WEBVTT - Morningstar CEO Kunal Kapoor Talks Asset Ratings

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<v Speaker 1>Well.

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<v Speaker 2>Another company turning to private markets is morning Star. The

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<v Speaker 2>firm has been grating stock and bond funds for years,

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<v Speaker 2>but it's now going to begin rating less liquid private

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<v Speaker 2>asset funds marketed to the masses. Places say that morning

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<v Speaker 2>Star CEO Kunel Copport joins us now, great to have

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<v Speaker 2>you with us. I talk to a lot of fund

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<v Speaker 2>managers and a lot of them live and die by

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<v Speaker 2>their morning Star ratings, So talk to us a little

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<v Speaker 2>bit about this move into now rating also these semi

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<v Speaker 2>these less liquid private asset funds as well.

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<v Speaker 1>Yeah, good morning to you as well.

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<v Speaker 3>It's great to be on and I just say that

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<v Speaker 3>it's a reflection of where we are today in the

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<v Speaker 3>world of investing. I came to morning strolomost thirty years

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<v Speaker 3>ago and the public and private worlds were quite different.

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<v Speaker 3>About about a decade ago. Morning Star bock pitchbook and

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<v Speaker 3>we've been gathering data on private companies first and then

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<v Speaker 3>private credit and today there's more than five million private companies,

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<v Speaker 3>for instance, that we're tracking, and all of that means

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<v Speaker 3>that there's a growing interest, there's more assets that are

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<v Speaker 3>in that space, and the reality is that it's largely

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<v Speaker 3>been the purview of institutional investors. But when you look

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<v Speaker 3>at the large pools of capital, and you also look

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<v Speaker 3>at the reality that individual investors tend to invest for

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<v Speaker 3>the long haul. There's a belief that they don't, but

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<v Speaker 3>our data consistently shows that they do through vehicles such

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<v Speaker 3>as the four to one K. It's become attractive to

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<v Speaker 3>think about how can you bring private assets, which are

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<v Speaker 3>a bigger part of the market to them, especially as

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<v Speaker 3>public assets have become a smaller part of the market,

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<v Speaker 3>and so we're particularly starting to see movement on private credit.

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<v Speaker 3>In fact, in your headlines you were talking about private

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<v Speaker 3>credit as pertained to HSBC, but broadly speaking, there's a

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<v Speaker 3>lot of interest in private credit, and so you're starting

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<v Speaker 3>to see the emergence of what are called semi liquid

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<v Speaker 3>investment options. They might be interval funds here in the US,

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<v Speaker 3>they may be something like an altaff in Europe, and

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<v Speaker 3>the reality is that they're garnering a lot of interest,

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<v Speaker 3>especially here in the US, from investors, and as they've

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<v Speaker 3>become a more significant part of the portfolio, who better

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<v Speaker 3>than morning Star to help investors navigate what it all

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<v Speaker 3>means and how they can think about including them in

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<v Speaker 3>a portfolio.

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<v Speaker 1>It's a good point, it's an obvious fit.

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<v Speaker 4>I started as a research intern at Tucker Anthony thirty

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<v Speaker 4>years ago and was always sent to pore over the

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<v Speaker 4>morning Star ratings for each fund. Katie points out that

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<v Speaker 4>from her cross asset desk, you know, everybody she talks

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<v Speaker 4>to is citing a morning Star rating. How much of

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<v Speaker 4>your business is it now private credit and what kind

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<v Speaker 4>of trajectory do you expect, Yeah.

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<v Speaker 3>We don't quantify private credit. Pitchbook itself is a very

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<v Speaker 3>significant part of morning Stars o world business. It's one

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<v Speaker 3>of our largest segments today. And within Pitchbook we have

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<v Speaker 3>Pitchbook Credit. And then you know, we are now the

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<v Speaker 3>world's fourth largest creditrating agency in morning our DVRs and

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<v Speaker 3>a significant portion of the issues we're rating are on

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<v Speaker 3>the private credit side. But what we started to talk

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<v Speaker 3>about more was sort of the intersection of public and private.

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<v Speaker 3>We talk about this convergence that's happening, and that's an

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<v Speaker 3>emerging area where you suddenly have retail investors, you have

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<v Speaker 3>wealth advisors starting to gain access to vehicles that essentially

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<v Speaker 3>go beyond public and then bring in the private. And

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<v Speaker 3>that's new and different than what used to exist.

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<v Speaker 2>Well, let's talk about that. I cover ETFs for a living,

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<v Speaker 2>and it's been interesting to see some issuers try to

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<v Speaker 2>fit private assets into these publicly daily liquid vehicles. The

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<v Speaker 2>Apollo State Street combination, for example, comes to mind. What

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<v Speaker 2>is the morning Star view on that? And basically this

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<v Speaker 2>rush to put private assets into exchange traded funds because

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<v Speaker 2>there is a lot of skepticism out there and a

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<v Speaker 2>lot of questions about sort of the liquidity mismatch.

