Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Welcome to in the City.
Speaker 1: Each week we unpack a story that's crucial to the
Speaker 1: world's financial capitals and Francis Laqua And this week, while
Speaker 1: everyone is talking about Donald Trump so called Liberation Day
Speaker 1: and the TERRFF announcements he might make, we want to
Speaker 1: look at what some of the consequences of those policies are.
Speaker 1: In particular, one market that's getting a boost. Private credit
Speaker 1: feels like the topic of the moment, So what's driving
Speaker 1: the momentum.
Speaker 2: Welcome to the City of London, the City of the City,
Speaker 2: the City of London.
Speaker 1: Please mind the gap between.
Speaker 2: The Trump and the plant, the financial hearts of the country,
Speaker 2: the city, the city. Welcome to in the city, stand
Speaker 2: clear of the doors.
Speaker 1: I'm glad to be joined here in the London studio
Speaker 1: with our senior reporter, Silas Brown. Silence, thank you so
Speaker 1: much for joining us.
Speaker 2: Thank you very much for having me.
Speaker 1: Private credit, I mean, it's the only thing that people
Speaker 1: are excited about talking about, and it's an ass a
Speaker 1: class that's grown exponentially really in the last couple of years.
Speaker 2: Yeah, it was a great coincidence that I decided to
Speaker 2: cover private credit just at the moment of the boom.
Speaker 2: So I'm enjoying the boom as well. But yeah, no, Look,
Speaker 2: private credit is growing, and in a way, it thrives
Speaker 2: in moments of manageable uncertainty. And I think the rollout
Speaker 2: of the tariffs has provoked a degree of uncertainty which
Speaker 2: has made its arch rival, the leverage loan market, struggle,
Speaker 2: and so private credit is a kind of clear beneficiary
Speaker 2: of that.
Speaker 1: So that's why has private credits actually increased so much.
Speaker 2: Private credit is in essence a service provider for private equity,
Speaker 2: and so I think, in very blunt terms, as the
Speaker 2: private equity market has been expanding, this new form of
Speaker 2: raising money to back the buy apps has risen, and
Speaker 2: now it has grown to a sufficiently high amount that
Speaker 2: even more players, even bigger asset managers, are piling money
Speaker 2: and resources into developing their own franchises, and so the
Speaker 2: increase of the market has become exponential.
Speaker 1: So as there are two annual letters to shareholders that
Speaker 1: I read religiously. One is Jamie Diamond and the other
Speaker 1: one is Larry Fink. I was, you know, surprised or encouraged,
Speaker 1: whatever word you want to use to see that Larry
Speaker 1: Fink was so focused on private markets this week.
Speaker 2: Yes, well, I hope other executives aren't upset by the
Speaker 2: fact that you don't reach them religious.
Speaker 1: I read a shareholder letters I just look forward to.
Speaker 2: But yeah, no, I think it was. It was a
Speaker 2: big statement, and I mean they've been on this kind
Speaker 2: of acquisition spree unparalleled in the history of private markets.
Speaker 2: With these two milestone acquisitions of g ip and and
Speaker 2: HPS and also pre Quinn Data Provider. I think they
Speaker 2: have acknowledged that there's two comparable markets, one which is
Speaker 2: the established publicly traded market and the private market. One
Speaker 2: is clearly growing and the other one is dwindling. And
Speaker 2: so I think it's acknowledgment from Larry think that a
Speaker 2: lot of the action is going private, and I think
Speaker 2: that's for a series of reasons. One is pretty obvious,
Speaker 2: which is that if you're looking for high fees, you
Speaker 2: can find them in private markets, not in public markets.
Speaker 2: Our brilliant colleague, Scilla Brush did did the maths, and
Speaker 2: he said that one of BlackRock's biggest funds, the I Shares,
Speaker 2: the brilliantly named I Shares Core SMP five hundred ETF,
Speaker 2: which manages about six hundred billion of assets only has
Speaker 2: a fee of zero point zero three percent, which brings
Speaker 2: in one hundred and eighty million in annual revenue. Conversely,
Speaker 2: the six hundred billion in alternative assets that Blackrock now
Speaker 2: has its expected to bring in three billion, and that
Speaker 2: doesn't include performance fees. By the way, the difference is stark.
Speaker 2: And I think it's a big moment for private markets
Speaker 2: because black Rock is an expert in bringing different financial
Speaker 2: products to retail investors, and I think that's clearly something
Speaker 2: that is going ahead in private markets.
