647 00:36:06,600 --> 00:36:09,240 Speaker 3: the movement of that universe over time to the marks 648 00:36:09,280 --> 00:36:12,399 Speaker 3: of private equity, and that's where we compared and saw 649 00:36:12,440 --> 00:36:14,680 Speaker 3: that a proxy in the public markets would have had 650 00:36:14,920 --> 00:36:17,799 Speaker 3: volatility closer to twenty percent. When we did the same 651 00:36:17,840 --> 00:36:22,560 Speaker 3: analysis for opportunistic credit, comparing the volatility from the published 652 00:36:22,560 --> 00:36:26,920 Speaker 3: returns to the public proxy, the difference wasn't nearly as material. 653 00:36:26,960 --> 00:36:30,719 Speaker 3: It was a few percentage points different, so low teens volatility. 654 00:36:30,960 --> 00:36:35,200 Speaker 3: So we found that the combination of the returns being 655 00:36:36,280 --> 00:36:39,000 Speaker 3: very similar, and actually we think the go forward returns 656 00:36:39,000 --> 00:36:43,280 Speaker 3: for opportunistic credit should be very promising given the supply 657 00:36:43,640 --> 00:36:46,640 Speaker 3: of opportunity that we alluded to, plus the fact that 658 00:36:46,800 --> 00:36:50,720 Speaker 3: historically in a higher rate environment, opportunistic credit performs well, 659 00:36:50,920 --> 00:36:55,120 Speaker 3: whereas private equity historically performs less well in a higher 660 00:36:55,160 --> 00:36:57,239 Speaker 3: rate environment. And you couple that with the fact that, 661 00:36:57,360 --> 00:36:59,200 Speaker 3: as we talked about, we've had a flood of capital 662 00:36:59,239 --> 00:37:03,600 Speaker 3: to private equity that we think vodes less well for 663 00:37:03,600 --> 00:37:07,520 Speaker 3: forward return So we actually reduced returns two hundred basis 664 00:37:07,520 --> 00:37:10,400 Speaker 3: points in our analysis for the go forward for private equity. 665 00:37:11,920 --> 00:37:15,480 Speaker 3: And even with that pretty modest assumption, but with the 666 00:37:15,560 --> 00:37:22,399 Speaker 3: higher vall the optimizer preferred opportunistic credit. One interesting sort 667 00:37:22,400 --> 00:37:24,680 Speaker 3: of side note there is. We did a quick LBO 668 00:37:24,760 --> 00:37:28,160 Speaker 3: analysis just to sanity check how private equity looks today 669 00:37:28,239 --> 00:37:31,160 Speaker 3: in the higher rate environment. And what's interesting is you've 670 00:37:31,160 --> 00:37:34,959 Speaker 3: had multiples go up over time just as interest rates 671 00:37:35,000 --> 00:37:37,640 Speaker 3: have also gone up, so therefore deals are more expensive. 672 00:37:38,560 --> 00:37:40,719 Speaker 3: And it suggested to us that even if you use 673 00:37:40,800 --> 00:37:44,600 Speaker 3: the same multiple in the ZERP period and today for 674 00:37:44,680 --> 00:37:47,840 Speaker 3: a deal, let's say ten times ebitdah for an LBO, 675 00:37:48,360 --> 00:37:51,360 Speaker 3: the excess return over cash today for private equity is 676 00:37:51,360 --> 00:37:54,080 Speaker 3: four hundred and fifty basis points lower than it would 677 00:37:54,080 --> 00:37:56,400 Speaker 3: have been during SERP, and that's all a function of 678 00:37:56,400 --> 00:37:59,279 Speaker 3: the higher financing costs. So that seems like a real 679 00:37:59,440 --> 00:38:04,239 Speaker 3: headwind for the industry just due to the interest rate issue. 680 00:38:04,760 --> 00:38:07,880 Speaker 1: Nine percent was the opportunistic credit return. That's nine percent 681 00:38:08,000 --> 00:38:10,480 Speaker 1: over what over cash? 682 00:38:10,520 --> 00:38:12,400 Speaker 3: So over the three month treasury. 683 00:38:12,120 --> 00:38:14,319 Speaker 1: Okay, so I'm just on top of my head, I'm 684 00:38:14,360 --> 00:38:16,239 Speaker 1: thinking thirteen percent roughly. All in. 685 00:38:16,760 --> 00:38:19,920 Speaker 3: This is again, this is the Cambridge. This is the Cambridge. 