WEBVTT - Why Private Credit's Been Booming Even as Interest Rates Go Up 0:00:10.720 --> 0:00:13.960 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:14.040 --> 0:00:15.480 I'm Tracy Alloway. 0:00:15.160 --> 0:00:16.320 And I'm Joe Wisenthal. 0:00:16.640 --> 0:00:18.600 Joe, what do you know about private credit? 0:00:20.760 --> 0:00:23.400 I know it's grown a lot. I know it's pretty good. 0:00:23.520 --> 0:00:25.040 That's I mean, that's the important thing. 0:00:25.320 --> 0:00:29.440 It's private and there's credit involved. Okay, I think that's 0:00:29.480 --> 0:00:31.880 about and I know it's grown, and I think that's 0:00:31.880 --> 0:00:32.800 about the extent of it. 0:00:33.040 --> 0:00:34.520 Yeah, all right, No, I actually. 0:00:34.280 --> 0:00:35.680 Wait, can I just add a little more? 0:00:36.600 --> 0:00:37.000 Maybe? 0:00:37.159 --> 0:00:41.040 No, I get the My sense is that for whatever reason, 0:00:41.120 --> 0:00:43.080 and this I don't know, people perceive there to be 0:00:43.159 --> 0:00:47.880 opportunities in private like you know, there's private equity buying mistakes, 0:00:48.240 --> 0:00:50.839 there's VC, et cetera. But people see an opportunity in 0:00:50.880 --> 0:00:54.240 pools of capital that are then lent out another lending 0:00:54.280 --> 0:00:55.200 that's not through banks. 0:00:55.320 --> 0:00:56.840 That's it. That's the episode. 0:00:57.040 --> 0:00:57.560 We're done. 0:00:57.760 --> 0:01:01.200 No, I mean you hit upon the most striking thing 0:01:01.320 --> 0:01:03.440 at the moment, which is that this is a market 0:01:03.600 --> 0:01:07.280 that has grown remarkably over the years. And I've seen 0:01:07.400 --> 0:01:10.880 various estimates. I think people calculate what counts as private 0:01:10.880 --> 0:01:14.080 credit somewhat differently, but I've seen estimates of about one 0:01:14.120 --> 0:01:18.240 point three trillion to one point six trillion outstanding, and 0:01:18.600 --> 0:01:22.120 if you think about the publicly traded bond market or 0:01:22.160 --> 0:01:25.120 the publicly issued bond market, So if you look at 0:01:25.200 --> 0:01:28.440 junk created corporate bonds, I think it's like one point 0:01:28.440 --> 0:01:31.200 three or one point four trillion outstanding, which means that 0:01:31.240 --> 0:01:34.319 the private credit market is now as big as the 0:01:34.640 --> 0:01:39.280 more broadly syndicated junk bond market, which is pretty stunning. 0:01:39.720 --> 0:01:42.919 And you also hit upon something really interesting that's happening 0:01:42.959 --> 0:01:46.200 right now, which is that the conventional line of thinking 0:01:46.520 --> 0:01:49.560 was that as interest rates go up, this was going 0:01:49.640 --> 0:01:52.000 to be bad for private credit. You were going to 0:01:52.000 --> 0:01:56.080 see more financial stress, maybe funding for private credit was 0:01:56.120 --> 0:01:58.560 going to be more difficult to come by, And instead 0:01:58.600 --> 0:02:02.560 the market has boomed, an appetite for these deals remains 0:02:02.640 --> 0:02:03.400 pretty strong. 0:02:03.760 --> 0:02:05.840 Yeah, it's sort of a subset, I guess of the 0:02:05.880 --> 0:02:09.919 surprising resilience of credit in general. But absolutely you would think, okay, 0:02:09.919 --> 0:02:14.320 here's this rapidly growing asset class. They're booming, and the 0:02:14.440 --> 0:02:17.680 zerp era and twenty and twenty twenty one, you think, okay, 0:02:17.760 --> 0:02:19.919 well this comes to an end now, right In other 0:02:20.200 --> 0:02:22.880 parts of private markets have gotten a lot of trouble 0:02:22.960 --> 0:02:24.720 you know, you know, I think about VC and how 0:02:24.800 --> 0:02:28.040 much slow down there has been there, and yet as 0:02:28.080 --> 0:02:29.600 far as I know, as far as we can tell, 0:02:29.600 --> 0:02:32.560 and everything that we've heard in sort of snippets from 0:02:32.560 --> 0:02:35.120 other conversations, that has not been the case in the 0:02:35.120 --> 0:02:37.360 private credit space. I gotta say, I'm surprised when we 0:02:37.360 --> 0:02:39.920 were about to say how big the junk bond market was, 0:02:39.960 --> 0:02:41.600 I thought you were going to say something much bigger 0:02:41.639 --> 0:02:43.720 than private credit. Still, so the fact that it's caught 0:02:43.800 --> 0:02:45.080 up is pretty striking. 