1 00:00:02,320 --> 00:00:06,680 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:06,840 --> 00:00:09,400 Speaker 2: For more on private equity markets. We're joined by Troy Gieski, 3 00:00:09,560 --> 00:00:12,920 Speaker 2: FS Investment's chief market strategy at FS Investments. He's known 4 00:00:12,920 --> 00:00:13,960 Speaker 2: for a campaign called. 5 00:00:13,760 --> 00:00:15,560 Speaker 3: The Time for Alts is Now. 6 00:00:16,160 --> 00:00:17,680 Speaker 2: Troy, great to have you with us here on this 7 00:00:17,800 --> 00:00:21,160 Speaker 2: day after Christmas approach New Year's Let me ask you 8 00:00:21,239 --> 00:00:22,960 Speaker 2: just to pick up on what we heard there from 9 00:00:23,000 --> 00:00:25,440 Speaker 2: Bruce Richard's talking about private credit. Would love to get 10 00:00:25,480 --> 00:00:28,240 Speaker 2: your sense of sort of where the runway goes from here. 11 00:00:28,280 --> 00:00:31,160 Speaker 2: We've seen such enthusiasm and excitement about it in twenty 12 00:00:31,200 --> 00:00:33,800 Speaker 2: twenty four game out for us. What you think twenty 13 00:00:33,840 --> 00:00:36,080 Speaker 2: twenty five looks like in terms of where private credit 14 00:00:36,120 --> 00:00:36,680 Speaker 2: goes from here? 15 00:00:37,320 --> 00:00:39,760 Speaker 4: Yeah, so private credit is one of our key strategies 16 00:00:39,840 --> 00:00:43,520 Speaker 4: for as Bruce is articulating, solving for that forty fixed 17 00:00:43,520 --> 00:00:45,519 Speaker 4: income has been a rather strategic place to be. 18 00:00:45,800 --> 00:00:47,720 Speaker 3: Yet again this year you're going to earn your yield 19 00:00:48,120 --> 00:00:50,560 Speaker 3: and have some capital depreciation as the back end the 20 00:00:50,640 --> 00:00:51,640 Speaker 3: curve is sold off. 21 00:00:52,080 --> 00:00:54,200 Speaker 4: And so if you think about the last several years, 22 00:00:54,200 --> 00:00:57,200 Speaker 4: to Bruce's point, a lot of the lending was focused 23 00:00:57,200 --> 00:01:01,520 Speaker 4: on creative financing, receivable financing, also known as asset based lending, 24 00:01:01,960 --> 00:01:05,200 Speaker 4: you know, helping really high quality yet pass strap companies 25 00:01:05,240 --> 00:01:07,959 Speaker 4: make it through a tough patch where we had exceptionally 26 00:01:08,040 --> 00:01:10,320 Speaker 4: high rates at the short end of the curve and 27 00:01:10,360 --> 00:01:15,240 Speaker 4: their primarily folding rate borrowers lifting assets off bank balance sheets, 28 00:01:15,840 --> 00:01:18,960 Speaker 4: other creative financing sources to keep that yield very attractive 29 00:01:19,000 --> 00:01:22,640 Speaker 4: for investors relatively passion fixed income. You know, what we've 30 00:01:22,640 --> 00:01:25,680 Speaker 4: seen and we expected this regardless of election. Outcome of 31 00:01:25,760 --> 00:01:29,600 Speaker 4: what we've really seen since the election is an enthusiasm 32 00:01:29,720 --> 00:01:34,600 Speaker 4: for both private to private takeouts, merger and acquisition financings 33 00:01:34,680 --> 00:01:38,720 Speaker 4: coming back, and just as standard lbls, you know, public 34 00:01:38,760 --> 00:01:41,320 Speaker 4: to privates come back really strong. So you know, the 35 00:01:41,360 --> 00:01:44,399 Speaker 4: outlook is very robust both over the short and the 36 00:01:44,440 --> 00:01:48,520 Speaker 4: long term. The one factor we're really focused on on 37 00:01:48,560 --> 00:01:51,000 Speaker 4: the supply of credit because their demand for credit, which 38 00:01:51,000 --> 00:01:54,320 Speaker 4: is clearly taking off, but on the supply side is 39 00:01:54,440 --> 00:01:57,600 Speaker 4: how aggressive banks get back to lending. You know, bank 40 00:01:57,680 --> 00:02:03,040 Speaker 4: lending completely stagnated for roughly two years, particularly after bank failures, 41 00:02:03,040 --> 00:02:05,160 Speaker 4: so that was really really good for private lenders because 42 00:02:05,200 --> 00:02:09,960 Speaker 4: you had massive GP growth and stagnating lending. You start 43 00:02:10,000 --> 00:02:11,880 Speaker 4: and see that pick back up it's still at a 44 00:02:11,919 --> 00:02:15,000 Speaker 4: relatively placid pace, so to speak. 