686 00:38:19,480 --> 00:38:23,040 Speaker 1: Historical and data, and that holds you think going forward. 687 00:38:23,360 --> 00:38:28,680 Speaker 3: What we're saying is that based on what we're seeing 688 00:38:28,680 --> 00:38:33,319 Speaker 3: in terms of opportunity and supply, it looks like a 689 00:38:33,320 --> 00:38:36,120 Speaker 3: promising asset class. Again, it's a global strategy, so this 690 00:38:36,160 --> 00:38:37,000 Speaker 3: is not just us. 691 00:38:37,200 --> 00:38:40,719 Speaker 1: And is it basically picking a bunch of scraps from 692 00:38:40,880 --> 00:38:43,120 Speaker 1: tiny capital structures or is it you know, I'm wondering 693 00:38:43,120 --> 00:38:46,200 Speaker 1: how scalable it is by you know, a single name. 694 00:38:46,480 --> 00:38:48,279 Speaker 3: Well, that's a very good point, and we make the 695 00:38:48,320 --> 00:38:50,719 Speaker 3: point in our paper that there's no way in which 696 00:38:50,840 --> 00:38:54,400 Speaker 3: all allocators could could put all of their private sleeve 697 00:38:54,440 --> 00:38:57,399 Speaker 3: into opportunistic credit because the asset class just isn't big enough. 698 00:38:57,760 --> 00:39:02,200 Speaker 3: But our exercise suggests that I'm the margin. It's a creative. Basically, 699 00:39:02,239 --> 00:39:05,239 Speaker 3: what we found is when you a portfolio that has 700 00:39:05,280 --> 00:39:08,480 Speaker 3: opportunistic credit versus one that doesn't, based on our inputs, 701 00:39:08,800 --> 00:39:12,400 Speaker 3: can generate forty basis points a year of greater return 702 00:39:12,480 --> 00:39:16,160 Speaker 3: at the same risk profile. So basically it pushes out 703 00:39:16,160 --> 00:39:19,160 Speaker 3: what's called the efficient frontier forty basis points. And that's 704 00:39:19,239 --> 00:39:22,560 Speaker 3: due to the lower correlation with the public sleeve and 705 00:39:22,600 --> 00:39:26,360 Speaker 3: the lower volatility and yet the still attractive returns. 706 00:39:26,880 --> 00:39:29,080 Speaker 1: David Din's jump in, but I have on that. I mean, 707 00:39:29,120 --> 00:39:31,399 Speaker 1: who is it for? Because we've got this issue right 708 00:39:31,440 --> 00:39:35,320 Speaker 1: now with retail realizing that private credit is not liquid 709 00:39:35,320 --> 00:39:37,160 Speaker 1: and trying to get out because they're panicking a bit. 710 00:39:37,200 --> 00:39:39,120 Speaker 1: But who is this strategy for? 711 00:39:39,840 --> 00:39:42,440 Speaker 3: Yeah, so I mean for us. The genesis of writing 712 00:39:42,440 --> 00:39:45,320 Speaker 3: the paper was really geared more towards our institutional clients, 713 00:39:46,080 --> 00:39:49,280 Speaker 3: for whom, as I said, sometimes opportunistic credit. It doesn't 714 00:39:49,280 --> 00:39:52,440 Speaker 3: fit neatly in a box. Nobody had done this analysis 715 00:39:52,440 --> 00:39:56,640 Speaker 3: before on the optimization exercise. People had done it with 716 00:39:56,719 --> 00:40:00,720 Speaker 3: private equity, but never looping in opportunity is to credit, 717 00:40:02,160 --> 00:40:04,200 Speaker 3: And so I think it was it was just helpful 718 00:40:04,320 --> 00:40:06,839 Speaker 3: for us both to check the ASSEAD class. This isn't 719 00:40:06,880 --> 00:40:09,279 Speaker 3: just this isn't Davidson Keepner's data. This is all the 720 00:40:09,360 --> 00:40:11,600 Speaker 3: data out there in terms of private assets. So we 721 00:40:11,640 --> 00:40:15,440 Speaker 3: thought it was pretty interesting to see, you know, what 722 00:40:15,880 --> 00:40:18,960 Speaker 3: looks attractive just based on a quantitative analysis. I will 723 00:40:19,000 --> 00:40:21,000 Speaker 3: say shout out to our quant research team for the 724 00:40:21,040 --> 00:40:23,680 Speaker 3: great work here. They You know, it was a lot 725 00:40:23,680 --> 00:40:27,040 Speaker 3: of different analyses to get to this conclusion. 