0:02:45.280 --> 0:02:48.000 Yeah, it really is. So We've been meaning to do 0:02:48.040 --> 0:02:49.720 this for a while, but I think we need to 0:02:49.800 --> 0:02:51.800 dive into this market. I expect we're going to do 0:02:51.919 --> 0:02:54.760 more over time, but to begin with, we need to 0:02:54.760 --> 0:02:58.520 figure out how these deals are structured, how they're different 0:02:58.720 --> 0:03:02.720 to broadly syndication to debt, so stuff like corporate bonds 0:03:02.760 --> 0:03:06.120 or leverage loans, what higher interest rates actually mean for 0:03:06.200 --> 0:03:10.280 this asset class, and maybe even what private credits impact 0:03:10.320 --> 0:03:13.519 could be on the broader economy. And I'm very pleased 0:03:13.520 --> 0:03:15.919 to say we do have the perfect guest. We're going 0:03:15.960 --> 0:03:18.720 to be speaking with, Laura Holsen. She is a managing 0:03:18.760 --> 0:03:22.600 director at New Mountain Capital. She is also COO of 0:03:22.680 --> 0:03:27.720 New Mountain's Credit platform, which manages nearly nine billion dollars 0:03:27.800 --> 0:03:32.120 across private credit, So everything from private funds to publicly 0:03:32.160 --> 0:03:36.000 traded business development companies or BDC's. You might remember them 0:03:36.080 --> 0:03:39.720 from our interview with Dan Swarren way back in the day. 0:03:39.880 --> 0:03:41.160 I think that was like seven or. 0:03:41.080 --> 0:03:44.440 Eight years all odd loge heads, remember the dins were 0:03:44.440 --> 0:03:45.160 on interview. 0:03:45.280 --> 0:03:47.760 Well, this was when we still referred to private credit 0:03:47.880 --> 0:03:52.160 as shadow banking, which I don't see as much anymore. 0:03:52.280 --> 0:03:54.920 It's sort of this more accepted part of the market. 0:03:54.920 --> 0:03:57.760 But Okay, on that note, Laura, thank you so much 0:03:57.800 --> 0:03:58.800 for joining Odd Lots. 0:03:58.880 --> 0:03:59.680 Thanks for having me. 0:04:00.160 --> 0:04:03.080 So maybe I could begin with a very simple question, 0:04:03.240 --> 0:04:05.320 which Joe kind of alluded to in the intro, but 0:04:05.400 --> 0:04:08.280 what exactly counts as private credit nowadays? 0:04:08.800 --> 0:04:10.960 Yeah, So, the way I think about private credit is 0:04:11.000 --> 0:04:14.160 that it's debt that is privately originated and Joe, as 0:04:14.160 --> 0:04:17.599 you said, meaning not intermediated by a bank, but that's 0:04:17.640 --> 0:04:21.680 also not traded on any kind of public market. And 0:04:21.720 --> 0:04:25.200 the term private credit is pretty all encompassing. There's everything 0:04:25.240 --> 0:04:28.279 from direct lending, which is probably the largest element of 0:04:28.320 --> 0:04:32.560 private credit, but there's also opportunistic debt, there's distressed there's 0:04:32.600 --> 0:04:35.160 real estate financing. There's a pretty wide range of things. 0:04:35.200 --> 0:04:37.520 I think that counts as private credit. And it can 0:04:37.560 --> 0:04:39.960 be up and down the capital structure. So you could 0:04:39.960 --> 0:04:43.200 be senior in the capital structure, you could be junior, subordinated. 0:04:43.360 --> 0:04:44.839 It's pretty all encompassing. 0:04:45.200 --> 0:04:47.800 It also tends to be unrated as well. Right, It 0:04:47.839 --> 0:04:49.520 seems to me like this is the big difference. So 0:04:49.600 --> 0:04:52.000 you'll get you know, a corporate bond that is rated 0:04:52.040 --> 0:04:54.120 by a Moody's or a standard im Pores, but a 0:04:54.200 --> 0:04:57.040 direct loan or something like that would be unrated. 0:04:57.480 --> 0:04:59.120 Correct, DA, It's typically not rated. 