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<v Speaker 3>Yeah, So first I'll start by saying that they're probably

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<v Speaker 3>already are some degree of private assets in other ETFs

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<v Speaker 3>that have fixed income holdings. The line between public and

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<v Speaker 3>private has blurred, and some people think certain things are

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<v Speaker 3>you know, in the private space and some in the public,

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<v Speaker 3>but oftentimes you'll see them wrapped in there. But what

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<v Speaker 3>we have not really seen full on is someone coming

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<v Speaker 3>to market with a full on private credit ETF. Now

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<v Speaker 3>State Street is trying to change that, but even there,

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<v Speaker 3>the initial take is a mix of public and private assets,

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<v Speaker 3>and they've done something unique in terms of how they

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<v Speaker 3>are trying to make sure.

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<v Speaker 1>It's priced appropriately.

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<v Speaker 3>So we're watching it carefully. We think there's some you know,

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<v Speaker 3>work to be done to sort of see how the

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<v Speaker 3>mechanisms will play out, particularly in the stress market. But

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<v Speaker 3>that level of innovation I think is likely just a

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<v Speaker 3>tip of the sphere in terms of what we're going

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<v Speaker 3>to see, because more and more folks are going to

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<v Speaker 3>try to bring liquidity to this space, and if you

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<v Speaker 3>think about it, that's probably one of the main reasons

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<v Speaker 3>people have not accessed the private markets in the world

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<v Speaker 3>they have the public markets because of liquidity tends to

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<v Speaker 3>be an issue, and so firms like State Street, I think,

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<v Speaker 3>are really trying to solve this problem. And I think

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<v Speaker 3>the ETF that you reference is probably the first of

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<v Speaker 3>many such products we're likely to see.

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<v Speaker 2>Do you ever think we will see a true private

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<v Speaker 2>credit one hundred percent pure play private asset ETF, because,

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<v Speaker 2>like you said, you have seen the line blur, you

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<v Speaker 2>have seen private assets make their way into some ETFs

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<v Speaker 2>that also hold public assets as well. But do you

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<v Speaker 2>think it's a possibility that we could have the real deal?

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<v Speaker 3>I think it's possible, I would say, does it make

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<v Speaker 3>sense from an investment perspective? So if I go back

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<v Speaker 3>and think about, you know, even the public markets, I

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<v Speaker 3>remember when I was an analyst twenty five years ago.

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<v Speaker 3>We used to think if the world is bifurcated, you

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<v Speaker 3>had an international fund, you had a domestic fund, and

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<v Speaker 3>managers would concentrate in that fashion. And you still have

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<v Speaker 3>some of that, but more and more managers moved to

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<v Speaker 3>try to have global strategies where they pick the best companies,

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<v Speaker 3>the best credits, and they try to put them in

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<v Speaker 3>one portfolio. And I think that's what you're going to

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<v Speaker 3>happen here too, is the lines between public and private

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<v Speaker 3>will keep blurring, and so you're going to have offerings

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<v Speaker 3>that can hold both and move across both to ensure

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<v Speaker 3>that they're getting hold of the best assets. And you know,

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<v Speaker 3>even in our indexes and what we're trying to build

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<v Speaker 3>out in that space, you know, we started with the

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<v Speaker 3>suite of public benchmarks, We've introduced private benchmarks, and I

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<v Speaker 3>think the future is really in trying to blend some

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<v Speaker 3>of those together, because that's how people's portfolios are structured.

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<v Speaker 4>Canel We're trying to get a grasp on the health

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<v Speaker 4>and vigor of your business, just the way you would.

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<v Speaker 1>When you're talking to fund managers.

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<v Speaker 4>After S and P and Moody's cut their earnings outlooks

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<v Speaker 4>last month, how do you compare with them and the

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<v Speaker 4>big three in terms of market share, in terms of

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<v Speaker 4>growth rates?

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<v Speaker 1>Can you quantify some of these things for us?

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<v Speaker 3>Yeah, So in the private credit business, which I'm sorry,

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<v Speaker 3>in the credit ratings business, which is what I think

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<v Speaker 3>you know you're referring to. We're the world's fourth largest

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<v Speaker 3>credit agency now, so we're a little bit smaller than

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<v Speaker 3>the three legacy firms that you referenced, But where we

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<v Speaker 3>are growing and where we're focused is, you know, primarily, uh,

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<v Speaker 3>in adjacencies. We're very strong in Canada. We own DVRs

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<v Speaker 3>and so that's the premier franchise in Canada, and so

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<v Speaker 3>we're big partners to all the financial institutions and issuers

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<v Speaker 3>in Canada. And then uh, you know, around the world,

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<v Speaker 3>we've really tried to lean into areas where there's a

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<v Speaker 3>premium on transparency, there is a premium on service, and

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<v Speaker 3>where some of the barriers that exist in the fundamental

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<v Speaker 3>corporatings business in in you know, elsewhere around the world

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<v Speaker 3>don't exist because there's more of a level playing field.

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<v Speaker 3>And that's one of the interesting things about private credit

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<v Speaker 3>and if you're trying to rate debt there the playing

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<v Speaker 3>field is far more leveled because it doesn't exist uh

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<v Speaker 3>in the way that the traditional corporate fundamentals have existed,

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<v Speaker 3>which have sort of favored, if you will, the legacy players,

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<v Speaker 3>and in in a way that some new markets do not.

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<v Speaker 1>All right, Canal, we have to leave it there.

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<v Speaker 2>Great to have some time with you on this Friday,

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<v Speaker 2>that is Kunal Kapor. He is the CEO of morning

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<v Speaker 2>Star