726 00:40:27,400 --> 00:40:28,120 Speaker 2: So basically, what. 727 00:40:28,120 --> 00:40:29,920 Speaker 1: Was saying is that there's seven hundred and seventy billion 728 00:40:29,960 --> 00:40:34,280 Speaker 1: dollars of stressed in the US direct loans and leverage loans. 729 00:40:35,160 --> 00:40:38,000 Speaker 1: You know, stressed sounds bad. They could blow up, they 730 00:40:38,000 --> 00:40:40,719 Speaker 1: could default something, back could happen unless someone comes in 731 00:40:40,800 --> 00:40:43,839 Speaker 1: and you know, lends the money to tie them over 732 00:40:44,600 --> 00:40:48,759 Speaker 1: and they get you know, fished out of stress. But 733 00:40:48,920 --> 00:40:52,279 Speaker 1: I'm wondering what the knock on effect is because that's 734 00:40:52,320 --> 00:40:55,319 Speaker 1: what most people, I think, looking at financial markets are 735 00:40:55,400 --> 00:40:58,480 Speaker 1: worried about. You know, does this spill over onto banks, 736 00:40:58,520 --> 00:41:00,759 Speaker 1: does it spill over onto insurance comeanies. Does it have 737 00:41:00,840 --> 00:41:04,000 Speaker 1: a much bigger riff of effects on the on the economy. 738 00:41:04,000 --> 00:41:05,919 Speaker 1: And I'm wondering, you know, what you were seeing there 739 00:41:06,080 --> 00:41:08,200 Speaker 1: and whether you think that there is a bigger problem here. 740 00:41:09,160 --> 00:41:13,680 Speaker 3: I think we think that it will actually be naturally resolved, 741 00:41:13,680 --> 00:41:16,840 Speaker 3: but it will be slow. It's not going to be 742 00:41:16,960 --> 00:41:21,160 Speaker 3: some big systemic crisis like we had during the GFC 743 00:41:21,280 --> 00:41:25,080 Speaker 3: with subprime mortgages. Rather, I think the implication of this, 744 00:41:25,239 --> 00:41:29,320 Speaker 3: as the losses start to manifest is that the allocations 745 00:41:29,640 --> 00:41:34,319 Speaker 3: likely to private equity and direct lending over time go down. 746 00:41:34,520 --> 00:41:36,880 Speaker 3: I think that's the natural consequence. That's partly why we 747 00:41:37,080 --> 00:41:42,480 Speaker 3: showed the optimization model. I think as people re underwrite 748 00:41:42,520 --> 00:41:47,239 Speaker 3: the asset classes based on what are the go forward returns, 749 00:41:48,440 --> 00:41:51,480 Speaker 3: you your you're that the issue will correct itself. 750 00:41:51,960 --> 00:41:55,200 Speaker 2: I mean, I think the resolution process has changed over 751 00:41:55,239 --> 00:41:58,720 Speaker 2: the years too, Like bank regulators were all over banks 752 00:41:58,760 --> 00:42:01,680 Speaker 2: to you know, sort of fess up to problems early 753 00:42:01,719 --> 00:42:04,320 Speaker 2: and deal with them and move them off off their 754 00:42:04,440 --> 00:42:07,200 Speaker 2: balance sheets. And then you know, as you had some 755 00:42:07,280 --> 00:42:13,640 Speaker 2: disintermiation out of the banking system into more static clos 756 00:42:13,680 --> 00:42:20,360 Speaker 2: and conduits and secured lending vehicles, those vehicles don't have 757 00:42:20,440 --> 00:42:23,760 Speaker 2: flexibility to sort of work with borrowers to the extent 758 00:42:23,800 --> 00:42:26,600 Speaker 2: that direct blending does. So it seems like it's just 759 00:42:26,640 --> 00:42:29,800 Speaker 2: going to extend itself the way that these resolutions occur. 