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Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.

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Speaker 1: I'm Tracy Alloway.

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Speaker 2: And I'm Joe Wisenthal.

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Speaker 1: Joe, what do you know about private credit?

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Speaker 2: I know it's grown a lot. I know it's pretty good.

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Speaker 1: That's I mean, that's the important thing.

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Speaker 2: It's private and there's credit involved. Okay, I think that's

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Speaker 2: about and I know it's grown, and I think that's

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Speaker 2: about the extent of it.

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Speaker 1: Yeah, all right, No, I actually.

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Speaker 2: Wait, can I just add a little more?

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Speaker 1: Maybe?

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Speaker 2: No, I get the My sense is that for whatever reason,

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Speaker 2: and this I don't know, people perceive there to be

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Speaker 2: opportunities in private like you know, there's private equity buying mistakes,

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Speaker 2: there's VC, et cetera. But people see an opportunity in

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Speaker 2: pools of capital that are then lent out another lending

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Speaker 2: that's not through banks.

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Speaker 1: That's it. That's the episode.

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Speaker 3: We're done.

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Speaker 1: No, I mean you hit upon the most striking thing

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Speaker 1: at the moment, which is that this is a market

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Speaker 1: that has grown remarkably over the years. And I've seen

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Speaker 1: various estimates. I think people calculate what counts as private

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Speaker 1: credit somewhat differently, but I've seen estimates of about one

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Speaker 1: point three trillion to one point six trillion outstanding, and

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Speaker 1: if you think about the publicly traded bond market or

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Speaker 1: the publicly issued bond market, So if you look at

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Speaker 1: junk created corporate bonds, I think it's like one point

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Speaker 1: three or one point four trillion outstanding, which means that

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Speaker 1: the private credit market is now as big as the

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Speaker 1: more broadly syndicated junk bond market, which is pretty stunning.

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Speaker 1: And you also hit upon something really interesting that's happening

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Speaker 1: right now, which is that the conventional line of thinking

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Speaker 1: was that as interest rates go up, this was going

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Speaker 1: to be bad for private credit. You were going to

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Speaker 1: see more financial stress, maybe funding for private credit was

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Speaker 1: going to be more difficult to come by, And instead

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Speaker 1: the market has boomed, an appetite for these deals remains

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Speaker 1: pretty strong.

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Speaker 2: Yeah, it's sort of a subset, I guess of the

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Speaker 2: surprising resilience of credit in general. But absolutely you would think, okay,

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Speaker 2: here's this rapidly growing asset class. They're booming, and the

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Speaker 2: zerp era and twenty and twenty twenty one, you think, okay,

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Speaker 2: well this comes to an end now, right In other

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Speaker 2: parts of private markets have gotten a lot of trouble

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Speaker 2: you know, you know, I think about VC and how

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Speaker 2: much slow down there has been there, and yet as

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Speaker 2: far as I know, as far as we can tell,

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Speaker 2: and everything that we've heard in sort of snippets from

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Speaker 2: other conversations, that has not been the case in the

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Speaker 2: private credit space. I gotta say, I'm surprised when we

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Speaker 2: were about to say how big the junk bond market was,

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Speaker 2: I thought you were going to say something much bigger

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Speaker 2: than private credit. Still, so the fact that it's caught

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Speaker 2: up is pretty striking.

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Speaker 1: Yeah, it really is. So We've been meaning to do

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Speaker 1: this for a while, but I think we need to

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Speaker 1: dive into this market. I expect we're going to do

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Speaker 1: more over time, but to begin with, we need to

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Speaker 1: figure out how these deals are structured, how they're different

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Speaker 1: to broadly syndication to debt, so stuff like corporate bonds

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Speaker 1: or leverage loans, what higher interest rates actually mean for

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Speaker 1: this asset class, and maybe even what private credits impact

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Speaker 1: could be on the broader economy. And I'm very pleased

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Speaker 1: to say we do have the perfect guest. We're going

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Speaker 1: to be speaking with, Laura Holsen. She is a managing

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Speaker 1: director at New Mountain Capital. She is also COO of

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Speaker 1: New Mountain's Credit platform, which manages nearly nine billion dollars

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Speaker 1: across private credit, So everything from private funds to publicly

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Speaker 1: traded business development companies or BDC's. You might remember them

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Speaker 1: from our interview with Dan Swarren way back in the day.

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Speaker 1: I think that was like seven or.

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Speaker 2: Eight years all odd loge heads, remember the dins were

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Speaker 2: on interview.

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Speaker 1: Well, this was when we still referred to private credit

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Speaker 1: as shadow banking, which I don't see as much anymore.

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Speaker 1: It's sort of this more accepted part of the market.

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Speaker 1: But Okay, on that note, Laura, thank you so much

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Speaker 1: for joining Odd Lots.

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Speaker 3: Thanks for having me.

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Speaker 1: So maybe I could begin with a very simple question,

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Speaker 1: which Joe kind of alluded to in the intro, but

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Speaker 1: what exactly counts as private credit nowadays?

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Speaker 4: Yeah, So, the way I think about private credit is

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Speaker 4: that it's debt that is privately originated and Joe, as

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Speaker 4: you said, meaning not intermediated by a bank, but that's

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Speaker 4: also not traded on any kind of public market. And

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Speaker 4: the term private credit is pretty all encompassing. There's everything

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Speaker 4: from direct lending, which is probably the largest element of

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Speaker 4: private credit, but there's also opportunistic debt, there's distressed there's

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Speaker 4: real estate financing. There's a pretty wide range of things.

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Speaker 4: I think that counts as private credit. And it can

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Speaker 4: be up and down the capital structure. So you could

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Speaker 4: be senior in the capital structure, you could be junior, subordinated.

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Speaker 4: It's pretty all encompassing.

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Speaker 1: It also tends to be unrated as well. Right, It

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Speaker 1: seems to me like this is the big difference. So

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Speaker 1: you'll get you know, a corporate bond that is rated

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Speaker 1: by a Moody's or a standard im Pores, but a

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Speaker 1: direct loan or something like that would be unrated.

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Speaker 5: Correct, DA, It's typically not rated.

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Speaker 2: I ask another detail about what private credit is? What

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Speaker 2: is Why don't you tell us what New Mountain Capital

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Speaker 2: is and what you do there?

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Speaker 5: Sure?

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Speaker 4: So, New Mountain Capital we're an alternative asset management firm.

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Speaker 4: We have kind of three pillars to our strategy. We

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Speaker 4: have private equity, we have credit, and we have a

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Speaker 4: net least strategy. And the way to think about New

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Speaker 4: Mountain is that we're focused on what we call defensive

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Speaker 4: growth sectors. So those are sectors of the economy that

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Speaker 4: we think are going to perform well regardless of what

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Speaker 4: kind of macroeconomic environment we're in. So whether we're in inflation, deflation,

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Speaker 4: boom or bust, we want to invest in very resilient

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Speaker 4: acyclical sectors and we apply that strategy across all of

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Speaker 4: our products. And importantly, we use the knowledge that we've

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Speaker 4: built up over our nearly twenty five year history as

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Speaker 4: a firm and apply that same mentality and the same

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Speaker 4: underrating knowledge and intellectual capabilities that we have to credit

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Speaker 4: to net least and obviously to our core private equity strategy.

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Speaker 1: Okay, so here's my other question. You know, we were

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Speaker 1: talking about how big this asset class has actually gotten,

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Speaker 1: how old is it actually? Because I hear different things.

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Speaker 1: I hear people express concern for private debt because they'll say, well,

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Speaker 1: we don't actually have that much historical data about defaults

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Speaker 1: and things like that. But I also imagine there were

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Speaker 1: private debt deals being done, you know, decades ago. Maybe

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Speaker 1: not in the same format, certainly not to the same extent,

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Speaker 1: but we must have some historical basis for comparison.

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Speaker 5: Yeah, no, it's a fair question.

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Speaker 4: I mean, the reality is the asset class has grown

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Speaker 4: tremendously over the last you know, ten to fifteen years,

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Speaker 4: but New Mountain's credit business. For example, we've been around

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Speaker 4: since two thousand and eight, and we got our start

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Speaker 4: by buying debt on the secondary market, debt that was

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Speaker 4: trading at distressed levels, not because those companies were fundamentally impaired,

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Speaker 4: but just because of the technical reasons in the marketplace that.

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Speaker 1: Drove because it was two thousand and eight, exactly because it.

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Speaker 5: Was two thousand and eight.

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Speaker 4: And so as a result, we've seen our own track

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Speaker 4: record and we you know, so we feel like we

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Speaker 4: have been cycle tested, right, We've gone through COVID, We've

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Speaker 4: gone through you know, the Silicon Valley Bank, We've gone

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Speaker 4: through you know, definitely a pretty crazy period from an

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Speaker 4: inflation standpoint. So there's been a lot of elements that

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Speaker 4: we feel like we've kind of cycle tested our portfolio.

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Speaker 4: But you're right, I think it's a little bit of

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Speaker 4: a different form today than maybe private credit was, you

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Speaker 4: know fifteen twenty years ago, what.

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Speaker 1: Happened to private debt during the big COVID market route.

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Speaker 1: And you know, you can look at proxies, you can

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Speaker 1: look at publicly listed BDCs. I think New Mountain has

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Speaker 1: one of those, and you can see certainly, like the

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Speaker 1: share price went down quite a lot, but like what

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Speaker 1: happened in more opaque corners of the market.