45 00:02:15,320 --> 00:02:18,320 Speaker 5: So we're hoping that banks continue to lend through lenders 46 00:02:18,320 --> 00:02:22,359 Speaker 5: as first articulated and allow private lenders to provide financing 47 00:02:22,360 --> 00:02:25,399 Speaker 5: to the broader US economy, particularly middle market corporations. 48 00:02:25,800 --> 00:02:26,360 Speaker 3: Yeah, and Troy. 49 00:02:26,440 --> 00:02:28,200 Speaker 1: Early in my career, I was at the Chase Manhattan 50 00:02:28,240 --> 00:02:30,920 Speaker 1: Bank at the TMT Group, and we were lending against air. 51 00:02:31,200 --> 00:02:34,800 Speaker 1: There were no assets, there was no inventory. We lent. 52 00:02:35,280 --> 00:02:39,240 Speaker 1: We lent money to fleet call, which was some frequencies 53 00:02:39,240 --> 00:02:42,440 Speaker 1: that didn't even exist. Why did they walk away from 54 00:02:42,440 --> 00:02:44,960 Speaker 1: that business, that leverage lending business. We made a fortune 55 00:02:44,960 --> 00:02:47,040 Speaker 1: in that stuff. Why did the banks walk away from 56 00:02:47,080 --> 00:02:50,760 Speaker 1: that and then create the demand from private credit? Yeah? 57 00:02:50,880 --> 00:02:54,000 Speaker 4: So, I mean, look so much of what of the 58 00:02:54,040 --> 00:02:57,880 Speaker 4: opportunities that were created for alternative managers, including ourselves, from 59 00:02:57,919 --> 00:02:59,320 Speaker 4: driven by regulatory reform. 60 00:03:00,040 --> 00:03:02,400 Speaker 3: If you look at private equity, you can go back further. 61 00:03:02,840 --> 00:03:05,440 Speaker 4: It was really Starving's oxity that started the trend of 62 00:03:05,480 --> 00:03:08,680 Speaker 4: companies preferring to stay private because of all the additional 63 00:03:08,720 --> 00:03:09,919 Speaker 4: regulatory oversight. 64 00:03:10,400 --> 00:03:12,839 Speaker 3: And now you have really a private economy in the US. 65 00:03:12,960 --> 00:03:15,360 Speaker 4: Ninety six percent of the companies that have one hundred 66 00:03:15,400 --> 00:03:18,239 Speaker 4: more employees or private and only four percent of public. 67 00:03:18,360 --> 00:03:21,880 Speaker 4: So you've had this mega trend for companies staying private 68 00:03:22,240 --> 00:03:24,200 Speaker 4: that created demand on private credit. 69 00:03:24,280 --> 00:03:27,160 Speaker 3: Now to your point on banks, it was really the 70 00:03:27,240 --> 00:03:28,840 Speaker 3: hangover from the Global. 71 00:03:28,480 --> 00:03:32,400 Speaker 4: Financial Crisis where Boss three started getting implemented Dot Frank, 72 00:03:32,480 --> 00:03:35,480 Speaker 4: et cetera. And so that created a long period of 73 00:03:35,480 --> 00:03:38,840 Speaker 4: banks for trenching from core businesses. For instance, one of 74 00:03:38,880 --> 00:03:42,160 Speaker 4: our core strategies senior secret commercial real estate lending that 75 00:03:42,320 --> 00:03:45,640 Speaker 4: was completely a bank domain prior to the GFC. Completely 76 00:03:45,760 --> 00:03:48,480 Speaker 4: is a strong term, but primarily and they really stepped 77 00:03:48,520 --> 00:03:51,920 Speaker 4: back from acquisition, development and transitional lending, which allowed private 78 00:03:51,920 --> 00:03:54,440 Speaker 4: credit to step in now more locally. 79 00:03:54,840 --> 00:03:55,920 Speaker 3: You know, people forget this. 80 00:03:56,040 --> 00:03:59,200 Speaker 4: The banks lent very aggressively coming out of the pandemic. 81 00:03:59,200 --> 00:04:01,360 Speaker 4: They were growing their home books that sometimes two to 82 00:04:01,480 --> 00:04:04,240 Speaker 4: three times to pace the nominal GDP growth, which is historic. 