0:05:00.000 --> 0:05:02.320 I ask another detail about what private credit is? What 0:05:02.440 --> 0:05:04.560 is Why don't you tell us what New Mountain Capital 0:05:04.640 --> 0:05:05.440 is and what you do there? 0:05:05.560 --> 0:05:05.800 Sure? 0:05:05.839 --> 0:05:09.039 So, New Mountain Capital we're an alternative asset management firm. 0:05:09.680 --> 0:05:11.880 We have kind of three pillars to our strategy. We 0:05:11.960 --> 0:05:14.080 have private equity, we have credit, and we have a 0:05:14.120 --> 0:05:16.720 net least strategy. And the way to think about New 0:05:16.720 --> 0:05:19.480 Mountain is that we're focused on what we call defensive 0:05:19.600 --> 0:05:22.680 growth sectors. So those are sectors of the economy that 0:05:22.720 --> 0:05:25.279 we think are going to perform well regardless of what 0:05:25.400 --> 0:05:29.920 kind of macroeconomic environment we're in. So whether we're in inflation, deflation, 0:05:30.160 --> 0:05:32.960 boom or bust, we want to invest in very resilient 0:05:33.279 --> 0:05:36.760 acyclical sectors and we apply that strategy across all of 0:05:36.800 --> 0:05:40.479 our products. And importantly, we use the knowledge that we've 0:05:40.480 --> 0:05:43.320 built up over our nearly twenty five year history as 0:05:43.320 --> 0:05:47.280 a firm and apply that same mentality and the same 0:05:47.480 --> 0:05:52.680 underrating knowledge and intellectual capabilities that we have to credit 0:05:52.800 --> 0:05:55.760 to net least and obviously to our core private equity strategy. 0:05:56.120 --> 0:05:58.200 Okay, so here's my other question. You know, we were 0:05:58.240 --> 0:06:02.120 talking about how big this asset class has actually gotten, 0:06:03.000 --> 0:06:07.080 how old is it actually? Because I hear different things. 0:06:07.279 --> 0:06:12.080 I hear people express concern for private debt because they'll say, well, 0:06:12.120 --> 0:06:15.520 we don't actually have that much historical data about defaults 0:06:15.600 --> 0:06:18.800 and things like that. But I also imagine there were 0:06:18.960 --> 0:06:22.799 private debt deals being done, you know, decades ago. Maybe 0:06:22.839 --> 0:06:25.960 not in the same format, certainly not to the same extent, 0:06:26.360 --> 0:06:29.760 but we must have some historical basis for comparison. 0:06:30.040 --> 0:06:31.200 Yeah, no, it's a fair question. 0:06:31.279 --> 0:06:33.560 I mean, the reality is the asset class has grown 0:06:33.600 --> 0:06:36.599 tremendously over the last you know, ten to fifteen years, 0:06:36.920 --> 0:06:39.560 but New Mountain's credit business. For example, we've been around 0:06:39.640 --> 0:06:42.240 since two thousand and eight, and we got our start 0:06:42.320 --> 0:06:45.400 by buying debt on the secondary market, debt that was 0:06:45.480 --> 0:06:50.040 trading at distressed levels, not because those companies were fundamentally impaired, 0:06:50.120 --> 0:06:53.280 but just because of the technical reasons in the marketplace that. 0:06:53.240 --> 0:06:55.320 Drove because it was two thousand and eight, exactly because it. 0:06:55.279 --> 0:06:56.160 Was two thousand and eight. 0:06:56.440 --> 0:06:59.080 And so as a result, we've seen our own track 0:06:59.120 --> 0:07:00.960 record and we you know, so we feel like we 0:07:01.040 --> 0:07:04.240 have been cycle tested, right, We've gone through COVID, We've 0:07:04.240 --> 0:07:07.000 gone through you know, the Silicon Valley Bank, We've gone 0:07:07.040 --> 0:07:10.480 through you know, definitely a pretty crazy period from an 0:07:10.520 --> 0:07:14.120 inflation standpoint. So there's been a lot of elements that 0:07:14.160 --> 0:07:17.080 we feel like we've kind of cycle tested our portfolio. 0:07:17.520 --> 0:07:19.040 But you're right, I think it's a little bit of 0:07:19.080 --> 0:07:22.440 a different form today than maybe private credit was, you 0:07:22.520 --> 0:07:24.440 know fifteen twenty years ago, what. 0:07:24.480 --> 0:07:29.920 Happened to private debt during the big COVID market route. 