Speaker 1: Lear rethink basically promise to open up private markets to
Speaker 1: millions of every day investors, not just a wealthy few
Speaker 1: a How will he do that and does that change
Speaker 1: the proposition for private markets?
Speaker 2: I think that is the key point when it comes
Speaker 2: to black Rock's introduction into private markets is their ability
Speaker 2: to move and sell financial products to retail investors. The
Speaker 2: key thing for me with private markets is to do
Speaker 2: with scale. They've picked the low hanging fruit of pension
Speaker 2: funds and softeign wealth, and now they're moving on to
Speaker 2: insurance and also retail, and that's the key drivers for
Speaker 2: growth in the industry. So I think it's significant that
Speaker 2: black Rock is energetically figuring out ways of selling private
Speaker 2: markets products to retail investors.
Speaker 1: So this is one of my favorite codes from Larry.
Speaker 1: Think it's quite dramatic. They're in private markets locked behind
Speaker 1: high walls with gates that only open for the wealthiest
Speaker 1: or largest market participants, and so he's trying to sell
Speaker 1: this idea of your democratizing.
Speaker 2: Yeah, it sounds like one of Bloomberg News's articles brilliantly worded. Yeah, no,
Speaker 2: I think that's Shakespeare. But okay, I think that's the
Speaker 2: key thing. His point is that there's only a small
Speaker 2: group of investors that are benefiting from this attractive proposition
Speaker 2: that private markets has to offer. By the way, he's
Speaker 2: not alone in wanting to do this. If you look
Speaker 2: at the earnings calls of Blackstone or Apollo, you will
Speaker 2: also find a motivation to construct different ways of bringing
Speaker 2: high net worth slash retail people into private markets.
Speaker 1: Sounds this President trump push on tariff's must mean bad
Speaker 1: news for public markets, but are news for private markets?
Speaker 2: I think so. The canny among private equity firms have
Speaker 2: done is sort of reincarnate themselves like the phoenix, and
Speaker 2: they've moved from being known as buyout firms to being
Speaker 2: known as private markets firms. So the lights of Blackstone
Speaker 2: and Apollo, they're as proficient in investing in credit and infrastructure,
Speaker 2: and I think that naturally makes the investment proposition all
Speaker 2: the more appealing. I think with public markets, obviously they
Speaker 2: are at least superficially more affected by volatility, and so
Speaker 2: I think to bring a company to IPO, or to
Speaker 2: even sell debt for a company in the publicly traded
Speaker 2: markets is much trickier in times of uncertainty, and I
Speaker 2: think with private credit and private equity firms, I think
Speaker 2: one of their key advantages is their ability to price
Speaker 2: through uncertainty, provided it's not an uncertainty that it's like
Speaker 2: totally unmanageable.
Speaker 1: Is there just simply better returns and more money in
Speaker 1: private market?
Speaker 2: I think this is the real question of the decades.
Speaker 2: I think private equity and to a certain lesser extent,
Speaker 2: private credit flourished in a low interest rate environment where
Speaker 2: the ability to buy and sell companies was a bit easier.
Speaker 2: Now with a prolonged period of high interest rates, and
Speaker 2: often a lot of these companies having already been bought
Speaker 2: by private equity a lot of the attractive companies. The
Speaker 2: ability for them to deliver returns for investors, I think
Speaker 2: is the key question of the next five years. And yeah,
Speaker 2: we'll wait and see. I mean it certainly the practitioners
Speaker 2: think it is, and presumably Larry think does as well.
Speaker 2: So I guess it's a wait and see.
Speaker 1: So silas you mentioned higher for longer interest rates have
Speaker 1: gone up so quickly, do we really know that the
Speaker 1: valuations of a lot of these private companies and private
Speaker 1: credit aren't correct.
Speaker 2: I think the challenge for private equity firms is with
Speaker 2: a prolonged period of higher in trust rates when they've
Speaker 2: bought companies when the rates were lower, will the valuation
Speaker 2: judgments that they applied when they bought the companies bear
Speaker 2: out when they sell the companies. I think M and
Speaker 2: A has fallen globally, and perhaps that informs us as
Speaker 2: to why that there is a challenge selling these businesses
Speaker 2: at their lofty heights that they valued them when they
Speaker 2: bought them. On the private credit side, again it is
Speaker 2: a hot topic how do you value these loans? And
Speaker 2: I think there are actually different judgments as to how
Speaker 2: you value these loans, both in Europe and the US.