83 00:04:04,920 --> 00:04:07,200 Speaker 4: Then you had the financial condition tightened in twenty two. 84 00:04:07,720 --> 00:04:10,600 Speaker 4: Then you had the bank failures and that completely arrested 85 00:04:10,960 --> 00:04:14,360 Speaker 4: while nominal GDP grew by over two trillion dollars, which 86 00:04:14,400 --> 00:04:15,640 Speaker 4: created this great window. 87 00:04:16,200 --> 00:04:17,480 Speaker 3: And then with mergers. 88 00:04:17,080 --> 00:04:21,520 Speaker 4: Coming back, acquisitions coming back, private private transactions, and longer 89 00:04:21,600 --> 00:04:24,560 Speaker 4: term close to two trillion of dry powder and private equity. 90 00:04:24,640 --> 00:04:26,479 Speaker 4: That needs to be a fin answer with atturn of debt. 91 00:04:26,520 --> 00:04:29,120 Speaker 4: Every unit of equality needs the unit of debt. Yeah, 92 00:04:29,160 --> 00:04:30,760 Speaker 4: we think the outlooks here, I robust. 93 00:04:31,480 --> 00:04:34,000 Speaker 2: We've spent some time this morning talking about this moment 94 00:04:34,080 --> 00:04:37,640 Speaker 2: of political transition, talked about the President elect and his 95 00:04:37,640 --> 00:04:40,640 Speaker 2: appointments and nominations. Let me ask you sort of how 96 00:04:40,680 --> 00:04:42,600 Speaker 2: you and others in the deal making space are kind 97 00:04:42,600 --> 00:04:44,800 Speaker 2: of looking at this period of transition before the new 98 00:04:44,839 --> 00:04:47,120 Speaker 2: administration comes in. I know, there's a lot of optimism 99 00:04:47,200 --> 00:04:49,400 Speaker 2: about what the deal making environment is going to look 100 00:04:49,520 --> 00:04:52,480 Speaker 2: like in the latter part of January going into twenty 101 00:04:52,520 --> 00:04:56,120 Speaker 2: twenty five. What are you watching fore most closely and 102 00:04:56,160 --> 00:04:59,080 Speaker 2: what about that environment are you most happy with or 103 00:04:59,120 --> 00:05:01,400 Speaker 2: optimistic about? Is likely to change and we get President 104 00:05:01,440 --> 00:05:02,920 Speaker 2: Electrum back in office once again. 105 00:05:03,640 --> 00:05:06,560 Speaker 4: Yeah, so there's a whole host of policy issues that 106 00:05:06,680 --> 00:05:08,800 Speaker 4: still need to be addressed. I mean, the most important 107 00:05:08,839 --> 00:05:11,440 Speaker 4: is the extension that Tax Cut and Jobs Act that 108 00:05:11,520 --> 00:05:14,280 Speaker 4: looks highly highly likely, but is lurking as a left 109 00:05:14,279 --> 00:05:18,160 Speaker 4: tail if we have political dysfunction. You know, the one 110 00:05:18,200 --> 00:05:20,200 Speaker 4: negative I think would be, you know, higher yields to 111 00:05:20,279 --> 00:05:22,960 Speaker 4: the back end of the curve through more expansionary fiscal 112 00:05:23,000 --> 00:05:27,240 Speaker 4: policy tied to that, But in terms of excitement, I mean, 113 00:05:27,279 --> 00:05:30,159 Speaker 4: if you think about what really pulled up next year, 114 00:05:30,520 --> 00:05:35,400 Speaker 4: you have unusual period where capital markets, particularly public equities, 115 00:05:35,440 --> 00:05:38,560 Speaker 4: have reflated dramatically pre election and post election. 116 00:05:38,920 --> 00:05:40,640 Speaker 3: Now, I know some of the stem has come out of. 117 00:05:40,600 --> 00:05:43,280 Speaker 4: The Russell for instance, which you know really has poor 118 00:05:43,400 --> 00:05:45,800 Speaker 4: earnings and cash flow properties. 119 00:05:46,040 --> 00:05:47,640 Speaker 3: Where you've had this huge expansion in. 120 00:05:48,000 --> 00:05:51,440 Speaker 4: Valuations in public equities, Yet in private equity we had 121 00:05:51,480 --> 00:05:53,719 Speaker 4: two years of real multiple compression. 122 00:05:54,200 --> 00:05:56,200 Speaker 3: So we think we're due for a catch up there. 123 00:05:56,480 --> 00:05:58,800 Speaker 4: And then if you look at it at a deeper level, 124 00:05:59,080 --> 00:06:01,719 Speaker 4: you know, we always remind people if you're investing in equity, 125 00:06:01,880 --> 00:06:03,960 Speaker 4: you want to invest for growth and where do you 126 00:06:04,000 --> 00:06:04,480 Speaker 4: get growth? 