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Speaker 4: Yeah, so I think, you know, during COVID, private credit,

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Speaker 4: I would argue, held up better than you know, the

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Speaker 4: broadly syndicated market. You saw the debt and the broadly

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Speaker 4: syndicated market from a trading level perspective trade down pretty meaningfully.

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Speaker 4: But from a default perspective, actually, private credit turned out

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Speaker 4: to be more resilient during COVID, and I think it's

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Speaker 4: a function of how these deals are set up, because

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Speaker 4: they are meant to be a little bit more bespoke,

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Speaker 4: more relationship oriented, and so private equity sponsors were able

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Speaker 4: to have direct dialogue with the lenders and talk through Okay,

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Speaker 4: here's what we're seeing in these underlying companies, here's what

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Speaker 4: we're doing about it.

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Speaker 5: Let's talk. It's not a group.

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Speaker 4: Of fifty years or so syndicated investors that they have

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Speaker 4: no relationship with. And as a result, I think we

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Speaker 4: saw better outcomes in terms of just actual default losses

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Speaker 4: during that period.

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Speaker 2: Okay, to help understand this market, what would be the

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Speaker 2: modal or typical borrowing entity for whom private credit is

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Speaker 2: a more attractive lending option. Than say going to the

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Speaker 2: bond market and or going to a bank.

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Speaker 4: Yes, So the way I think about it, and again

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Speaker 4: from where I said, at New Mountain, we focus primarily

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Speaker 4: on what I call sponsor back direct lending, so direct

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Speaker 4: lending to private companies that are owned by private equity firms,

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Speaker 4: and the private equity firms need to make a decisions,

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Speaker 4: as you said, do they want to go to the

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Speaker 4: syndicated market or do they want to tap the direct

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Speaker 4: lending market for their financing. And there's a bunch of

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Speaker 4: things to consider. But the way I think about the

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Speaker 4: benefits of direct lending are number one, you have more

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Speaker 4: certain execution because when you're doing a syndicated deal, that's

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Speaker 4: a deal that you're getting intermediated by a bank. They're

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Speaker 4: underwriting it at a certain pricing level, but then they

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Speaker 4: have the ability to flex that pricing level wider or

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Speaker 4: tighter depending on market conditions at the time. And you're

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Speaker 4: in market for I don't know, maybe four weeks, and

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Speaker 4: so you're taking a lot of market risk, particularly during

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Speaker 4: times like we're in today where there's a lot of

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Speaker 4: market volatility. So that's one thing, is just a certainty

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Speaker 4: of execution because a direct lending deal. You commit from

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Speaker 4: a pricing perspective, and then you stick to that price

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Speaker 4: throughout the rest of the negotiation, so you know what

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Speaker 4: terms you're getting from the sponsor perspective. The second thing

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Speaker 4: is it also can be a little bit of an

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Speaker 4: easier execution because in a syndicated market, if a sponsor

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Speaker 4: wants to get a first lean and second lean financing done,

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Speaker 4: that's two different credit agreements, a first line credit agreement,

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Speaker 4: a second lean credit agreement, and an inter creditor agreement.

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Speaker 4: As to how those two tranches interact with each other. Again,

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Speaker 4: you can trast that to a direct lending solution where

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Speaker 4: you have a unitron structure with just one credit agreement,

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Speaker 4: so it's also easier. You also don't need to go

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Speaker 4: through the rating agency process, which also just saves time.

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Speaker 4: And as I said, it's more relationship oriented. It could

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Speaker 4: be more flexible and more bespoke to what the sponsors

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Speaker 4: are looking for.

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Speaker 2: Real quickly for the listeners. And also me what is

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Speaker 2: first and second lean mean?

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Speaker 5: Yeah, no, it's a good question.

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Speaker 4: So it's depends where you are in the capital structure.

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Speaker 4: So first lean means you have the first claim or

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Speaker 4: the first priority on the assets, and the second lean

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Speaker 4: would be junior to them.

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Speaker 1: I think we're kind of getting to the heart of

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Speaker 1: why this asset class has been booming, because I hear

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Speaker 1: this a lot from market participants, this idea that like, well,

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Speaker 1: maybe the deals are structured in a way that makes

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Speaker 1: them more appealing to investors versus the broadly syndicated stuff. So,

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Speaker 1: you know, you mentioned that sponsors can get more definitive terms.

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Speaker 1: You know, maybe the issuer doesn't have to go through

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Speaker 1: the hassle of getting a rating and that sort of thing.

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Speaker 1: And then you mentioned the first lean and second lean issue.

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Speaker 1: And I've seen this come up in various ways. The

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Speaker 1: idea of a preferential treatment in the payment waterfall is

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Speaker 1: that the right way to think about it. So, if

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Speaker 1: you're in a private debt deal, can you structure it

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Speaker 1: such that maybe you're closer to the issuer than anyone else,

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Speaker 1: maybe you get more insight into potential credit challenges before others.

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Speaker 1: And maybe also you can enforce remedy payments that make

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Speaker 1: you come out on top in the event of a default.

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Speaker 1: So preferential treatment versus other creditors.

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Speaker 4: Yeah, I mean, I think that is a fair way

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Speaker 4: to think about it. When I think about again the

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Speaker 4: purpose of a direct lending solution, right, it's a lot

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Speaker 4: simpler of a capital structure, right, so you don't get

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Speaker 4: into a situation where maybe you're fighting between the first

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Speaker 4: lean and the second lean creditors for example.

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Speaker 1: Which we've seen recently.

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Speaker 2: Yeah.

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Speaker 4: Absolutely, And to your point about just being closer to

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Speaker 4: the borrow or and closer to the company, the way

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Speaker 4: most direct lending deals work is it's a club of

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Speaker 4: direct lenders. So you don't typically have one direct lender

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Speaker 4: that's underwriting and holding the whole tranch, but you have

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Speaker 4: a club, meaning you might have I don't know, anywhere

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Speaker 4: from three to ten direct lenders in a deal. And

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Speaker 4: there's real benefits to having that diversification from the sponsor perspective,

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Speaker 4: because you have more dry powder, meaning you have the

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Speaker 4: ability to go back to that same group and upsize

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Speaker 4: and do incrementals or follow on deals for that same company.

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Speaker 4: But you're also not beholden to any one lender because

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Speaker 4: one thing you could say is, oh, well, in a

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Speaker 4: direct lending deal, if you have more if you have

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Speaker 4: fewer lenders in the group, maybe those lenders have more

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Speaker 4: power over the company or the private equity firm. And

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Speaker 4: again I think that really speaks to the benefit of

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Speaker 4: having a small club. But you can trast that to

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Speaker 4: a bank, send a kit which might have thirty fifty

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Speaker 4: one hundred lenders in it, and inevitably, you know when

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Speaker 4: you have a club of three, that those three lenders

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Speaker 4: are all going to have more access, They're going to

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Speaker 4: have more conversations with the sponsor, They're going to be

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Speaker 4: able to call and have more of a direct dialogue

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Speaker 4: with the management team as compared to you know, if

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Speaker 4: you're one of one hundred.

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Speaker 2: So I think I understand to some extent the appeal

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Speaker 2: of direct lending. What is the pitch, you know, let's

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Speaker 2: say I'm an ultra high net worth individual or family

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Speaker 2: and my advisory oh, we want to you should have

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Speaker 2: allocate some to private credit. What is the pitch to

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Speaker 2: limited partners or investors for why this is an appealing

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Speaker 2: asset class.

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Speaker 4: Yeah, So, the way I think about it is private

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Speaker 4: credit and direct lending specifically offers very attractive and consistent yield,

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Speaker 4: and it's I think a very good thing to allocate

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Speaker 4: as part of your fixed income portfolio. I think number one,

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Speaker 4: it's floating rate typically, so we move up and down

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Speaker 4: with interest rates. So in this period where we've had

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Speaker 4: a significant run up, that has helped increase the yield

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Speaker 4: of direct lending funds because the way the coupon is

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Speaker 4: structured is you're tied to a base rate plus a spread,

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Speaker 4: and so as that base rate has gone up, the

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Speaker 4: overall interest rate that the investors end up earning has

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Speaker 4: gone up pretty meaningfully. And it also provides some interest

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Speaker 4: rate protection because valuation, for example, for a fixed rate

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Speaker 4: bond has come down very meaningfully as rates have risen.

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Speaker 4: So I think that's one thing to highlight. The second

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Speaker 4: thing would just be that the higher spread compared to

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Speaker 4: a broadly syndicated load, and part of that is an

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Speaker 4: illiquidity premium because it's not traded. You can't you know,

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Speaker 4: necessarily get out as easily, but you need to get

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Speaker 4: paid for that, so you do get some extra spread

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Speaker 4: from that. And then I think the there's been good

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Speaker 4: data showing lower loss ratios also of direct lending, again

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Speaker 4: compared to a broadly syndicated fund or a high yield fund,

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Speaker 4: and so I think generally speaking it's kind of that all,

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Speaker 4: you know, all of those things combined end up with

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Speaker 4: a higher, more stable, more consistent yield, which I think

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Speaker 4: is very attractive for you know, an ultra net worth.

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Speaker 4: And the other thing I would just say is it

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Speaker 4: does provide some diversification because it's not quite as correlated

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Speaker 4: with all the other public markets as maybe you know,

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Speaker 4: high yield or broadly syndicated loans are just.