760 00:42:30,440 --> 00:42:32,800 Speaker 3: I think that's right. It won't be an acute crisis 761 00:42:32,800 --> 00:42:35,120 Speaker 3: where everyone I don't think will be needing to sell 762 00:42:35,160 --> 00:42:37,719 Speaker 3: at the same time. But I do think where there 763 00:42:37,840 --> 00:42:40,279 Speaker 3: is the recognition from the private equity owner that there's 764 00:42:40,280 --> 00:42:44,759 Speaker 3: no more equity value, they will move on. Hopefully in 765 00:42:44,760 --> 00:42:49,080 Speaker 3: their portfolio. They'll have other investments you know, that work out. 766 00:42:48,840 --> 00:42:52,520 Speaker 3: But probably bigger picture, the returns for private equity won't 767 00:42:52,520 --> 00:42:54,719 Speaker 3: be as good as they had been historically before the 768 00:42:54,760 --> 00:42:58,480 Speaker 3: asset class became crowded. And then yeah, for the direct lenders, 769 00:42:58,520 --> 00:43:01,080 Speaker 3: I think in some instances they'll be happy in there's 770 00:43:01,120 --> 00:43:03,960 Speaker 3: more troubled credits to sell the loan and take the 771 00:43:04,000 --> 00:43:06,760 Speaker 3: proceeds and do something else with it, right, make another 772 00:43:06,840 --> 00:43:11,280 Speaker 3: par loan, meet redemption requests, or there are all sorts 773 00:43:11,280 --> 00:43:13,800 Speaker 3: of uses for that capital. It probably is more efficient 774 00:43:13,840 --> 00:43:16,840 Speaker 3: for them to free up that capital rather than continue 775 00:43:16,880 --> 00:43:20,359 Speaker 3: to own some of the troubled assets. But I do 776 00:43:20,440 --> 00:43:24,120 Speaker 3: think it will be less chaotic as a result of 777 00:43:24,160 --> 00:43:27,520 Speaker 3: all the changes from regulations post GFC, where we don't 778 00:43:27,560 --> 00:43:29,640 Speaker 3: have a lot of leverage in the system the way 779 00:43:29,640 --> 00:43:31,920 Speaker 3: we did, you know, where banks were levered, you know, 780 00:43:31,960 --> 00:43:34,319 Speaker 3: I think Lehman was up to fifteen times and you 781 00:43:34,360 --> 00:43:35,480 Speaker 3: had synthetic. 782 00:43:35,120 --> 00:43:38,600 Speaker 2: CDOs there more like fifty zero. 783 00:43:38,480 --> 00:43:41,160 Speaker 3: So that this does feel more contained, And I do 784 00:43:41,200 --> 00:43:43,799 Speaker 3: think it's just it's more about the future implications for 785 00:43:43,840 --> 00:43:44,799 Speaker 3: asset allocations. 786 00:43:44,920 --> 00:43:47,319 Speaker 2: Yeah, and I think, you know, sort of explaining the 787 00:43:47,320 --> 00:43:50,520 Speaker 2: dimensions of the market, you know, we're talking to sort 788 00:43:50,520 --> 00:43:53,000 Speaker 2: of using a round number. Direct lending is a two 789 00:43:53,080 --> 00:43:56,120 Speaker 2: trillion dollar market. That's a big number, but the context 790 00:43:56,160 --> 00:43:59,480 Speaker 2: of the overall financial system in the US credit market, 791 00:43:59,719 --> 00:44:01,879 Speaker 2: it's not that big. Yet. 792 00:44:03,120 --> 00:44:05,719 Speaker 1: Does all of this drama those slow the growth or 793 00:44:05,719 --> 00:44:08,000 Speaker 1: averse the growth of private credit? 794 00:44:08,800 --> 00:44:11,560 Speaker 3: Yes, I definitely think the direct lending growth. I mean 795 00:44:11,840 --> 00:44:14,759 Speaker 3: again ninefold growth over the last ten years, so that 796 00:44:14,800 --> 00:44:18,080 Speaker 3: we're not going to see that maybe even at best 797 00:44:18,080 --> 00:44:22,239 Speaker 3: a flat trajectory. Probably it's going to start to dip, 798 00:44:22,320 --> 00:44:23,960 Speaker 3: I would imagine. But there is in the meantime a 799 00:44:24,000 --> 00:44:26,319 Speaker 3: lot of dry powder. So that is the one that's 800 00:44:26,320 --> 00:44:28,240 Speaker 3: why it's going to take a while for this to adjust, 801 00:44:28,320 --> 00:44:30,680 Speaker 3: because you have a lot of dry powder sitting in 802 00:44:30,719 --> 00:44:34,279 Speaker 3: private equity and direct lending that they still are going 803 00:44:34,320 --> 00:44:36,279 Speaker 3: to want to put to work, but hopefully at lower 804 00:44:36,360 --> 00:44:38,600 Speaker 3: valuations or you with better underwriting. 