0:07:29.960 --> 0:07:31.840 And you know, you can look at proxies, you can 0:07:31.880 --> 0:07:35.080 look at publicly listed BDCs. I think New Mountain has 0:07:35.120 --> 0:07:37.560 one of those, and you can see certainly, like the 0:07:37.600 --> 0:07:39.640 share price went down quite a lot, but like what 0:07:39.760 --> 0:07:42.560 happened in more opaque corners of the market. 0:07:43.240 --> 0:07:46.760 Yeah, so I think, you know, during COVID, private credit, 0:07:46.800 --> 0:07:49.880 I would argue, held up better than you know, the 0:07:49.920 --> 0:07:53.440 broadly syndicated market. You saw the debt and the broadly 0:07:53.480 --> 0:07:58.240 syndicated market from a trading level perspective trade down pretty meaningfully. 0:07:58.680 --> 0:08:02.640 But from a default perspective, actually, private credit turned out 0:08:02.680 --> 0:08:04.840 to be more resilient during COVID, and I think it's 0:08:04.840 --> 0:08:08.320 a function of how these deals are set up, because 0:08:08.360 --> 0:08:10.960 they are meant to be a little bit more bespoke, 0:08:11.120 --> 0:08:14.960 more relationship oriented, and so private equity sponsors were able 0:08:15.000 --> 0:08:19.160 to have direct dialogue with the lenders and talk through Okay, 0:08:19.200 --> 0:08:22.080 here's what we're seeing in these underlying companies, here's what 0:08:22.120 --> 0:08:22.960 we're doing about it. 0:08:23.080 --> 0:08:27.000 Let's talk. It's not a group. 0:08:26.720 --> 0:08:29.920 Of fifty years or so syndicated investors that they have 0:08:30.000 --> 0:08:32.240 no relationship with. And as a result, I think we 0:08:32.280 --> 0:08:36.240 saw better outcomes in terms of just actual default losses 0:08:36.320 --> 0:08:37.120 during that period. 0:08:37.559 --> 0:08:41.200 Okay, to help understand this market, what would be the 0:08:41.320 --> 0:08:47.040 modal or typical borrowing entity for whom private credit is 0:08:47.080 --> 0:08:50.240 a more attractive lending option. Than say going to the 0:08:50.280 --> 0:08:52.680 bond market and or going to a bank. 0:08:52.800 --> 0:08:55.520 Yes, So the way I think about it, and again 0:08:55.600 --> 0:08:58.320 from where I said, at New Mountain, we focus primarily 0:08:58.360 --> 0:09:02.199 on what I call sponsor back direct lending, so direct 0:09:02.280 --> 0:09:06.760 lending to private companies that are owned by private equity firms, 0:09:07.440 --> 0:09:10.840 and the private equity firms need to make a decisions, 0:09:11.120 --> 0:09:12.719 as you said, do they want to go to the 0:09:12.760 --> 0:09:15.240 syndicated market or do they want to tap the direct 0:09:15.280 --> 0:09:18.640 lending market for their financing. And there's a bunch of 0:09:18.640 --> 0:09:21.040 things to consider. But the way I think about the 0:09:21.080 --> 0:09:25.480 benefits of direct lending are number one, you have more 0:09:25.600 --> 0:09:30.360 certain execution because when you're doing a syndicated deal, that's 0:09:30.559 --> 0:09:33.960 a deal that you're getting intermediated by a bank. They're 0:09:34.080 --> 0:09:37.719 underwriting it at a certain pricing level, but then they 0:09:37.760 --> 0:09:41.320 have the ability to flex that pricing level wider or 0:09:41.360 --> 0:09:44.360 tighter depending on market conditions at the time. And you're 0:09:44.400 --> 0:09:47.720 in market for I don't know, maybe four weeks, and 0:09:47.760 --> 0:09:50.640 so you're taking a lot of market risk, particularly during 0:09:50.679 --> 0:09:52.800 times like we're in today where there's a lot of 0:09:52.840 --> 0:09:56.559 market volatility. So that's one thing, is just a certainty 0:09:56.559 --> 0:10:00.320 of execution because a direct lending deal. You commit from 0:10:00.320 --> 0:10:03.319 a pricing perspective, and then you stick to that price 0:10:03.600 --> 0:10:06.760 throughout the rest of the negotiation, so you know what 0:10:06.880 --> 0:10:10.640 terms you're getting from the sponsor perspective. The second thing 0:10:10.679 --> 0:10:12.319 is it also can be a little bit of an 0:10:12.400 --> 0:10:16.120 easier execution because in a syndicated market, if a sponsor 0:10:16.160 --> 0:10:20.439 wants to get a first lean and second lean financing done, 0:10:20.840 --> 0:10:23.560 that's two different credit agreements, a first line credit agreement, 0:10:23.600 --> 0:10:26.720 a second lean credit agreement, and an inter creditor agreement. 