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Speaker 1: On the yield and spread point. I mean, it is

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Speaker 1: true that we have seen both yields and spreads start

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Speaker 1: to pick up in the broadly syndicated market recently, and

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Speaker 1: I've seen some people making the argument that like, well

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Speaker 1: maybe now, maybe not right now, maybe a week ago

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Speaker 1: was the time to sort of pick up some exposure

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Speaker 1: in the corporate bond market and things like that. But

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Speaker 1: do you see, you know, when yields and spreads start

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Speaker 1: to move around in the broadly syndicated market, do you

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Speaker 1: typically see investors start to make that relative value judgment,

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Speaker 1: Like will they sit there and think, well, I could

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Speaker 1: either have this private debt deal or I could buy

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Speaker 1: this in the publicly traded market.

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Speaker 4: Yes, I think people definitely look at kind of the

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Speaker 4: relative value versus the public benchmarks. But again, I think

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Speaker 4: direct lending as an asset class has historically over now

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Speaker 4: many years outperformed the public credit benchmarks. So you've seen

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Speaker 4: that relative value I think always kind of shift in

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Speaker 4: the favor of the direct lending funds.

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Speaker 5: And again it comes back to.

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Speaker 4: The spread premium compared to just a broadly syndicated loan.

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Speaker 2: Can we talk about you know, you mentioned the clubs

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Speaker 2: and the idea that Okay, you're not just gonna have

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Speaker 2: one direct lender, you might have three, ten, whatever it is.

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Speaker 2: How does deal flow typically work? How does something land

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Speaker 2: on your desk in the first place, in the sort

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Speaker 2: of standard mode.

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Speaker 4: Yeah, so I think most credit firms the way they

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Speaker 4: attack the market, most direct lending firms, they have sponsor

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Speaker 4: coverage people who go out and call on a set

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Speaker 4: group of private equity firms. Okay, and they call them

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Speaker 4: and they say, hey, what deals are you working on

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Speaker 4: on the private equity side? Can we help you finance them?

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Speaker 4: So that's the typical model as to how most standalone

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Speaker 4: private credit firms get deal flow. I would say New

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Speaker 4: Mountain we approach things a little bit differently because we

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Speaker 4: also have a private equity business. We are seeing the

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Speaker 4: deal flow earlier because we're seeing it on the equity side.

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Speaker 4: And what we're able to do is then triage those deals.

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Speaker 4: And not all of them we're going to buy for

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Speaker 4: private equity, of course, but a lot of them are

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Speaker 4: really high quality, good businesses that maybe are going to

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Speaker 4: trade at evaluation that we think is too high. So

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Speaker 4: rather than buy the company on the private equity side,

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Speaker 4: we can say, okay, well, now we know that deal

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Speaker 4: is in market, let's see if we can go finance

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Speaker 4: it for another private equity firm. And so we take

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Speaker 4: a pretty different, i think, more proactive approach to deal

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Speaker 4: sourcing because we know those deals are out there and

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Speaker 4: then we just need to go find them. And again,

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Speaker 4: the conversation that enables us to have with our private

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Speaker 4: equity clients is, Okay, we know this deal is in market,

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Speaker 4: our private equity firm is not looking at it, but

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Speaker 4: we like the business, we have a view on leverage,

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Speaker 4: we've already underwritten the space. Again, back to the point

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Speaker 4: that I made in the beginning is to New Mountain

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Speaker 4: focuses on the same industries across the board, and we

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Speaker 4: have some really unique diligence angles that we could bring

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Speaker 4: to bear. So that kind of conversation with our private

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Speaker 4: equity clients I think gives us an edge and allows

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Speaker 4: us to source very effectively.

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Speaker 1: Just on this note, how sticky or reliable is this

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Speaker 1: type of financing for the company itself, because again this

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Speaker 1: is a place where you hear different arguments in the market.

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Speaker 1: So on the one hand, you know, a lot of

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Speaker 1: private equity funds have lock up periods and so people

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Speaker 1: can't suddenly withdraw their money. But on the other hand,

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Speaker 1: there is a concern that maybe this kind of financing

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Speaker 1: is less sticky than, for instance, a bank loan, where

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Speaker 1: maybe some of that is funded by deposits and things

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Speaker 1: like that. So how reliable is this time of financing?

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Speaker 4: Yeah, it is very reliable. When you think about the

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Speaker 4: types of structures that underlie private credit funds, a lot

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Speaker 4: of them are permanent capital vehicles. You mentioned business development

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Speaker 4: companies or BDCs. The publicly traded ones are a form

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Speaker 4: of permanent capital. So that's about as stable or as

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Speaker 4: sticky as.

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Speaker 5: You can get.

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Speaker 4: And you also have other kinds of funds that are

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Speaker 4: structured as draw down funds, which again have kind of

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Speaker 4: a locked up life for a period of time. There's,

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Speaker 4: of course, other types of funds that are maybe a

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Speaker 4: little bit more open ended and the ability to come

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Speaker 4: in and out, and so that can be where maybe

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Speaker 4: you have a little bit less sticky, But I would

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Speaker 4: argue that you have those dynamics kind of in all

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Speaker 4: areas of credit investing, not just the direct lending market.

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Speaker 4: So overall, I think it is really sticky and very

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Speaker 4: reliable from the sponsor standpoint, and that's ultimately what they

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Speaker 4: care about.

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Speaker 2: How do you build expertise when you're walking through a

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Speaker 2: whole range of industries because private equity could be literally

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Speaker 2: anything thing. Do you have to build that expertise in

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Speaker 2: house to be able to judge the credit quality of

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Speaker 2: each type of deal that comes across your desk? How

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Speaker 2: do you internally get to know whether a company is

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Speaker 2: a good credit or not?

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Speaker 5: Absolutely? Yeah, so skill.

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Speaker 4: Yeah, So the due diligence process is incredibly important, and

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Speaker 4: as you said, it takes a lot of time in

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Speaker 4: many years to build so a new mountain. We proactively

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Speaker 4: have come up with sectors of the economy that we

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Speaker 4: think are going to be again those defensive growth sectors. Yeah,

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Speaker 4: So sectors like enterprise software, right, so you have mission

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Speaker 4: critical software that's deeply embedded, very sticky, very hard to

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Speaker 4: rip out, high retention rates, good recurring revenue, so you know,

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Speaker 4: we really like that sector. For example, we also really

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Speaker 4: like tech enabled healthcare, right where you have different types

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Speaker 4: of tools and both services and technology that power different

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Speaker 4: healthcare providers and payers to ultimately take cost out of

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Speaker 4: the system. So we kind of we get very you know,

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Speaker 4: into very specific niches because it's not good enough in

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Speaker 4: our mind to say, oh, yes, healthcare is a good sector,

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Speaker 4: let's go invest in healthcare. We want to really narrow

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Speaker 4: that down and find the sub sectors within healthcare and

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Speaker 4: within enterprise software, within business services that we think will

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Speaker 4: be really resilient for the long term. And then what

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Speaker 4: we do is then we we staff a very full team.

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Speaker 4: You know, we have over one hundred and fifty investment

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Speaker 4: professionals at New Mountain that spend every single day you know,

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Speaker 4: in some of these sectors. And then we become experts

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Speaker 4: in these sectors. We look at companies that you know,

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Speaker 4: are in these sectors, we map them out in a

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Speaker 4: lot of detail. We hire bankers and consultants to help

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Speaker 4: us map these sectors out and figure out that, you know,

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Speaker 4: what's good and what's bad about these sectors. We also

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Speaker 4: own companies in these sectors. Right, So we own forty

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Speaker 4: five companies on our private equity side, and so we're

439
00:22:54,720 --> 00:22:58,399
Speaker 4: seeing the real time trends within these sectors, and we

440
00:22:58,440 --> 00:23:01,000
Speaker 4: can apply all of that, all of that knowledge, all

441
00:23:01,080 --> 00:23:04,080
Speaker 4: that intellectual capital, we can apply it to the next

442
00:23:04,119 --> 00:23:06,600
Speaker 4: credit deal. So we're never trying to figure out something

443
00:23:06,600 --> 00:23:08,880
Speaker 4: from scratch. It's not we're not waiting for that deal

444
00:23:08,920 --> 00:23:11,240
Speaker 4: to come across our desk and then say okay, let's

445
00:23:11,240 --> 00:23:14,359
Speaker 4: go try to figure this out. No, if that's the case,

446
00:23:14,400 --> 00:23:15,960
Speaker 4: we're just like, we're not going to look at that.

447
00:23:15,960 --> 00:23:18,240
Speaker 4: That's not you know, within our scope. But what we

448
00:23:18,320 --> 00:23:20,080
Speaker 4: do is we say, okay, we want to be starting

449
00:23:20,119 --> 00:23:22,920
Speaker 4: from you know, the sixth, seventh or eighth inning from

450
00:23:22,960 --> 00:23:27,440
Speaker 4: a diligence perspective and really just be doing bringdown work

451
00:23:27,520 --> 00:23:30,240
Speaker 4: and not trying to figure something out from scratch.