805 00:44:39,040 --> 00:44:40,520 Speaker 2: Well, I think I think you also have to think 806 00:44:40,520 --> 00:44:44,640 Speaker 2: about direct lending in two ways. There's the retail side 807 00:44:44,640 --> 00:44:48,240 Speaker 2: of the marketplace where you've got you know, privately traded 808 00:44:48,719 --> 00:44:52,799 Speaker 2: business development companies, where there is you know where you 809 00:44:52,840 --> 00:44:55,120 Speaker 2: do have a stampede for the exits, but the gates 810 00:44:55,120 --> 00:44:56,400 Speaker 2: have come down, which by the way, is a very 811 00:44:56,400 --> 00:44:59,200 Speaker 2: responsible thing for those those funds to do. But then 812 00:44:59,239 --> 00:45:03,759 Speaker 2: on the institution side, I think that black Rock had 813 00:45:03,760 --> 00:45:07,480 Speaker 2: their earnings called today and they were talking about you know, 814 00:45:07,600 --> 00:45:12,239 Speaker 2: continued significant demand for private credit for direct lending, you know, 815 00:45:12,320 --> 00:45:15,120 Speaker 2: opportunities from the institutional side of things. 816 00:45:15,280 --> 00:45:18,040 Speaker 3: Yeah, it'll definitely be interesting to see how it plays 817 00:45:18,040 --> 00:45:19,200 Speaker 3: out and how that diverges. 818 00:45:19,680 --> 00:45:21,600 Speaker 1: But if this seven hundred and seventy billion just in 819 00:45:21,640 --> 00:45:25,080 Speaker 1: the US alone gets marked down significantly, someone takes a hit, 820 00:45:25,320 --> 00:45:27,279 Speaker 1: and you know, I'm wondering who that's is and how 821 00:45:27,400 --> 00:45:30,279 Speaker 1: concentrated those losses are, and then what's the impact of that. 822 00:45:31,040 --> 00:45:33,319 Speaker 3: I think, you know, if you look at some of 823 00:45:33,360 --> 00:45:37,040 Speaker 3: the different BDC structures, it could have implications for some 824 00:45:37,120 --> 00:45:40,440 Speaker 3: of the in addition to not having liquidity, you know, 825 00:45:40,480 --> 00:45:43,320 Speaker 3: effectively having dead money for a period of time because 826 00:45:43,680 --> 00:45:47,440 Speaker 3: the losses will offset the income. And you know, leverage 827 00:45:47,440 --> 00:45:50,600 Speaker 3: worked well on the way up, but it doesn't work 828 00:45:51,160 --> 00:45:53,919 Speaker 3: well on the way down, and so I think that's 829 00:45:53,920 --> 00:45:57,400 Speaker 3: more the implication is that people are stuck in the 830 00:45:57,480 --> 00:46:02,200 Speaker 3: asset class with turns that they're not happy with. Even 831 00:46:02,239 --> 00:46:04,680 Speaker 3: if even if you just look back to twenty fifteen, 832 00:46:04,960 --> 00:46:08,800 Speaker 3: before this asset class became so big, the direct lending 833 00:46:08,880 --> 00:46:11,799 Speaker 3: vintage from that year, based on an academic study that 834 00:46:11,880 --> 00:46:14,840 Speaker 3: came out a few months ago, still has thirty percent 835 00:46:15,040 --> 00:46:20,000 Speaker 3: of its return stuck in the funds. So there still 836 00:46:20,040 --> 00:46:24,520 Speaker 3: are issues for old vintages where people have gotten reported 837 00:46:24,560 --> 00:46:27,759 Speaker 3: returns but they haven't gotten realized returns, and so the 838 00:46:27,840 --> 00:46:30,279 Speaker 3: question will be also, you know some of that where 839 00:46:30,320 --> 00:46:33,200 Speaker 3: is it marked? Has it just? I mean, that's a 840 00:46:33,239 --> 00:46:37,319 Speaker 3: long time for a private or a direct lending fund 841 00:46:37,360 --> 00:46:43,080 