0:10:26.760 --> 0:10:30.240 As to how those two tranches interact with each other. Again, 0:10:30.360 --> 0:10:34.559 you can trast that to a direct lending solution where 0:10:34.679 --> 0:10:37.640 you have a unitron structure with just one credit agreement, 0:10:37.720 --> 0:10:40.280 so it's also easier. You also don't need to go 0:10:40.320 --> 0:10:44.440 through the rating agency process, which also just saves time. 0:10:44.600 --> 0:10:47.200 And as I said, it's more relationship oriented. It could 0:10:47.200 --> 0:10:50.760 be more flexible and more bespoke to what the sponsors 0:10:50.880 --> 0:10:51.840 are looking for. 0:10:51.880 --> 0:10:55.200 Real quickly for the listeners. And also me what is 0:10:55.720 --> 0:10:57.760 first and second lean mean? 0:10:58.000 --> 0:10:59.160 Yeah, no, it's a good question. 0:10:59.280 --> 0:11:01.920 So it's depends where you are in the capital structure. 0:11:01.960 --> 0:11:04.280 So first lean means you have the first claim or 0:11:04.280 --> 0:11:06.840 the first priority on the assets, and the second lean 0:11:06.880 --> 0:11:22.760 would be junior to them. 0:11:23.200 --> 0:11:25.440 I think we're kind of getting to the heart of 0:11:25.720 --> 0:11:28.520 why this asset class has been booming, because I hear 0:11:28.559 --> 0:11:31.160 this a lot from market participants, this idea that like, well, 0:11:31.200 --> 0:11:34.240 maybe the deals are structured in a way that makes 0:11:34.280 --> 0:11:39.560 them more appealing to investors versus the broadly syndicated stuff. So, 0:11:39.880 --> 0:11:43.760 you know, you mentioned that sponsors can get more definitive terms. 0:11:44.760 --> 0:11:48.000 You know, maybe the issuer doesn't have to go through 0:11:48.000 --> 0:11:50.840 the hassle of getting a rating and that sort of thing. 0:11:51.360 --> 0:11:55.160 And then you mentioned the first lean and second lean issue. 0:11:55.200 --> 0:11:58.360 And I've seen this come up in various ways. The 0:11:58.440 --> 0:12:02.880 idea of a preferential treatment in the payment waterfall is 0:12:02.920 --> 0:12:04.920 that the right way to think about it. So, if 0:12:04.920 --> 0:12:07.920 you're in a private debt deal, can you structure it 0:12:08.240 --> 0:12:12.040 such that maybe you're closer to the issuer than anyone else, 0:12:12.200 --> 0:12:16.600 maybe you get more insight into potential credit challenges before others. 0:12:17.360 --> 0:12:22.640 And maybe also you can enforce remedy payments that make 0:12:22.760 --> 0:12:26.400 you come out on top in the event of a default. 0:12:26.440 --> 0:12:28.679 So preferential treatment versus other creditors. 0:12:29.240 --> 0:12:31.320 Yeah, I mean, I think that is a fair way 0:12:31.360 --> 0:12:33.880 to think about it. When I think about again the 0:12:34.000 --> 0:12:36.839 purpose of a direct lending solution, right, it's a lot 0:12:37.000 --> 0:12:39.400 simpler of a capital structure, right, so you don't get 0:12:39.440 --> 0:12:42.680 into a situation where maybe you're fighting between the first 0:12:42.800 --> 0:12:45.280 lean and the second lean creditors for example. 0:12:45.120 --> 0:12:46.880 Which we've seen recently. 