452
00:23:45,440 --> 00:23:49,360
Speaker 1: So I take the point about due diligence and expertise,

453
00:23:49,520 --> 00:23:52,919
Speaker 1: but it has to be true that the macro environment,

454
00:23:53,600 --> 00:23:56,680
Speaker 1: you know, where we have seen this very dramatic increase

455
00:23:56,760 --> 00:24:00,960
Speaker 1: in interest rates is deteriorating in way. And I think

456
00:24:01,000 --> 00:24:04,359
Speaker 1: if you look at leverage loans, broadly syndicated leverage loans,

457
00:24:04,359 --> 00:24:07,840
Speaker 1: which would be private credits nearest competitor. I think the

458
00:24:07,880 --> 00:24:11,480
Speaker 1: default rate there has increased. It's not enormous, but I

459
00:24:11,480 --> 00:24:14,040
Speaker 1: think it's gone up from like one point four percent

460
00:24:14,160 --> 00:24:16,960
Speaker 1: last year to four percent now. And you've also seen

461
00:24:17,000 --> 00:24:19,440
Speaker 1: some ratings downgrades there, although you've seen a lot of

462
00:24:19,520 --> 00:24:22,960
Speaker 1: upgrades in the junk bond market. But anyway, when you

463
00:24:23,200 --> 00:24:28,040
Speaker 1: observe what's going on with defaults in the broadly syndicated market,

464
00:24:28,680 --> 00:24:32,960
Speaker 1: what are you thinking about how that will feed through

465
00:24:33,240 --> 00:24:37,439
Speaker 1: into the private credit market. And also, you know you

466
00:24:37,520 --> 00:24:42,760
Speaker 1: mentioned illiquidity previously, is a lot of private credits resilience

467
00:24:43,080 --> 00:24:46,320
Speaker 1: just down to that illiquidity Because I always think of

468
00:24:46,400 --> 00:24:49,200
Speaker 1: liquidity as both a pro and a con right.

469
00:24:49,240 --> 00:24:50,840
Speaker 3: You pay up, you.

470
00:24:50,840 --> 00:24:53,800
Speaker 1: Pay a liquidity premium so that you can get rid

471
00:24:53,840 --> 00:24:56,320
Speaker 1: of things if you need to. But on the other hand,

472
00:24:56,359 --> 00:24:58,879
Speaker 1: if there is financial distress and some thing's a liquid

473
00:24:58,920 --> 00:25:01,359
Speaker 1: maybe you don't have to take your on it as soon.

474
00:25:01,440 --> 00:25:03,600
Speaker 1: Maybe you have more time to work something out with

475
00:25:03,680 --> 00:25:04,200
Speaker 1: the issuer.

476
00:25:04,720 --> 00:25:07,720
Speaker 4: Yeah, so a lot embedded in that question for sure.

477
00:25:07,760 --> 00:25:10,960
Speaker 4: But you're right, so you know, with rates rising, you know,

478
00:25:11,040 --> 00:25:14,159
Speaker 4: call it over five hundred basis points in eighteen months.

479
00:25:14,480 --> 00:25:17,199
Speaker 4: Of course, that is going to pressure these companies right there.

480
00:25:17,640 --> 00:25:20,240
Speaker 4: You know a lot of these companies were financed and

481
00:25:20,480 --> 00:25:22,880
Speaker 4: the capital structures were put in place when rates were

482
00:25:22,880 --> 00:25:25,920
Speaker 4: close to zero. So I think it really comes down

483
00:25:26,119 --> 00:25:29,480
Speaker 4: to what does your portfolio look like from an underlying

484
00:25:29,880 --> 00:25:33,959
Speaker 4: industry perspective, from a quality perspective, are these companies equipped

485
00:25:34,000 --> 00:25:35,960
Speaker 4: to deal with that? And I think some are more

486
00:25:36,000 --> 00:25:39,520
Speaker 4: than others. When I look again at our portfolio because

487
00:25:39,560 --> 00:25:42,639
Speaker 4: of the sectors that we focus on, these sectors tend

488
00:25:42,680 --> 00:25:46,960
Speaker 4: to be higher EBADAM margin businesses, So you're starting from

489
00:25:47,000 --> 00:25:49,960
Speaker 4: a good place from a cash flow perspective. And again

490
00:25:50,000 --> 00:25:53,440
Speaker 4: it comes back to cash flow, and so these sectors

491
00:25:53,520 --> 00:25:57,680
Speaker 4: tend to be lower cap X, lower working capital from

492
00:25:57,720 --> 00:26:01,000
Speaker 4: a you know, cash outflow perspective, because their asset light,

493
00:26:01,400 --> 00:26:04,920
Speaker 4: they're more, they're tech, their service oriented, and so they

494
00:26:05,000 --> 00:26:07,960
Speaker 4: are generating a lot of cash flow which helps them

495
00:26:08,119 --> 00:26:12,080
Speaker 4: cope better with you know, the higher rate environment. All

496
00:26:12,080 --> 00:26:14,160
Speaker 4: that being said, I think the other thing that we

497
00:26:14,200 --> 00:26:17,040
Speaker 4: take a lot of comfort in is something that you know,

498
00:26:17,080 --> 00:26:19,120
Speaker 4: we talk about a lot, which is loan to value.

499
00:26:19,280 --> 00:26:20,280
Speaker 5: And so when we look at.

500
00:26:20,160 --> 00:26:22,639
Speaker 4: A capital structure today or one that was put in

501
00:26:22,680 --> 00:26:25,639
Speaker 4: place even a couple of years ago. The vast majority

502
00:26:25,640 --> 00:26:29,400
Speaker 4: of the capital structures that our sponsor backed again are

503
00:26:29,440 --> 00:26:33,159
Speaker 4: financed with equity, not debt. So if you just rewind

504
00:26:33,200 --> 00:26:35,800
Speaker 4: and think about the history, right in two thousand and seven,

505
00:26:36,200 --> 00:26:39,520
Speaker 4: the capital structure set up of a typical LBO was

506
00:26:39,560 --> 00:26:43,040
Speaker 4: mostly debt, right, and the equity was a small portion

507
00:26:43,160 --> 00:26:45,080
Speaker 4: of it, so it was really more of an equity option,

508
00:26:45,800 --> 00:26:50,760
Speaker 4: whereas today equity comprises the vast majority of the capital structure,

509
00:26:51,000 --> 00:26:54,240
Speaker 4: meaning that the private equity firms have a lot more

510
00:26:54,280 --> 00:26:57,159
Speaker 4: at stake, right. And so when you think about what

511
00:26:57,200 --> 00:27:00,000
Speaker 4: that means, you know, one percent, two percent, five percent

512
00:27:00,160 --> 00:27:04,159
Speaker 4: change in interest rates, that dollar cost of supporting that

513
00:27:04,280 --> 00:27:09,440
Speaker 4: company is pretty small relative to the equity dollars. And

514
00:27:09,480 --> 00:27:11,160
Speaker 4: just to give an example, because I think it brings

515
00:27:11,160 --> 00:27:13,040
Speaker 4: it to life a little bit, if you think about

516
00:27:13,040 --> 00:27:16,879
Speaker 4: a billion dollar capital structure that's financed with three hundred

517
00:27:16,920 --> 00:27:20,520
Speaker 4: million dollars of debt and seven hundred million dollars of equity,

518
00:27:20,600 --> 00:27:23,280
Speaker 4: and that's a typical capital structure that we're seeing today.

519
00:27:23,880 --> 00:27:26,160
Speaker 4: If you have interest rates go up by one percent,

520
00:27:26,320 --> 00:27:29,479
Speaker 4: that's an extra three million dollars of interest expense, so

521
00:27:29,880 --> 00:27:32,800
Speaker 4: or maybe went up five percents. That's fifteen million dollars

522
00:27:32,840 --> 00:27:36,080
Speaker 4: of extra annual interest expense, but that's still such a

523
00:27:36,200 --> 00:27:39,840
Speaker 4: small amount compared to that seven hundred million of equity

524
00:27:40,040 --> 00:27:42,960
Speaker 4: that a private equity firm has at stake. So again,

525
00:27:43,040 --> 00:27:47,000
Speaker 4: unless the business is fundamentally broken or really, you know,

526
00:27:47,160 --> 00:27:50,040
Speaker 4: just a disaster, they're very inclined to feed it and

527
00:27:50,080 --> 00:27:52,680
Speaker 4: support it to preserve the equity.

528
00:27:52,320 --> 00:27:53,440
Speaker 5: Value that they have.

529
00:27:53,840 --> 00:27:55,520
Speaker 4: And I think that speaks to the second part of

530
00:27:55,560 --> 00:27:59,120
Speaker 4: your question, which is around default rates and thinking about yes,

531
00:27:59,320 --> 00:28:02,320
Speaker 4: clearly defaults have picked up in the syndicated market, you

532
00:28:02,440 --> 00:28:05,720
Speaker 4: haven't seen it pick up materially and the direct lending market.

533
00:28:05,800 --> 00:28:08,840
Speaker 4: And I think a bit of that is what you said,

534
00:28:08,880 --> 00:28:12,720
Speaker 4: which is, you know, illoquidity, and therefore it's not as

535
00:28:12,920 --> 00:28:15,399
Speaker 4: much out there. That data probably isn't as strong. But

536
00:28:15,440 --> 00:28:17,359
Speaker 4: I think a big piece of it, and probably the

537
00:28:17,400 --> 00:28:20,119
Speaker 4: bigger piece of it, is the fact that kind of

538
00:28:20,160 --> 00:28:22,199
Speaker 4: back to the dynamics that I talked about before, is

539
00:28:22,240 --> 00:28:26,280
Speaker 4: that the relationship between the lenders and the sponsor, that

540
00:28:26,359 --> 00:28:30,359
Speaker 4: more flexible capital structure allows people to work through things

541
00:28:30,400 --> 00:28:33,720
Speaker 4: a little bit more effectively and therefore don't end up,

542
00:28:33,880 --> 00:28:36,640
Speaker 4: you know, as frequently in kind of a default scenario.