Speaker 3: to still have a big chunk of unrealized years. Yeah, 842 00:46:43,160 --> 00:46:44,960 Speaker 3: so I think that was an early indicator of some 843 00:46:45,000 --> 00:46:47,400 Speaker 3: of the issues. But yeah, I think it's going to 844 00:46:47,400 --> 00:46:50,000 Speaker 3: show up more in returns that people aren't happy with. 845 00:46:50,680 --> 00:46:54,640 Speaker 1: Going back to David's original question earlier in this conversation, 846 00:46:54,760 --> 00:46:58,880 Speaker 1: that we've been hearing for years now, maybe a decade, 847 00:46:58,880 --> 00:47:02,440 Speaker 1: that this is the end of the credit cycle and 848 00:47:02,480 --> 00:47:04,000 Speaker 1: it's all going to blow up from here, and you 849 00:47:04,040 --> 00:47:07,400 Speaker 1: know we're facing a big wave of distress. It never happens. 850 00:47:08,200 --> 00:47:10,919 Speaker 1: So I'm wondering what gives you conviction right now that 851 00:47:11,040 --> 00:47:13,360 Speaker 1: this call you know that we are actually at a 852 00:47:13,400 --> 00:47:15,000 Speaker 1: tipping point for distress. 853 00:47:15,880 --> 00:47:19,560 Speaker 3: It goes back to that we're in year three of 854 00:47:20,000 --> 00:47:22,960 Speaker 3: what's already the longest default cycle in twenty years. The 855 00:47:23,000 --> 00:47:25,680 Speaker 3: only other longer one was in the early two thousands. 856 00:47:26,200 --> 00:47:29,560 Speaker 3: But most of the defaults have not resolved the underlying issue. 857 00:47:29,600 --> 00:47:32,520 Speaker 3: They haven't been restructurings where the capital structure was fixed. 858 00:47:32,760 --> 00:47:38,719 Speaker 3: They've been about extending maturities deferring interest. And so that's 859 00:47:38,760 --> 00:47:42,080 Speaker 3: why we think that the cycle will extend. But this 860 00:47:42,239 --> 00:47:46,520 Speaker 3: second phase of it will be comprised increasingly of hard defaults, 861 00:47:47,080 --> 00:47:49,000 Speaker 3: where the losses will be fault And so it's not 862 00:47:49,040 --> 00:47:51,360 Speaker 3: that we're going to have a spike necessarily an overall 863 00:47:51,400 --> 00:47:54,880 Speaker 3: default rates. Maybe a bit in certain sectors for sure, 864 00:47:55,920 --> 00:47:59,000 Speaker 3: But it's that the nature of the defaults is going 865 00:47:59,040 --> 00:48:01,360 Speaker 3: to change, is going to feel different for people. People 866 00:48:01,360 --> 00:48:03,400 Speaker 3: didn't really pay attention in the last few years because, 867 00:48:03,920 --> 00:48:06,480 Speaker 3: particularly in direct lending, it didn't show up in marks. 868 00:48:07,239 --> 00:48:10,759 Speaker 3: It was just deferrals. And I think that's where the 869 00:48:10,800 --> 00:48:12,320 Speaker 3: next few years are going to feel different. 870 00:48:12,719 --> 00:48:14,759 Speaker 1: And with that, where is the I mean, you talked 871 00:48:14,760 --> 00:48:17,000 Speaker 1: about a global portfolio, and it talks about very briefly 872 00:48:17,000 --> 00:48:19,200 Speaker 1: about how the other opportunities exist elsewhereund the world. But 873 00:48:19,239 --> 00:48:21,759 Speaker 1: where is the best relative value for you right now? 874 00:48:22,920 --> 00:48:27,440 Speaker 3: Oh? A good question. We find value across different markets. 875 00:48:27,440 --> 00:48:29,840 Speaker 3: It's just the nature of what we see that differs. 876 00:48:30,200 --> 00:48:34,720 Speaker 3: If you're talking about credit. Yeah, increasingly we're seeing interesting 877 00:48:34,800 --> 00:48:38,719 Speaker 3: opportunities in the US because of this dynamic, We're seeing 878 00:48:38,760 --> 00:48:43,239 Speaker 3: more engagement from the direct lending universe. That's pretty new 879 00:48:43,719 --> 00:48:45,960 Speaker 3: versus where we were a year ago. So that's definitely 880 00:48:46,040 --> 00:48:47,160 Speaker 3: a big focus. 