0:12:47.080 --> 0:12:47.360 Yeah. 0:12:47.400 --> 0:12:50.400 Absolutely, And to your point about just being closer to 0:12:50.480 --> 0:12:53.480 the borrow or and closer to the company, the way 0:12:53.640 --> 0:12:56.320 most direct lending deals work is it's a club of 0:12:56.400 --> 0:12:59.520 direct lenders. So you don't typically have one direct lender 0:13:00.080 --> 0:13:03.640 that's underwriting and holding the whole tranch, but you have 0:13:03.720 --> 0:13:06.880 a club, meaning you might have I don't know, anywhere 0:13:06.960 --> 0:13:10.880 from three to ten direct lenders in a deal. And 0:13:10.960 --> 0:13:15.600 there's real benefits to having that diversification from the sponsor perspective, 0:13:16.160 --> 0:13:19.520 because you have more dry powder, meaning you have the 0:13:19.559 --> 0:13:22.320 ability to go back to that same group and upsize 0:13:22.320 --> 0:13:25.760 and do incrementals or follow on deals for that same company. 0:13:25.800 --> 0:13:28.440 But you're also not beholden to any one lender because 0:13:28.800 --> 0:13:31.000 one thing you could say is, oh, well, in a 0:13:31.040 --> 0:13:33.720 direct lending deal, if you have more if you have 0:13:33.840 --> 0:13:37.000 fewer lenders in the group, maybe those lenders have more 0:13:37.080 --> 0:13:40.880 power over the company or the private equity firm. And 0:13:40.960 --> 0:13:43.560 again I think that really speaks to the benefit of 0:13:43.600 --> 0:13:46.040 having a small club. But you can trast that to 0:13:46.600 --> 0:13:49.440 a bank, send a kit which might have thirty fifty 0:13:49.480 --> 0:13:53.760 one hundred lenders in it, and inevitably, you know when 0:13:53.760 --> 0:13:56.400 you have a club of three, that those three lenders 0:13:56.440 --> 0:13:58.400 are all going to have more access, They're going to 0:13:58.400 --> 0:14:01.880 have more conversations with the sponsor, They're going to be 0:14:01.920 --> 0:14:03.920 able to call and have more of a direct dialogue 0:14:03.960 --> 0:14:06.800 with the management team as compared to you know, if 0:14:06.800 --> 0:14:07.840 you're one of one hundred. 0:14:08.240 --> 0:14:11.200 So I think I understand to some extent the appeal 0:14:11.240 --> 0:14:14.320 of direct lending. What is the pitch, you know, let's 0:14:14.320 --> 0:14:17.560 say I'm an ultra high net worth individual or family 0:14:17.600 --> 0:14:19.320 and my advisory oh, we want to you should have 0:14:19.440 --> 0:14:22.200 allocate some to private credit. What is the pitch to 0:14:23.440 --> 0:14:26.040 limited partners or investors for why this is an appealing 0:14:26.080 --> 0:14:26.800 asset class. 0:14:26.920 --> 0:14:29.680 Yeah, So, the way I think about it is private 0:14:29.720 --> 0:14:35.280 credit and direct lending specifically offers very attractive and consistent yield, 0:14:35.800 --> 0:14:38.040 and it's I think a very good thing to allocate 0:14:38.080 --> 0:14:41.360 as part of your fixed income portfolio. I think number one, 0:14:41.480 --> 0:14:45.800 it's floating rate typically, so we move up and down 0:14:46.000 --> 0:14:48.960 with interest rates. So in this period where we've had 0:14:48.960 --> 0:14:52.440 a significant run up, that has helped increase the yield 0:14:52.720 --> 0:14:56.000 of direct lending funds because the way the coupon is 0:14:56.000 --> 0:14:59.520 structured is you're tied to a base rate plus a spread, 0:15:00.080 --> 0:15:02.240 and so as that base rate has gone up, the 0:15:02.360 --> 0:15:06.320 overall interest rate that the investors end up earning has 0:15:06.360 --> 0:15:09.480 gone up pretty meaningfully. And it also provides some interest 0:15:09.560 --> 0:15:13.480 rate protection because valuation, for example, for a fixed rate 0:15:13.560 --> 0:15:17.800 bond has come down very meaningfully as rates have risen. 