127 00:06:04,560 --> 00:06:07,640 Speaker 3: Right? Well, the US you have really strong normal GDP growth. 128 00:06:08,040 --> 00:06:10,800 Speaker 4: If you look across different sectors of the US, you 129 00:06:10,920 --> 00:06:14,720 Speaker 4: had over twelve percent consistent revenue growth in middle market 130 00:06:15,400 --> 00:06:16,640 Speaker 4: private equity, you've. 131 00:06:16,480 --> 00:06:17,919 Speaker 3: Had about six in the S and P. 132 00:06:18,520 --> 00:06:20,680 Speaker 4: You've only had about two percent in the rustle And 133 00:06:20,680 --> 00:06:23,159 Speaker 4: when you go internationally it's actually been negative over a 134 00:06:23,200 --> 00:06:26,920 Speaker 4: long period of time. You're getting revenue growth, you're getting 135 00:06:27,000 --> 00:06:29,840 Speaker 4: earnings or even dog growth, and you're at a much 136 00:06:29,880 --> 00:06:33,320 Speaker 4: more reasonable valuation in mid market pee relative to the 137 00:06:33,400 --> 00:06:36,799 Speaker 4: Russell in particular. So there's this whole concept of growth 138 00:06:36,839 --> 00:06:39,000 Speaker 4: at a reasonable price. It used to be a thing 139 00:06:39,160 --> 00:06:42,560 Speaker 4: back in the day. When you look at public equities, 140 00:06:42,800 --> 00:06:45,640 Speaker 4: you have growth at elevated or a reasonable prices, and 141 00:06:45,720 --> 00:06:47,840 Speaker 4: you look at middle market private equity, you have growth 142 00:06:47,880 --> 00:06:50,680 Speaker 4: at reasonable prices. Growth is the most important part, which 143 00:06:50,680 --> 00:06:52,480 Speaker 4: you'd rather paid less for it than. 144 00:06:52,360 --> 00:06:55,000 Speaker 3: More, so, Trey. 145 00:06:55,040 --> 00:06:57,720 Speaker 1: One of the things I think a lot of deal 146 00:06:57,760 --> 00:07:00,680 Speaker 1: makers are thinking about what the Trump administration is boy 147 00:07:00,760 --> 00:07:03,760 Speaker 1: the regulations, and you know, whether it's the part of 148 00:07:03,760 --> 00:07:06,440 Speaker 1: a justice or the Federal Trade communication, it's going to 149 00:07:06,480 --> 00:07:09,240 Speaker 1: be a lot easier to get deals done. Do you 150 00:07:09,279 --> 00:07:10,880 Speaker 1: buy into that, Oh. 151 00:07:10,840 --> 00:07:12,040 Speaker 3: Yeah, one hundred percent. 152 00:07:12,200 --> 00:07:15,160 Speaker 4: I mean that's pretty mainstream I think at this point. 153 00:07:15,480 --> 00:07:19,280 Speaker 4: And again everyone was expecting mergers to come back regardless 154 00:07:19,320 --> 00:07:22,400 Speaker 4: of election outcome, but because of much more business friendly, 155 00:07:22,760 --> 00:07:26,760 Speaker 4: much more FCC friendly towards acquisitions. When we look at 156 00:07:26,760 --> 00:07:30,600 Speaker 4: the landscape, you know, other than megacap Tech, which is 157 00:07:30,640 --> 00:07:33,720 Speaker 4: going to be under pressure from an acquisition standpoint pretty 158 00:07:33,760 --> 00:07:36,840 Speaker 4: much forever, it's one of the few areas of bipartisan consensus. 159 00:07:36,440 --> 00:07:38,960 Speaker 3: In DC right one is you know, to take a 160 00:07:38,960 --> 00:07:39,840 Speaker 3: hard line in China. 161 00:07:39,920 --> 00:07:41,920 Speaker 4: The second is megacap tech is not going to be 162 00:07:41,920 --> 00:07:44,480 Speaker 4: allowed to buy anything ever again. But if you look 163 00:07:44,480 --> 00:07:48,360 Speaker 4: at other sectors, whether it's airlines or manufacturing, you know 164 00:07:48,400 --> 00:07:50,120 Speaker 4: it's clear that M and A is going to come 165 00:07:50,160 --> 00:07:50,920 Speaker 4: back very strong. 