543
00:28:36,960 --> 00:28:39,600
Speaker 1: Yeah, that's my impression as well, just looking at the

544
00:28:39,640 --> 00:28:43,800
Speaker 1: wider market, What is your impression of how much froth

545
00:28:44,040 --> 00:28:46,880
Speaker 1: is out there in private debt? Because I wouldn't expect

546
00:28:46,920 --> 00:28:49,280
Speaker 1: you to say that, you know, New Mountain has underwritten

547
00:28:49,280 --> 00:28:51,560
Speaker 1: a bunch of frath details or something like that. But

548
00:28:51,640 --> 00:28:56,320
Speaker 1: I remember no. But seriously, I remember in the leverage

549
00:28:56,360 --> 00:28:59,120
Speaker 1: loan market in like I guess this must have been

550
00:28:59,160 --> 00:29:03,120
Speaker 1: circa thirteen or something. I remember going to the office

551
00:29:03,320 --> 00:29:07,000
Speaker 1: of a certain Swiss bank that doesn't exist anymore. And

552
00:29:07,360 --> 00:29:10,200
Speaker 1: that's one reason why I feel comfortable now telling the story.

553
00:29:10,360 --> 00:29:12,360
Speaker 1: But also I think I've told it in public before.

554
00:29:13,280 --> 00:29:15,760
Speaker 1: But I went to the office of this leverage loan

555
00:29:15,840 --> 00:29:18,840
Speaker 1: guy and he had a shirt that was framed in

556
00:29:18,960 --> 00:29:22,160
Speaker 1: his office with a little plaque that said I stole

557
00:29:22,200 --> 00:29:26,480
Speaker 1: this shirt off my client's back, which is pretty amazing.

558
00:29:26,520 --> 00:29:28,440
Speaker 1: But you know, this was the time when the leverage

559
00:29:28,480 --> 00:29:30,880
Speaker 1: loan market was booming. There was a lot of concern

560
00:29:31,120 --> 00:29:36,520
Speaker 1: about deterioration and quality more risk embedded in these deals.

561
00:29:36,960 --> 00:29:40,440
Speaker 1: Have we seen a similar dynamic in the private debt market.

562
00:29:40,680 --> 00:29:43,240
Speaker 4: I don't necessarily think so. I mean, if you go

563
00:29:43,360 --> 00:29:45,600
Speaker 4: back just a couple of years. You know, certainly twenty

564
00:29:45,680 --> 00:29:48,840
Speaker 4: twenty one probably felt a little bit more like that

565
00:29:49,080 --> 00:29:53,040
Speaker 4: environment where you know, rates were low, leverage was high,

566
00:29:53,640 --> 00:29:56,720
Speaker 4: it was a competitive environment for the direct lenders, and

567
00:29:57,440 --> 00:30:00,320
Speaker 4: you know, spreads were a lot lower, and so you

568
00:30:00,400 --> 00:30:02,320
Speaker 4: kind of had a little bit of a dynamic where

569
00:30:02,440 --> 00:30:05,160
Speaker 4: everything was kind of peak peak. But I do think

570
00:30:05,200 --> 00:30:07,680
Speaker 4: we've kind of come off from that quite a bit.

571
00:30:07,760 --> 00:30:10,120
Speaker 4: I think, you know, just the volatility in the markets,

572
00:30:10,160 --> 00:30:13,080
Speaker 4: the fact that the syndicated market had been closed for

573
00:30:13,200 --> 00:30:16,480
Speaker 4: big chunks of time, and just overall deal flow had

574
00:30:16,480 --> 00:30:19,360
Speaker 4: come down so much given the rise in rates, And

575
00:30:19,400 --> 00:30:22,440
Speaker 4: I attribute a lot of that to just the valuation gap,

576
00:30:22,600 --> 00:30:24,680
Speaker 4: you know, where people are just trying to level set

577
00:30:24,680 --> 00:30:27,960
Speaker 4: as to where valuation should be in an environment where

578
00:30:28,000 --> 00:30:30,120
Speaker 4: base rates are five and a half percent, and you

579
00:30:30,160 --> 00:30:32,840
Speaker 4: have a dynamic where buyers don't want to pay those

580
00:30:32,920 --> 00:30:36,040
Speaker 4: high prices anymore and sellers don't want to sell at

581
00:30:36,080 --> 00:30:38,840
Speaker 4: prices below those peak levels. So you've definitely had a

582
00:30:38,880 --> 00:30:40,680
Speaker 4: little bit more of a pause I think in the

583
00:30:40,720 --> 00:30:42,800
Speaker 4: market over the list likes the housing market.

584
00:30:42,640 --> 00:30:47,719
Speaker 2: Yeah, absolutely, Speaking of twenty twenty twenty twenty one. In

585
00:30:47,840 --> 00:30:51,080
Speaker 2: other credit conversations, there's a lot of there's a lot

586
00:30:51,080 --> 00:30:53,600
Speaker 2: of talk about firms taking out a bunch of debt,

587
00:30:53,640 --> 00:30:56,480
Speaker 2: refining their own debt, terming out the debt, and we

588
00:30:56,560 --> 00:30:58,480
Speaker 2: talk about this maturity wall that's coming out. But I

589
00:30:58,480 --> 00:31:00,560
Speaker 2: guess in private credit, if it's all flow, that's not

590
00:31:00,600 --> 00:31:03,240
Speaker 2: really the same phenomenon doesn't really exist in there. There's

591
00:31:03,280 --> 00:31:06,719
Speaker 2: not going to be some day when companies that you

592
00:31:06,760 --> 00:31:08,440
Speaker 2: interact with suddenly resets.

593
00:31:08,880 --> 00:31:11,840
Speaker 4: Well, I would say that you know these are still

594
00:31:11,960 --> 00:31:15,480
Speaker 4: you know, have a finite life on them, these underlying loans, right,

595
00:31:15,520 --> 00:31:18,920
Speaker 4: so they're typically six seven year loans, and so but

596
00:31:19,000 --> 00:31:22,120
Speaker 4: you're right, the maturity wall that exists on the syndicated market,

597
00:31:22,200 --> 00:31:24,600
Speaker 4: there's I think almost a trillion dollars of debt coming

598
00:31:24,680 --> 00:31:27,239
Speaker 4: due by the end of twenty twenty six. That's going

599
00:31:27,280 --> 00:31:29,200
Speaker 4: to create in my mind, that's going to create a

600
00:31:29,200 --> 00:31:33,120
Speaker 4: lot of opportunity for the private credit market because, as

601
00:31:33,160 --> 00:31:35,600
Speaker 4: I talked about, the direct lending market has taken share,

602
00:31:36,080 --> 00:31:39,040
Speaker 4: and so as those deals come up for refinancing, a

603
00:31:39,080 --> 00:31:41,040
Speaker 4: lot of those are going to need to be get

604
00:31:41,080 --> 00:31:43,840
Speaker 4: you know, taken out with a direct lending solution. And

605
00:31:43,880 --> 00:31:46,880
Speaker 4: we've seen some of that happen already right, there are

606
00:31:47,240 --> 00:31:51,600
Speaker 4: large syndicated loans that have been taken out with very

607
00:31:51,680 --> 00:31:54,320
Speaker 4: large direct lending loans. There was a five billion dollar

608
00:31:54,440 --> 00:31:57,040
Speaker 4: one earlier this year, which is huge in the realm

609
00:31:57,040 --> 00:31:59,680
Speaker 4: of private credit, and so I think that, if anything,

610
00:31:59,720 --> 00:32:02,160
Speaker 4: it'll create more of opportunities.

611
00:32:01,440 --> 00:32:05,240
Speaker 1: That So you mentioned the maturity wall, and we are

612
00:32:05,320 --> 00:32:07,920
Speaker 1: obliged to say the looming maturity wall. I feel like

613
00:32:07,960 --> 00:32:11,560
Speaker 1: we cannot have a credit market discussion without mentioning the

614
00:32:11,600 --> 00:32:14,840
Speaker 1: maturity wall. But also we cannot have a private debt

615
00:32:14,920 --> 00:32:19,200
Speaker 1: discussion without mentioning the term dry powder, which you already have.

616
00:32:19,880 --> 00:32:22,920
Speaker 1: So I guess my question is a how much dry

617
00:32:22,960 --> 00:32:26,000
Speaker 1: powder is actually out there, and then be on the

618
00:32:26,160 --> 00:32:31,000
Speaker 1: topic of sponsors and their behavior and their goals and

619
00:32:31,120 --> 00:32:35,040
Speaker 1: targets and how those might change. Would there ever be

620
00:32:35,120 --> 00:32:38,920
Speaker 1: a time where you do get this pressure where the

621
00:32:39,080 --> 00:32:42,560
Speaker 1: entire industry sort of needs to get out, Maybe they're

622
00:32:42,600 --> 00:32:46,720
Speaker 1: mandated to exit, maybe there's a wider macro thing happening,

623
00:32:46,760 --> 00:32:49,760
Speaker 1: and you're not as able to roll all this stuff over.