881 00:48:47,040 --> 00:48:49,239 Speaker 1: Engagement, by which you mean they are coming to you 882 00:48:49,280 --> 00:48:51,359 Speaker 1: and saying, can you take these loans off our hands 883 00:48:51,400 --> 00:48:52,560 Speaker 1: because we're not refinancing. 884 00:48:52,719 --> 00:48:55,200 Speaker 3: Is that there's more of that. We had had some 885 00:48:55,400 --> 00:48:58,920 Speaker 3: activity in the past, but it seems to be picking 886 00:48:59,000 --> 00:49:03,880 Speaker 3: up in terms of the level of due diligence that 887 00:49:03,960 --> 00:49:07,240 Speaker 3: the team is doing. So that's that's an interesting indicator. 888 00:49:06,920 --> 00:49:09,120 Speaker 1: It will continue at this pace to grow into I 889 00:49:09,120 --> 00:49:09,600 Speaker 1: think it's. 890 00:49:09,480 --> 00:49:11,239 Speaker 3: Going to I think it's going to keep growing in 891 00:49:11,280 --> 00:49:14,000 Speaker 3: the US and then in Europe, where we have a 892 00:49:14,040 --> 00:49:17,680 Speaker 3: lot of activity. It's really been more about the bank 893 00:49:17,800 --> 00:49:20,800 Speaker 3: dynamic there. As I mentioned that, you know, the banks 894 00:49:20,800 --> 00:49:24,640 Speaker 3: basically provide twice as much of the credit as in 895 00:49:24,680 --> 00:49:27,040 Speaker 3: the US, and what we've seen is, whereas in the 896 00:49:27,120 --> 00:49:32,719 Speaker 3: US we've had actually regulations at loosening up earlier this year, 897 00:49:32,920 --> 00:49:35,080 Speaker 3: in Europe that hasn't been the case. And I think 898 00:49:35,120 --> 00:49:38,720 Speaker 3: you add on the Ukraine War and now the energy 899 00:49:38,760 --> 00:49:41,440 Speaker 3: shock from the Iran War, I think there will be 900 00:49:41,480 --> 00:49:45,480 Speaker 3: more opportunities for opportunistic credit investors to provide capital to 901 00:49:45,520 --> 00:49:48,359 Speaker 3: companies where banks might be more cautious and so again 902 00:49:48,480 --> 00:49:53,120 Speaker 3: quality companies. But we're flexible capital that can kind of 903 00:49:53,120 --> 00:49:57,080 Speaker 3: see through cyclical versus secular issues can be very helpful 904 00:49:57,120 --> 00:49:59,960 Speaker 3: and generate you know, positive outcomes. 905 00:50:00,000 --> 00:50:01,719 Speaker 1: Is there anything that kind of worries you in terms 906 00:50:01,719 --> 00:50:04,920 Speaker 1: of you know, potentially positive bull shock, you know, the 907 00:50:04,960 --> 00:50:08,360 Speaker 1: government suddenly bails everyone else, or you know, the midterms. 908 00:50:08,400 --> 00:50:10,000 Speaker 1: You know that someone weighs a magic wand and we 909 00:50:10,520 --> 00:50:13,040 Speaker 1: turn into this GOLDI Loot's economy when none of this 910 00:50:13,120 --> 00:50:13,920 Speaker 1: distress happens. 911 00:50:15,000 --> 00:50:19,080 Speaker 3: Again, we don't need distress to be busy. The cycles 912 00:50:19,080 --> 00:50:21,440 Speaker 3: are different. What we see in Europe is not related 913 00:50:21,480 --> 00:50:25,400 Speaker 3: to this private equity dislocation issue. It's related to actually 914 00:50:25,440 --> 00:50:28,520 Speaker 3: fragmentation even we didn't get to but parts of southern 915 00:50:28,520 --> 00:50:33,120 Speaker 3: Europe in particular are really underbanked and are growing rapidly. 