166 00:07:51,080 --> 00:07:53,560 Speaker 3: And again that affects different strategies and different ways. 167 00:07:53,760 --> 00:07:56,560 Speaker 4: In private equity, it allows you to have exits right 168 00:07:56,640 --> 00:07:59,920 Speaker 4: at reasonable prices or higher valuations than even more past 169 00:08:00,040 --> 00:08:02,760 Speaker 4: two years. In private credit, it creates a lot of 170 00:08:02,760 --> 00:08:05,240 Speaker 4: deal flow for financing, and then on more. 171 00:08:05,120 --> 00:08:09,520 Speaker 6: Liquid strategies, it should create a robust environment for merger arbitrage, 172 00:08:09,800 --> 00:08:12,480 Speaker 6: which was one of the few strategies that struggled mightily 173 00:08:12,640 --> 00:08:15,640 Speaker 6: last year because of the very aggressive intervention. 174 00:08:15,720 --> 00:08:18,600 Speaker 4: And they put some numbers around that typically five percent 175 00:08:18,760 --> 00:08:22,040 Speaker 4: of merger's break for whatever reason. You know, during peak 176 00:08:22,440 --> 00:08:25,760 Speaker 4: FCC intervention it was around around nine percent. So you know, 177 00:08:25,760 --> 00:08:28,720 Speaker 4: we're very optimistic about that driver of alpha. And this 178 00:08:28,760 --> 00:08:31,280 Speaker 4: is a reminder sometimes you know the best time to 179 00:08:31,280 --> 00:08:34,040 Speaker 4: invest in strategies is active had a tough patch and. 180 00:08:34,040 --> 00:08:36,160 Speaker 3: You had a very transformational outcome. 181 00:08:36,480 --> 00:08:39,280 Speaker 4: In this case, you know, a much more friendly government 182 00:08:39,320 --> 00:08:41,199 Speaker 4: approach towards mergers and acquisitions. 183 00:08:41,720 --> 00:08:43,400 Speaker 2: Troey, we got about thirty seconds left. I'm going to 184 00:08:43,440 --> 00:08:45,480 Speaker 2: steal a question from Paulie's been asking everybody that is, 185 00:08:45,520 --> 00:08:47,560 Speaker 2: what's your theme for the year ahead, if you could 186 00:08:47,559 --> 00:08:49,120 Speaker 2: put it in a shortened sweet way. 187 00:08:49,880 --> 00:08:52,599 Speaker 4: Yes, the seeing put cash to work, right, that was 188 00:08:52,640 --> 00:08:55,240 Speaker 4: our theme coming in last year. It's still our theme today. 189 00:08:55,360 --> 00:08:59,560 Speaker 4: Cash balances are extremely high. You have multiple choices for 190 00:08:59,559 --> 00:09:02,520 Speaker 4: putting that cashtowork. One is in private aquity, one is 191 00:09:02,559 --> 00:09:05,599 Speaker 4: in private credit. You have liquid multi strategy fonds that 192 00:09:05,640 --> 00:09:07,680 Speaker 4: are viable solution, so put. 193 00:09:07,440 --> 00:09:08,040 Speaker 3: Cash to work. 194 00:09:08,440 --> 00:09:12,640 Speaker 4: The second, you know, don't expect materially better fixed income returns, 195 00:09:13,360 --> 00:09:15,040 Speaker 4: so again you can rotate some of. 196 00:09:14,960 --> 00:09:16,440 Speaker 3: That capital into private credit. 197 00:09:16,720 --> 00:09:20,840 Speaker 7: And then lastly, you know, when you think of alternatives, right, 198 00:09:20,880 --> 00:09:23,320 Speaker 7: there's a big difference between large and mega cap private 199 00:09:23,320 --> 00:09:26,120 Speaker 7: equity and middle market, just like there's a big difference 200 00:09:26,120 --> 00:09:29,360 Speaker 7: between a clean vintage private credit strategy and those that 201 00:09:29,480 --> 00:09:32,679 Speaker 7: lent rather aggressively in twenty twenty one, which is one 202 00:09:32,720 --> 00:09:35,480 Speaker 7: of the worst vintages ever in mind so. 203 00:09:35,440 --> 00:09:37,920 Speaker 3: To speak, or minted in private credit states. 204 00:09:38,720 --> 00:09:40,520 Speaker 2: Troy always great to talk to you. Appreciate your time 205 00:09:40,559 --> 00:09:42,800 Speaker 2: here on this the twenty sixth of December. Troy Gieski 206 00:09:42,920 --> 00:09:46,680 Speaker 2: is FS Investment's Chief market strategist and I've known for 207 00:09:46,720 --> 00:09:49,480 Speaker 2: his campaign The Time for Alts is now joining us 208 00:09:49,480 --> 00:09:51,400 Speaker 2: here on Bloomberg. Great to speak with you.