Speaker 1: You know, we speak to a lot of private market
Speaker 1: chief executives, and I always feel the need to push
Speaker 1: them a little bit, say, you know, the problem is
Speaker 1: that some of the valuations could be a concern, Like
Speaker 1: the difference between a public company and a private company
Speaker 1: is that they could have a lot more debt and
Speaker 1: you don't really know how to value it unless you
Speaker 1: sell it.
Speaker 2: Yeah, I mean, look, we've done a lot of reporting
Speaker 2: on valuation mismatches in private credit. I think the mismatches
Speaker 2: become more stark naturally in private equity. I think regulators,
Speaker 2: both in the US and Europe are keen to understand
Speaker 2: valuation methodologies more. The key things I think from a
Speaker 2: regulatory perspective that keep coming up are valuations. How do
Speaker 2: you value an asset that isn't traded? I don't have
Speaker 2: the answer. It's a tricky one. But also just transparency.
Speaker 2: It's a totally different realm to public companies and their
Speaker 2: disclosure requirements. But having said that, conversely, and slightly slightly ironically,
Speaker 2: one of the reasons why I think private markets are
Speaker 2: booming is because companies don't have to go through the
Speaker 2: kind of onerous rigmarole of quarterly earnings and disclosures, and
Speaker 2: so if you are bringing disclosures to private markets, you
Speaker 2: may find similar frustration both in finance and also corporate executives.
Speaker 1: Wasn't it something like a couple of weeks ago at
Speaker 1: the FCA was reviewing valuations across threety six firms serving
Speaker 1: UK clients and they basically said that they failed to
Speaker 1: police conflicts of interest. The concern with private markets full
Speaker 1: stop is that they can be a little bit murky. Yeah.
Speaker 2: I think they are a lot more discreet and secretive
Speaker 2: than their public market counterparts. You have interesting contradictions. For example,
Speaker 2: the largest private equity firms also owned some of the
Speaker 2: largest private credit units. I think you can find conflicts
Speaker 2: of interest across the board in all financial markets. But
Speaker 2: I think a lot of the evolution of private markets
Speaker 2: is really untested and still I think hard for regulators
Speaker 2: to understand. A lot of the strength in private markets
Speaker 2: is trying to correct problems that were inherent in financial
Speaker 2: markets already through the banking industry, and I think to
Speaker 2: a certain extent they've done that on the credit side.
Speaker 1: If you open private at a private companies private investments
Speaker 1: to retailers, does the regulation have to change.
Speaker 2: I think that's an important question. In a way, there's
Speaker 2: been limited regulatory scrutiny over private markets because the market
Speaker 2: has been somewhat closed off from retail investors, And one
Speaker 2: of the questions going forward is will the regulation have
Speaker 2: to change as a result of opening the market to
Speaker 2: the people on the street. I think it would be
Speaker 2: a natural conclusion to say it would. And I think
Speaker 2: it would be a fair conclusion to say it would,
Speaker 2: because ultimately regulators are interested in protecting retail investors from
Speaker 2: financial risk. With the dawn of this opportunity set, which
Speaker 2: is clearly attractive to some retail investors, that would naturally
Speaker 2: beg the question of when's the regulation going to adjust
Speaker 2: to that too.
Speaker 1: And if black Rock wants to open up this asset
Speaker 1: class to reach tail investors, will others do the same?
Speaker 2: Yes? I think with or without black Rock, there's been
Speaker 2: a concerted effort to build and develop financial products that
Speaker 2: would be suitable to retail investors, particularly in the US,
Speaker 2: and you see firms you know, Apollo and Blackstone and Ares,
Speaker 2: the kind of titans of private markets also discussing ways
Speaker 2: to accommodate retail investors. I think you can say with
Speaker 2: a high degree of certainty that this will be the
Speaker 2: topic going forward or one of the key topics going
Speaker 2: forward for both private credit and private equity.
Speaker 1: Silas, thank you so much, Thank you thanks for listening
Speaker 1: to this week's In the City from Bloomberg. This episode
Speaker 1: was hosted by me Francin Laqua. It was produced by
Speaker 1: Summersati and Moses and Dam with sound design by Blake Maples.
Speaker 1: Brendan France Newnham is our executive producer. Special thanks to
Speaker 1: Silas Brown. Please subscribe, rate, and review wherever you listen
Speaker 1: to podcasts.