624
00:32:50,960 --> 00:32:53,040
Speaker 4: Yeah, so you're right, we do spend a lot of

625
00:32:53,040 --> 00:32:55,960
Speaker 4: time talking about dry powder. I do think it is

626
00:32:56,320 --> 00:32:58,640
Speaker 4: a tailwind for our industry. So the way I think

627
00:32:58,640 --> 00:33:01,360
Speaker 4: about the numbers or maybe a little bit dated, but

628
00:33:01,800 --> 00:33:04,720
Speaker 4: for private equity, I think there's about five hundred and

629
00:33:04,880 --> 00:33:08,360
Speaker 4: eighty billion dollars of dry powder, the funds that they've

630
00:33:08,440 --> 00:33:10,960
Speaker 4: raised that they need to deploy. And again, we're coming

631
00:33:11,040 --> 00:33:14,040
Speaker 4: out of a period of time that's been relatively low

632
00:33:14,160 --> 00:33:17,040
Speaker 4: from a deal volume perspective, so there is some pressure

633
00:33:17,400 --> 00:33:19,560
Speaker 4: to deploy that capital. Right, they raise it and they

634
00:33:19,600 --> 00:33:23,160
Speaker 4: need to deploy it and generate attractive risk adjusted returns.

635
00:33:23,680 --> 00:33:26,960
Speaker 4: But I think also importantly, and something that I think

636
00:33:26,960 --> 00:33:30,160
Speaker 4: gets talked about less, is the need for private equity

637
00:33:30,200 --> 00:33:33,600
Speaker 4: firms to return capital to LPs. And so whether they're

638
00:33:33,600 --> 00:33:38,400
Speaker 4: deploying or whether they're returning capital by selling companies, both

639
00:33:38,440 --> 00:33:42,240
Speaker 4: of those events create opportunities for us as lenders to

640
00:33:42,320 --> 00:33:45,840
Speaker 4: finance deals. And so when I think about credit and

641
00:33:45,920 --> 00:33:49,840
Speaker 4: private credit dry powder, again there's not great data around this,

642
00:33:50,000 --> 00:33:52,080
Speaker 4: but one number that I saw was there's about one

643
00:33:52,160 --> 00:33:56,000
Speaker 4: hundred billion of private credit dry powder. You know, when

644
00:33:56,000 --> 00:33:58,280
Speaker 4: I think about sponsor back direct lending, we're still a

645
00:33:58,360 --> 00:34:02,600
Speaker 4: very small percentage of the dry powder of our clients,

646
00:34:03,000 --> 00:34:05,920
Speaker 4: and they've been raising money, you know, a faster pace

647
00:34:06,040 --> 00:34:08,480
Speaker 4: even than the private credit market has grown, and so

648
00:34:08,560 --> 00:34:11,120
Speaker 4: I think it ultimately creates a good backdrop and a

649
00:34:11,120 --> 00:34:15,240
Speaker 4: good opportunity set for us to deploy capital into this environment.

650
00:34:15,440 --> 00:34:18,040
Speaker 2: Is there a lot of room for private credit to expand?

651
00:34:18,120 --> 00:34:21,520
Speaker 2: Is the share of credit markets absolutely? Where would where

652
00:34:21,520 --> 00:34:22,040
Speaker 2: would that be?

653
00:34:22,280 --> 00:34:22,520
Speaker 5: Yeah?

654
00:34:22,560 --> 00:34:26,360
Speaker 4: So during COVID and during these like peak volatile moments

655
00:34:26,400 --> 00:34:30,680
Speaker 4: when the syndicated markets have been closed, direct lending and

656
00:34:30,800 --> 00:34:32,799
Speaker 4: private credit has gained a.

657
00:34:32,719 --> 00:34:33,800
Speaker 5: Lot of market share.

658
00:34:34,160 --> 00:34:35,960
Speaker 4: And that's not to say, you know, I don't expect

659
00:34:36,200 --> 00:34:38,240
Speaker 4: that will have as an industry, I have one hundred

660
00:34:38,239 --> 00:34:41,480
Speaker 4: percent market share forever by any stretch. But you know,

661
00:34:41,520 --> 00:34:44,000
Speaker 4: one interesting way to think about it is if you

662
00:34:44,040 --> 00:34:46,920
Speaker 4: look at our private equity business, because we issue a

663
00:34:46,960 --> 00:34:49,759
Speaker 4: lot of debt or you know, prolific issuers of financing

664
00:34:50,120 --> 00:34:52,759
Speaker 4: as part of our private equity business, we used to

665
00:34:52,800 --> 00:34:56,120
Speaker 4: be one hundred percent syndicated in terms of the types

666
00:34:56,160 --> 00:34:59,000
Speaker 4: of deals that we would do for our private equity deals.

667
00:34:59,320 --> 00:35:02,080
Speaker 4: Then maybe five or so years ago is probably about

668
00:35:02,120 --> 00:35:05,880
Speaker 4: fifty to fifty And now we're doing pretty much exclusively

669
00:35:06,080 --> 00:35:09,279
Speaker 4: only direct lending deals. So we've seen that market share

670
00:35:09,360 --> 00:35:12,799
Speaker 4: capture even in our own experience, and so I do

671
00:35:12,880 --> 00:35:15,239
Speaker 4: think that is something that will continue and it'll ebb

672
00:35:15,280 --> 00:35:18,239
Speaker 4: and flow with just you know, the overall market dynamics

673
00:35:18,239 --> 00:35:22,200
Speaker 4: and how open the syndicated market is, how attractive deals

674
00:35:22,239 --> 00:35:24,919
Speaker 4: are getting priced there. But right now, you know, I'd

675
00:35:24,920 --> 00:35:27,840
Speaker 4: say the syndicated market is open, but it's a pretty

676
00:35:28,000 --> 00:35:31,600
Speaker 4: tight box as to what can get done from a

677
00:35:31,600 --> 00:35:34,759
Speaker 4: syndicated perspective. You need a certain rating in order to

678
00:35:34,800 --> 00:35:35,040
Speaker 4: do it.

679
00:35:35,080 --> 00:35:36,120
Speaker 5: You know, you.

680
00:35:36,080 --> 00:35:39,040
Speaker 4: Need a certain credit story and loan to value to

681
00:35:39,239 --> 00:35:41,640
Speaker 4: kind of access that market, and you need a certain

682
00:35:41,719 --> 00:35:44,600
Speaker 4: size because liquidity is important in that market. So for

683
00:35:44,640 --> 00:35:47,000
Speaker 4: all of those reasons, I think, and for the reasons

684
00:35:47,000 --> 00:35:49,200
Speaker 4: that I talked about before as to the benefits of

685
00:35:49,280 --> 00:35:52,640
Speaker 4: direct lending, I think that market share shift will continue

686
00:35:53,160 --> 00:35:53,640
Speaker 4: to occur.

687
00:35:54,239 --> 00:35:57,960
Speaker 1: Do you see banks responding to competition from the private

688
00:35:58,000 --> 00:36:01,479
Speaker 1: debt market, Because if we think of leverage loans and

689
00:36:01,560 --> 00:36:06,440
Speaker 1: you know, corporate bond issuance, these are extremely lucrative businesses

690
00:36:06,719 --> 00:36:09,920
Speaker 1: for an investment bank. I can't imagine that they're going

691
00:36:10,000 --> 00:36:13,120
Speaker 1: to sit idly by as they watch, you know, more

692
00:36:13,160 --> 00:36:16,240
Speaker 1: and more issuers issue in the private market.

693
00:36:16,440 --> 00:36:19,400
Speaker 4: Yeah, it's a great point. We've seen some of the banks,

694
00:36:19,400 --> 00:36:22,040
Speaker 4: not all, but a good portion of them set up

695
00:36:22,400 --> 00:36:26,640
Speaker 4: their own little direct lending businesses that are on their

696
00:36:26,680 --> 00:36:29,680
Speaker 4: balance sheets, basically, I think, to your point, to offset

697
00:36:29,719 --> 00:36:32,960
Speaker 4: some of the revenue that they've lost from syndicating loans

698
00:36:33,000 --> 00:36:34,160
Speaker 4: or syndicating bonds.

699
00:36:34,719 --> 00:36:35,760
Speaker 5: And so we'll.

700
00:36:35,560 --> 00:36:39,120
Speaker 4: See how that evolves, because then to some extent they're

701
00:36:39,160 --> 00:36:41,719
Speaker 4: competing with some of their clients, right.

702
00:36:41,840 --> 00:36:43,000
Speaker 5: But I do think.

703
00:36:42,880 --> 00:36:46,000
Speaker 4: They've had, to your point, address it by kind of

704
00:36:46,040 --> 00:36:49,480
Speaker 4: setting up their own capabilities so that when a private

705
00:36:49,480 --> 00:36:52,160
Speaker 4: equity firm approaches them and says, okay, we want to

706
00:36:52,160 --> 00:36:55,080
Speaker 4: finance this, they can offer two solutions. They can offer

707
00:36:55,520 --> 00:36:57,920
Speaker 4: what does the syndicated path look like and what does

708
00:36:57,960 --> 00:37:00,440
Speaker 4: the direct lending path look like, and they can have

709
00:37:00,520 --> 00:37:03,320
Speaker 4: confidence as to how to really show those two paths

710
00:37:03,320 --> 00:37:06,080
Speaker 4: and how to price it, knowing what their own direct

711
00:37:06,160 --> 00:37:07,160
Speaker 4: lending business would do.