916 00:50:33,560 --> 00:50:36,759 Speaker 3: So that's a different dynamic. In countries like India, we 917 00:50:36,800 --> 00:50:40,640 Speaker 3: actually provide structured credit to businesses that are you know, 918 00:50:40,920 --> 00:50:43,200 Speaker 3: very I would say asset heavy, so the opposite of 919 00:50:43,200 --> 00:50:46,040 Speaker 3: the AI disruption theme or the Halo theme. But these 920 00:50:46,080 --> 00:50:49,759 Speaker 3: are low LTV loans that are structured. Again, our activities 921 00:50:49,880 --> 00:50:52,719 Speaker 3: differ across the world. But you know, if you're saying 922 00:50:52,760 --> 00:50:54,840 Speaker 3: if there's going to be some sort of a bailout 923 00:50:54,840 --> 00:50:57,160 Speaker 3: in terms of fiscal stimulus. We're already seeing a lot 924 00:50:57,200 --> 00:51:00,600 Speaker 3: of that in the in the U US in terms 925 00:51:00,640 --> 00:51:03,920 Speaker 3: of the impact of the one big beautiful bill and 926 00:51:04,040 --> 00:51:07,160 Speaker 3: tax refunds coming. We have, you know, headwinds and tailwinds 927 00:51:07,160 --> 00:51:09,759 Speaker 3: in the US in terms of the you know, all 928 00:51:09,760 --> 00:51:13,560 Speaker 3: the AI capex spending, but also on the other side 929 00:51:13,560 --> 00:51:15,799 Speaker 3: of the AI disruption. Right there's there's a lot of 930 00:51:15,800 --> 00:51:19,640 Speaker 3: cross currents in the market, which makes it fascinating. And 931 00:51:19,680 --> 00:51:22,920 Speaker 3: I think the big question longer term will be, you know, 932 00:51:22,960 --> 00:51:27,440 Speaker 3: where rates stay, what's the new normal given structural deficits, 933 00:51:27,920 --> 00:51:32,480 Speaker 3: sticky inflation. You know, that's all I think the longer 934 00:51:32,600 --> 00:51:35,160 Speaker 3: term question. But for for a credit investor, a higher 935 00:51:35,239 --> 00:51:40,160 Speaker 3: rate environment is actually favorable because, uh, not only you know, 936 00:51:40,280 --> 00:51:43,160 Speaker 3: you have more coupon, but we think there tends to 937 00:51:43,200 --> 00:51:47,279 Speaker 3: be more dispersion and therefore, you know more, uh, your 938 00:51:47,440 --> 00:51:51,080 Speaker 3: sort of credit underwriting matters more in a higher rate, 939 00:51:51,160 --> 00:51:53,960 Speaker 3: higher dispersion environment than in the Zert period where there 940 00:51:54,040 --> 00:51:56,240 Speaker 3: was just everybody got bailed out by low rates. 941 00:51:56,280 --> 00:51:58,880 Speaker 1: Great stuff, Sousi Givens with Davidson Kempna. It's been a 942 00:51:58,880 --> 00:52:01,879 Speaker 1: great pleasure having on the Credit Many thanks, thanks so much, 943 00:52:02,000 --> 00:52:04,200 Speaker 1: and of course to David Havens with Bloomberg Intelligence, thank 944 00:52:04,239 --> 00:52:05,319 Speaker 1: you very much for being on the show. 945 00:52:05,400 --> 00:52:07,040 Speaker 2: It's been great being with you both and all of 946 00:52:07,080 --> 00:52:07,680 Speaker 2: you out there. 947 00:52:07,800 --> 00:52:10,640 Speaker 1: Bloomberg Intelligence is part of our research department, with five 948 00:52:10,719 --> 00:52:13,720 Speaker 1: hundred analysts and strategists working across all markets. Coverage includes 949 00:52:13,760 --> 00:52:16,320 Speaker 1: over two thousand equities and credits, as well as outlooks 950 00:52:16,320 --> 00:52:19,440 Speaker 1: on more more than ninety industries and one hundred market indices, 951 00:52:19,480 --> 00:52:23,480 Speaker 1: currencies and commodities. Please do subscribe wherever you get your podcasts. 952 00:52:23,520 --> 00:52:26,480 Speaker 1: We're on Apple, Spotify, and all other good podcast providers, 953 00:52:26,480 --> 00:52:29,520 Speaker 1: including the Bloomberg Terminal at b pod Goo. Give us 954 00:52:29,560 --> 00:52:32,080 Speaker 1: a review, tell your friends, or email me directly at 955 00:52:32,160 --> 00:52:35,879 Speaker 1: Jcromby eight at Bloomberg dot net. I'm James Crombie. It's 956 00:52:35,880 --> 00:52:37,919 Speaker 1: been a pleasure having you join us again next week 957 00:52:38,000 --> 00:52:38,799 Speaker 1: on the Credit Edge.