0:15:17.960 --> 0:15:20.680 So I think that's one thing to highlight. The second 0:15:20.680 --> 0:15:24.200 thing would just be that the higher spread compared to 0:15:24.440 --> 0:15:26.960 a broadly syndicated load, and part of that is an 0:15:27.000 --> 0:15:30.400 illiquidity premium because it's not traded. You can't you know, 0:15:30.480 --> 0:15:32.800 necessarily get out as easily, but you need to get 0:15:32.840 --> 0:15:35.080 paid for that, so you do get some extra spread 0:15:35.640 --> 0:15:38.400 from that. And then I think the there's been good 0:15:38.480 --> 0:15:43.080 data showing lower loss ratios also of direct lending, again 0:15:43.200 --> 0:15:47.160 compared to a broadly syndicated fund or a high yield fund, 0:15:48.080 --> 0:15:50.680 and so I think generally speaking it's kind of that all, 0:15:50.840 --> 0:15:53.320 you know, all of those things combined end up with 0:15:53.440 --> 0:15:57.480 a higher, more stable, more consistent yield, which I think 0:15:57.600 --> 0:16:00.640 is very attractive for you know, an ultra net worth. 0:16:00.920 --> 0:16:02.360 And the other thing I would just say is it 0:16:02.360 --> 0:16:07.120 does provide some diversification because it's not quite as correlated 0:16:07.160 --> 0:16:10.480 with all the other public markets as maybe you know, 0:16:10.600 --> 0:16:14.280 high yield or broadly syndicated loans are just. 0:16:14.320 --> 0:16:17.320 On the yield and spread point. I mean, it is 0:16:17.440 --> 0:16:21.080 true that we have seen both yields and spreads start 0:16:21.160 --> 0:16:24.160 to pick up in the broadly syndicated market recently, and 0:16:24.200 --> 0:16:26.680 I've seen some people making the argument that like, well 0:16:26.720 --> 0:16:30.200 maybe now, maybe not right now, maybe a week ago 0:16:30.920 --> 0:16:35.000 was the time to sort of pick up some exposure 0:16:35.120 --> 0:16:37.440 in the corporate bond market and things like that. But 0:16:37.920 --> 0:16:40.240 do you see, you know, when yields and spreads start 0:16:40.280 --> 0:16:42.800 to move around in the broadly syndicated market, do you 0:16:42.840 --> 0:16:47.600 typically see investors start to make that relative value judgment, 0:16:47.720 --> 0:16:50.160 Like will they sit there and think, well, I could 0:16:50.200 --> 0:16:53.400 either have this private debt deal or I could buy 0:16:53.440 --> 0:16:55.440 this in the publicly traded market. 0:16:56.000 --> 0:16:58.680 Yes, I think people definitely look at kind of the 0:16:58.720 --> 0:17:02.080 relative value versus the public benchmarks. But again, I think 0:17:02.160 --> 0:17:06.640 direct lending as an asset class has historically over now 0:17:06.720 --> 0:17:12.320 many years outperformed the public credit benchmarks. So you've seen 0:17:12.359 --> 0:17:15.119 that relative value I think always kind of shift in 0:17:15.160 --> 0:17:17.840 the favor of the direct lending funds. 0:17:18.200 --> 0:17:19.480 And again it comes back to. 0:17:19.920 --> 0:17:24.480 The spread premium compared to just a broadly syndicated loan. 0:17:24.960 --> 0:17:28.160 Can we talk about you know, you mentioned the clubs 0:17:28.200 --> 0:17:30.040 and the idea that Okay, you're not just gonna have 0:17:30.040 --> 0:17:32.879 one direct lender, you might have three, ten, whatever it is. 0:17:33.359 --> 0:17:37.120 How does deal flow typically work? How does something land 0:17:37.320 --> 0:17:39.640 on your desk in the first place, in the sort 0:17:39.680 --> 0:17:40.960 of standard mode. 0:17:41.200 --> 0:17:44.080 Yeah, so I think most credit firms the way they 0:17:44.560 --> 0:17:48.280 attack the market, most direct lending firms, they have sponsor 0:17:48.440 --> 0:17:52.080 coverage people who go out and call on a set 0:17:52.080 --> 0:17:55.240 group of private equity firms. Okay, and they call them 0:17:55.280 --> 0:17:57.520 and they say, hey, what deals are you working on 0:17:57.520 --> 0:18:01.040 on the private equity side? Can we help you finance them? 0:18:01.359 --> 0:18:05.200 So that's the typical model as to how most standalone 0:18:05.240 --> 0:18:07.959 private credit firms get deal flow. I would say New 0:18:08.000 --> 0:18:11.280 Mountain we approach things a little bit differently because we 0:18:11.400 --> 0:18:15.199 also have a private equity business. We are seeing the 0:18:15.240 --> 0:18:19.240 deal flow earlier because we're seeing it on the equity side. 0:18:19.720 --> 0:18:22.600 And what we're able to do is then triage those deals. 