712
00:37:07,480 --> 00:37:09,560
Speaker 2: I want to come back to something you said, you know,

713
00:37:09,600 --> 00:37:11,239
Speaker 2: I think it was about what is the appeal from

714
00:37:11,239 --> 00:37:15,360
Speaker 2: the perspective of the investor of private credit. You mentioned

715
00:37:15,600 --> 00:37:18,680
Speaker 2: in some cases lack of correlation to other markets, and

716
00:37:18,719 --> 00:37:20,839
Speaker 2: this is of course Tracy sort of hit on this,

717
00:37:21,080 --> 00:37:24,240
Speaker 2: but also this is sort of people get very cynical

718
00:37:24,360 --> 00:37:27,040
Speaker 2: about this point when it comes to private markets, whether

719
00:37:27,080 --> 00:37:30,879
Speaker 2: it's VC or PE, and they say, yeah, it's uncorrelated

720
00:37:30,920 --> 00:37:33,279
Speaker 2: because they don't have to change the prices and there's

721
00:37:33,320 --> 00:37:36,719
Speaker 2: no market. And of course the fundamental economics do go

722
00:37:36,880 --> 00:37:40,080
Speaker 2: up and down, but there's no forcing mechanism. And some

723
00:37:40,120 --> 00:37:42,839
Speaker 2: people think, well, maybe that's a future that you don't

724
00:37:42,880 --> 00:37:45,040
Speaker 2: have to look at a line on a chart that

725
00:37:45,120 --> 00:37:48,479
Speaker 2: went down, which is never a pleasant thing. Is that real?

726
00:37:48,719 --> 00:37:53,920
Speaker 2: Do people really like private assets in general? Because they don't.

727
00:37:53,960 --> 00:37:56,440
Speaker 2: On a day when you know, their stock portfolio may

728
00:37:56,480 --> 00:37:59,840
Speaker 2: fall two percent, their private assets were flat on that.

729
00:38:01,600 --> 00:38:02,920
Speaker 5: It's a it's a fair point.

730
00:38:03,000 --> 00:38:05,480
Speaker 4: I mean, I think some of it you can just say,

731
00:38:05,680 --> 00:38:08,040
Speaker 4: you know, for private assets, you're just kind.

732
00:38:07,920 --> 00:38:11,840
Speaker 5: Of ignoring the endoring agnoring, So I hear you.

733
00:38:11,960 --> 00:38:15,440
Speaker 4: But I do think that still, you know, the the

734
00:38:15,560 --> 00:38:18,280
Speaker 4: inherent nature of it is that the direct lending market

735
00:38:18,400 --> 00:38:20,359
Speaker 4: or some of these other private markets, like they don't

736
00:38:20,400 --> 00:38:24,480
Speaker 4: react in as volatile of a way or as quickly. Right, So,

737
00:38:24,600 --> 00:38:27,479
Speaker 4: like I think about you know, the you know, the

738
00:38:27,480 --> 00:38:30,680
Speaker 4: the price for a typical unitronch loan. I'll just use

739
00:38:30,680 --> 00:38:33,560
Speaker 4: this as an example, like over the past ten years,

740
00:38:34,040 --> 00:38:37,439
Speaker 4: the range of price of spreads for a unitronch loan

741
00:38:37,440 --> 00:38:41,960
Speaker 4: has probably been anywhere from sofur plus five twenty five

742
00:38:42,200 --> 00:38:45,640
Speaker 4: to seven hundred. So it's a it's a wide range,

743
00:38:45,680 --> 00:38:49,880
Speaker 4: but not not so dramatic, right, And so depending on

744
00:38:49,920 --> 00:38:52,240
Speaker 4: where we are in those kind of ebbs and flows

745
00:38:52,280 --> 00:38:54,560
Speaker 4: of the equity markets, of the you know, the public

746
00:38:54,560 --> 00:38:57,480
Speaker 4: credit markets, you know, you're seeing a little bit of movement,

747
00:38:57,560 --> 00:39:00,680
Speaker 4: but you're not seeing the same spikes or the same valleys,

748
00:39:01,040 --> 00:39:02,680
Speaker 4: and so I do think it offers a little bit

749
00:39:02,719 --> 00:39:06,480
Speaker 4: of inherent protection. And again I think also in terms

750
00:39:06,480 --> 00:39:09,480
Speaker 4: of the lenders, you know, we continue to show up

751
00:39:09,520 --> 00:39:12,040
Speaker 4: and to be there, whereas again the banks can kind

752
00:39:12,040 --> 00:39:13,759
Speaker 4: of pull in and out of the market a little

753
00:39:13,800 --> 00:39:14,600
Speaker 4: bit more aggressively.

754
00:39:15,520 --> 00:39:18,319
Speaker 1: So just on that topic, I realized we've had this

755
00:39:18,520 --> 00:39:22,600
Speaker 1: entire conversation without actually talking about regulation. And I mean,

756
00:39:22,640 --> 00:39:26,319
Speaker 1: to some extent, the boom in private credit has been

757
00:39:26,520 --> 00:39:30,000
Speaker 1: by design of the regulators. So post two thousand and eight,

758
00:39:30,040 --> 00:39:32,719
Speaker 1: they wanted to squeeze out a lot of the riskier

759
00:39:32,760 --> 00:39:37,400
Speaker 1: stuff from the banks and into the so called shadow

760
00:39:37,440 --> 00:39:41,240
Speaker 1: banking market, which includes things like BBC's private credit funds.

761
00:39:42,000 --> 00:39:45,160
Speaker 1: Do you worry at all that they'll maybe start to

762
00:39:45,280 --> 00:39:48,840
Speaker 1: take a closer look at the private debt market, and

763
00:39:48,920 --> 00:39:52,719
Speaker 1: I think there have been some sort of rumblings around this,

764
00:39:52,960 --> 00:39:55,200
Speaker 1: But how are you thinking about the sort of I guess,

765
00:39:55,360 --> 00:39:59,560
Speaker 1: regulatory arbitrage question between the banks and private credit.

766
00:40:00,080 --> 00:40:02,000
Speaker 4: Yeah, so, I mean you're right that I think a

767
00:40:02,040 --> 00:40:05,640
Speaker 4: lot of the growth of the industry has somewhat stemmed from,

768
00:40:05,800 --> 00:40:07,920
Speaker 4: you know, just the change in regulation and the fact

769
00:40:07,920 --> 00:40:10,520
Speaker 4: that the banks kind of were somewhat prohibited from maybe

770
00:40:10,560 --> 00:40:12,600
Speaker 4: doing some of the things that they used to be doing.

771
00:40:13,040 --> 00:40:14,480
Speaker 4: But at the same time, I think there's a lot

772
00:40:14,520 --> 00:40:17,360
Speaker 4: of other reasons for the growth of the private credit

773
00:40:17,440 --> 00:40:21,799
Speaker 4: asset class. When I think about the inherent riskiness of

774
00:40:21,880 --> 00:40:24,760
Speaker 4: the asset class, I think it's a very different story

775
00:40:24,840 --> 00:40:26,919
Speaker 4: than you know, the banks or some of these other

776
00:40:27,320 --> 00:40:31,880
Speaker 4: more higher levered structures, right because as a BDC, for example,

777
00:40:31,920 --> 00:40:34,840
Speaker 4: we're limited as to how much leverage we can incur,

778
00:40:35,360 --> 00:40:38,080
Speaker 4: so we can be max. Two times debt for every

779
00:40:38,120 --> 00:40:40,800
Speaker 4: one part equity. So that's not very levered in the

780
00:40:40,840 --> 00:40:44,200
Speaker 4: scheme of things, and most BDCs, including ourselves, run way

781
00:40:44,239 --> 00:40:46,839
Speaker 4: below that. So you compare that to you know, other

782
00:40:46,920 --> 00:40:49,800
Speaker 4: again financial instruments where you're ten times levered or forty

783
00:40:49,840 --> 00:40:50,560
Speaker 4: times levered.

784
00:40:50,840 --> 00:40:53,760
Speaker 5: That's just a lot less risk in the system.

785
00:40:54,520 --> 00:40:56,600
Speaker 4: And as a result, you know, sure there might be

786
00:40:56,640 --> 00:40:59,239
Speaker 4: more regulation or there might be more focus around it,

787
00:40:59,400 --> 00:41:01,279
Speaker 4: just as the ass that class becomes a little bit

788
00:41:01,280 --> 00:41:06,400
Speaker 4: more institutionalized. But it's hard to attack of underlying fundamentals

789
00:41:06,440 --> 00:41:10,080
Speaker 4: necessarily because you know, we're lower levered. You know, we're

790
00:41:10,120 --> 00:41:13,799
Speaker 4: pretty matched from an asset and liability standpoint, from a

791
00:41:13,920 --> 00:41:17,400
Speaker 4: term point of view. You know, again, we're also largely

792
00:41:17,480 --> 00:41:19,920
Speaker 4: matched from a floating rate perspective. A lot of our

793
00:41:19,960 --> 00:41:22,360
Speaker 4: liabilities are floating rate, so there's a lot of inherent

794
00:41:22,480 --> 00:41:26,360
Speaker 4: safety I think in a lot of the structures of

795
00:41:26,400 --> 00:41:29,040
Speaker 4: the private credit market. So it is a little bit different,

796
00:41:29,920 --> 00:41:31,960
Speaker 4: But that's not to say, you know, we won't see

797
00:41:31,960 --> 00:41:34,680
Speaker 4: more regulations. I can definitely imagine that we will.