0:18:22.760 --> 0:18:24.560 And not all of them we're going to buy for 0:18:24.640 --> 0:18:27.280 private equity, of course, but a lot of them are 0:18:27.400 --> 0:18:30.560 really high quality, good businesses that maybe are going to 0:18:30.560 --> 0:18:34.280 trade at evaluation that we think is too high. So 0:18:34.440 --> 0:18:37.119 rather than buy the company on the private equity side, 0:18:37.480 --> 0:18:39.560 we can say, okay, well, now we know that deal 0:18:39.640 --> 0:18:42.120 is in market, let's see if we can go finance 0:18:42.160 --> 0:18:45.680 it for another private equity firm. And so we take 0:18:45.680 --> 0:18:48.800 a pretty different, i think, more proactive approach to deal 0:18:48.840 --> 0:18:51.280 sourcing because we know those deals are out there and 0:18:51.320 --> 0:18:54.040 then we just need to go find them. And again, 0:18:54.080 --> 0:18:57.679 the conversation that enables us to have with our private 0:18:57.680 --> 0:19:01.520 equity clients is, Okay, we know this deal is in market, 0:19:01.800 --> 0:19:04.600 our private equity firm is not looking at it, but 0:19:04.760 --> 0:19:07.399 we like the business, we have a view on leverage, 0:19:07.440 --> 0:19:10.600 we've already underwritten the space. Again, back to the point 0:19:10.600 --> 0:19:12.720 that I made in the beginning is to New Mountain 0:19:12.760 --> 0:19:16.240 focuses on the same industries across the board, and we 0:19:16.359 --> 0:19:18.880 have some really unique diligence angles that we could bring 0:19:18.920 --> 0:19:21.720 to bear. So that kind of conversation with our private 0:19:21.720 --> 0:19:24.719 equity clients I think gives us an edge and allows 0:19:24.800 --> 0:19:26.240 us to source very effectively. 0:19:27.200 --> 0:19:32.200 Just on this note, how sticky or reliable is this 0:19:32.320 --> 0:19:35.679 type of financing for the company itself, because again this 0:19:35.840 --> 0:19:38.879 is a place where you hear different arguments in the market. 0:19:38.960 --> 0:19:40.520 So on the one hand, you know, a lot of 0:19:40.520 --> 0:19:43.600 private equity funds have lock up periods and so people 0:19:43.680 --> 0:19:46.880 can't suddenly withdraw their money. But on the other hand, 0:19:46.880 --> 0:19:50.680 there is a concern that maybe this kind of financing 0:19:50.840 --> 0:19:54.040 is less sticky than, for instance, a bank loan, where 0:19:54.160 --> 0:19:57.240 maybe some of that is funded by deposits and things 0:19:57.280 --> 0:20:00.879 like that. So how reliable is this time of financing? 0:20:01.280 --> 0:20:04.119 Yeah, it is very reliable. When you think about the 0:20:04.200 --> 0:20:09.679 types of structures that underlie private credit funds, a lot 0:20:09.760 --> 0:20:13.360 of them are permanent capital vehicles. You mentioned business development 0:20:13.400 --> 0:20:16.920 companies or BDCs. The publicly traded ones are a form 0:20:16.960 --> 0:20:19.439 of permanent capital. So that's about as stable or as 0:20:19.480 --> 0:20:20.320 sticky as. 0:20:20.160 --> 0:20:20.760 You can get. 0:20:21.440 --> 0:20:23.560 And you also have other kinds of funds that are 0:20:23.600 --> 0:20:26.359 structured as draw down funds, which again have kind of 0:20:26.359 --> 0:20:29.320 a locked up life for a period of time. There's, 0:20:29.359 --> 0:20:32.560 of course, other types of funds that are maybe a 0:20:32.560 --> 0:20:34.760 little bit more open ended and the ability to come 0:20:34.760 --> 0:20:36.680 in and out, and so that can be where maybe 0:20:36.680 --> 0:20:39.120 you have a little bit less sticky, But I would 0:20:39.200 --> 0:20:42.240 argue that you have those dynamics kind of in all 0:20:42.280 --> 0:20:45.960 areas of credit investing, not just the direct lending market. 0:20:46.040 --> 0:20:48.880 So overall, I think it is really sticky and very 0:20:48.960 --> 0:20:52.760 reliable from the sponsor standpoint, and that's ultimately what they 0:20:52.800 --> 0:20:53.240 care about. 0:20:53.600 --> 0:20:56.439