798
00:41:35,040 --> 00:41:39,160
Speaker 1: Yeah, I'm getting I'm getting flashbacks to covering BDC's for

799
00:41:39,200 --> 00:41:41,479
Speaker 1: the ft, and I think there was a discussion about

800
00:41:41,520 --> 00:41:43,279
Speaker 1: raising the leverage limits and maybe they did it.

801
00:41:43,320 --> 00:41:46,200
Speaker 4: They did, they did exactly, Yeah, but raising it from

802
00:41:46,320 --> 00:41:49,480
Speaker 4: one time's debt equity to to two times, right, so

803
00:41:49,560 --> 00:41:51,640
Speaker 4: it's just still not very highly levered.

804
00:41:52,080 --> 00:41:55,799
Speaker 1: All right, Well, Laura, that was an incredible conversation, a

805
00:41:55,840 --> 00:41:59,160
Speaker 1: really good entry point to the private credit market. As

806
00:41:59,200 --> 00:42:01,600
Speaker 1: I said before, I suspect we're going to be doing

807
00:42:01,719 --> 00:42:04,480
Speaker 1: more on this, but appreciate you coming on all thoughts

808
00:42:04,560 --> 00:42:06,200
Speaker 1: and explaining the market to us.

809
00:42:06,400 --> 00:42:08,799
Speaker 2: Of course, that was great. That's exactly what we needed. Yeah,

810
00:42:08,800 --> 00:42:10,480
Speaker 2: that was exactly the conversation we need.

811
00:42:10,520 --> 00:42:24,680
Speaker 3: Thank you so much, Thank you, guys, Joe.

812
00:42:24,719 --> 00:42:26,320
Speaker 1: I feel like we should go out to the private

813
00:42:26,360 --> 00:42:28,680
Speaker 1: debt market and raise some capital. How much was the

814
00:42:28,760 --> 00:42:30,280
Speaker 1: dry powder? Like five hundred and eighty.

815
00:42:30,160 --> 00:42:31,480
Speaker 3: Billion, Yeah, let's do it.

816
00:42:31,680 --> 00:42:33,799
Speaker 1: Yeah, it seems like there's a lot of money out there.

817
00:42:33,960 --> 00:42:36,400
Speaker 1: But I thought that was a really interesting conversation, a

818
00:42:36,400 --> 00:42:39,160
Speaker 1: good introduction to the market. There are a couple things

819
00:42:39,160 --> 00:42:41,120
Speaker 1: that stood out to me. So one thing I've been

820
00:42:41,160 --> 00:42:44,120
Speaker 1: thinking about a lot recently. I think everyone's been thinking

821
00:42:44,120 --> 00:42:47,520
Speaker 1: about this, but to what degree the economic landscape has

822
00:42:47,680 --> 00:42:52,640
Speaker 1: changed in recent years? And I think maybe the evolution

823
00:42:53,080 --> 00:42:56,880
Speaker 1: of the debt market, which includes this boom in private credit,

824
00:42:57,440 --> 00:43:00,280
Speaker 1: is an underappreciated one. And if you think that, sodly

825
00:43:00,360 --> 00:43:03,040
Speaker 1: you have this market that's the same size as the

826
00:43:03,280 --> 00:43:07,520
Speaker 1: junk rated bond market, but is more able to be

827
00:43:07,880 --> 00:43:11,160
Speaker 1: flexible with issuers you know, has more of a tendency

828
00:43:11,239 --> 00:43:15,000
Speaker 1: towards workouts and things like that. Then maybe it explains

829
00:43:15,080 --> 00:43:17,840
Speaker 1: some of the reason why we haven't seen such a

830
00:43:18,040 --> 00:43:21,880
Speaker 1: huge impact from interest rate hikes just yet, Like maybe

831
00:43:21,960 --> 00:43:25,279
Speaker 1: that resiliency is coming from not just the workouts, but

832
00:43:25,320 --> 00:43:28,840
Speaker 1: also maybe some of the illiquidity that Laura mentioned. You know,

833
00:43:28,880 --> 00:43:31,279
Speaker 1: this idea that you're not under as much pressure as

834
00:43:31,320 --> 00:43:33,040
Speaker 1: maybe a public vehicle.

835
00:43:33,320 --> 00:43:34,920
Speaker 2: My mind went to the same place with the workout.

836
00:43:35,000 --> 00:43:37,520
Speaker 2: I guess we also talked about this in housing, although

837
00:43:37,520 --> 00:43:40,080
Speaker 2: there's been no housing distress in a long time, but

838
00:43:40,160 --> 00:43:42,719
Speaker 2: of course there's that infrastructure that got built up after

839
00:43:42,760 --> 00:43:45,520
Speaker 2: the Great Financial Crisis to work out mortgages. So it

840
00:43:45,560 --> 00:43:49,400
Speaker 2: made me wonder if just the credit industry in general,

841
00:43:49,760 --> 00:43:52,440
Speaker 2: after the credit crisis, after the crisis in two thousand

842
00:43:52,480 --> 00:43:54,960
Speaker 2: and eight two thousand and nine, just has deeper in

843
00:43:55,040 --> 00:44:00,720
Speaker 2: its DNA ability to avoid foreclosures or avoid defaults of reasons.

844
00:44:00,960 --> 00:44:02,800
Speaker 1: Well, I guess we'll find out, right.

845
00:44:03,239 --> 00:44:05,920
Speaker 2: Yeah, well when though I don't know, Yeah.

846
00:44:05,360 --> 00:44:08,520
Speaker 1: That's the question. One other thing I would say, just

847
00:44:08,560 --> 00:44:10,400
Speaker 1: on the ill liquidity point is I think it was

848
00:44:10,440 --> 00:44:13,400
Speaker 1: Perry Merling's quote, but this idea that you know, liquidity

849
00:44:13,440 --> 00:44:15,520
Speaker 1: can be your friend until it kills you. Yeah, and

850
00:44:15,520 --> 00:44:17,400
Speaker 1: then it kills you pretty quick. Oh yeah, And so

851
00:44:17,440 --> 00:44:20,480
Speaker 1: I guess like that's the sort of doom scenario for

852
00:44:20,680 --> 00:44:24,360
Speaker 1: private credit. Although again, you know, five hundred eighty billion

853
00:44:24,440 --> 00:44:27,759
Speaker 1: of dry powder sounds like a pretty big cushion to

854
00:44:27,880 --> 00:44:30,879
Speaker 1: prevent that from happening. So I guess we'll see.

855
00:44:30,680 --> 00:44:32,840
Speaker 2: We'll see. No, that was great, And now when I

856
00:44:33,000 --> 00:44:34,400
Speaker 2: follow it, or now when I read about it, I

857
00:44:34,400 --> 00:44:37,560
Speaker 2: feel I can at least attempt to track the trajectory

858
00:44:37,640 --> 00:44:38,240
Speaker 2: of this space.

859
00:44:38,560 --> 00:44:39,040
Speaker 3: Excellent.

860
00:44:39,280 --> 00:44:41,960
Speaker 1: Don't go chasing a payment waterfalls, Joe.

861
00:44:42,320 --> 00:44:43,680
Speaker 2: That's a good one. You just make that up.

862
00:44:43,719 --> 00:44:44,080
Speaker 5: I did.

863
00:44:44,239 --> 00:44:46,359
Speaker 1: Yeah, I don't know why. All right, shall we leave

864
00:44:46,360 --> 00:44:46,600
Speaker 1: it there?

865
00:44:46,680 --> 00:44:47,359
Speaker 2: Let's leave it there.

866
00:44:47,440 --> 00:44:47,800
Speaker 3: Okay.

867
00:44:48,200 --> 00:44:51,080
Speaker 1: This has been another episode of the ad Thoughts podcast.

868
00:44:51,160 --> 00:44:54,440
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway.

869
00:44:54,040 --> 00:44:56,759
Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart.

870
00:44:57,000 --> 00:45:01,160
Speaker 2: Follow our producers Carmen Rodriguez at Carmen r Dashel Bennett

871
00:45:01,160 --> 00:45:04,640
Speaker 2: at Dashbot and kel Brooks at kel Brooks. Thank you

872
00:45:04,680 --> 00:45:07,920
Speaker 2: to our producer Moses onm And. For more Oddlots content,

873
00:45:08,000 --> 00:45:10,640
Speaker 2: go to Bloomberg dot com slash Odlots, where we have

874
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Speaker 2: a blog, transcripts and a newsletter and you can chat

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00:45:14,200 --> 00:45:17,040
Speaker 2: about all of our episodes and more with fellow listeners

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Speaker 2: twenty four to seven in the discord one of my

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Speaker 2: favorite places to hang out online. I'm totally serious about that.

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Speaker 2: Discord dot gg slash od.

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Speaker 1: Loots And if you enjoy odd Lots, if you do,

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00:45:28,800 --> 00:45:31,759
Speaker 1: in fact want Joe and I to go chasing payment waterfalls,

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Speaker 1: then please leave us a positive review on your favorite

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Speaker 1: podcast platform. Thanks for listening. In a