Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 2: Joe, I keep thinking about that Sam Altman hype cycle
Speaker 2: kind of phrase, the whole it's over and then we're
Speaker 2: so back back thing. And obviously he was talking about
Speaker 2: AI and how people you know, feel about AI, but
Speaker 2: I think you could apply it to a bunch of
Speaker 2: different markets at the moment. So AI obviously, but also
Speaker 2: private credit totally. Think back to the end of last year, right,
Speaker 2: we had all the JP Morgan Jamie Diamond's proverbial cockroaches
Speaker 2: emerging from private credit, and people started to get really worried.
Speaker 2: Fast forward to January twenty twenty six, and a lot
Speaker 2: of those concerns seem to have faded into the background.
Speaker 3: Right, you wrote the thing, right, spreads everywhere are super tight,
Speaker 3: and already we know that the stock market is up
Speaker 3: for the year, but credit market is off to a
Speaker 3: very strong start of all flavors.
Speaker 2: From what I understand, right, stock markets stealing all the spotlight.
Speaker 2: But if you look at the corporate bond market, now
Speaker 2: this is the public bond market not private, but spreads
Speaker 2: are at basically historic tights. I think the high Yield
Speaker 2: Index is starting at its tightest level ever in the
Speaker 2: history of the index for the year. This is crazy,
Speaker 2: but it also highlights an important point, which is that
Speaker 2: spreads and returns are all relative. Yeah, right, And so
Speaker 2: if the public market is absolutely booming, that could be
Speaker 2: a good thing for private credit. But also private credit
Speaker 2: competes with the public market, right, so if you're getting
Speaker 2: pretty good returns in public credit, leverage loans, something like that,
Speaker 2: maybe you're not going into private credit as much as
Speaker 2: you used to.
Speaker 3: What if you found a house that just had one
Speaker 3: cockroach that could you imagine.
Speaker 2: There's never one cockroach? That's the point.
Speaker 3: There had to have been a first cockroach that enters
Speaker 3: the house. You get it really quickly in your and
Speaker 3: then you don't have a cockroach problem.
Speaker 2: Did I ever tell you I hate cockroaches so much?
Speaker 2: The first of all, the first Japanese word I ever
Speaker 2: relearned when I moved back to Japan as like a
Speaker 2: fourteen year old was go ki bori hoihoi because I
Speaker 2: had to go down to the local compini, the convenience
Speaker 2: store and buy cockroach hotels because the entire apartment was infested.
Speaker 2: And secondly, I hate cockroach is so much. I once
Speaker 2: read an entire book about cockroaches just to know my enemy. Wow,
Speaker 2: it was like three hundred pages on cockroache.
Speaker 3: Do we get the author on the podcast?
Speaker 2: It was actually a really good book. It was a
Speaker 2: sort of like cultural and scientific study of the history
Speaker 2: of cockroaches. But anyway, we are getting massively off topic.
Speaker 2: Shall I introduce our guest. We do, in fact have
Speaker 2: the perfect guest. All right, So we're going to be
Speaker 2: talking all things private credit, including how private credit is
Speaker 2: relating to the AI space. At the moment, we're speaking
Speaker 2: with Michael Zowatsky, also known as Ze. He is the
Speaker 2: global Chief Investment Officer for Blackstone Credit and Insurance. So Z,
Speaker 2: thank you so much for coming on the podcast.
Speaker 4: Wonderful to be here, Thanks for having me.
Speaker 2: So I am told by your lovely Blackstone representatives that
Speaker 2: over the last twenty years you have grown Blackstone's credit
Speaker 2: franchise into the largest business by assets at Blackstone. How
Speaker 2: hard was that? Were you just sort of like riding
Speaker 2: a wave of corporate issuance.
Speaker 4: Well, let's talk about a few things that have happened here.
Speaker 4: You know, I often get asked about this growth of
Speaker 4: private credit, and I think there's a misconception that that
Speaker 4: growth was driven by excess risk taking. But when you
Speaker 4: actually step back and think about what's happened in the market,
Speaker 4: you basically had a innovative breakthrough that changed the way
Speaker 4: business was done that was better for all market participants.
Speaker 4: The way I like to analogize it to is what
Speaker 4: happened with Amazon in the retail space. Right before Amazon,
Speaker 4: if you want to go buy something, you had to
Speaker 4: go to the store. But Amazon kind of took out
Speaker 4: that middleman and brought you the consumer directly in the
Speaker 4: manufacture and in the process created something that was simpler,
Speaker 4: more efficient, better for the economy, more transparent. What's private
Speaker 4: credit done. It's done the same thing. It's brought the
Speaker 4: borrower right up directly to our investor's capital least. Sometimes
Speaker 4: call it this farm to table model. Right, what have
Speaker 4: you done in that process? You've cut out all the middlemen,
Speaker 4: all the syndication, all the trading desks, all the stuff
Speaker 4: that led to leakage along the way, and in the
Speaker 4: process you built something that was better for all market participants.
Speaker 4: If you're a borrower, you get to speak directly to
Speaker 4: your lender. You get a customized solution, you get speed,
Speaker 4: certainty of execution. If you're an investor, you capture all
Speaker 4: of that excess leakage in the form of higher returns.
Speaker 4: And that's been the case for the last twenty years.
Speaker 4: And by the way, if you're the financial markets, you
Speaker 4: have an ecosystem that is less levered. More asset liability
Speaker 4: management brings more financial stability to the overall ecosystem. When
Speaker 4: you have something that's really good for all market participants,
Speaker 4: it tends to grow a lot. And that's what's happened
Speaker 4: in private credit.
Speaker 3: What is the equivalent of like in this analogy, which
Speaker 3: I really like, what is the equivalent of the web?
Speaker 4: Right?
Speaker 3: So, the reason Amazon could cut out the physical bookstore
Speaker 3: or the various other retailers, et cetera, is because the
Speaker 3: Internet exists and that creates solves some information problems, et cetera.
Speaker 3: How would you described the sort of like the thing
Speaker 3: that exists now such that so many different middleman and
Speaker 3: so forth can be cut out? Scale okay, scale?
Speaker 4: Right. The reason we couldn't do what we do today
Speaker 4: twenty years ago, Yeah, is because we didn't have the
Speaker 4: capital base, We couldn't write a billion dollar plus deal.
Speaker 4: Here's an interesting fact. Before twenty twenty one, there were
Speaker 4: only five billion dollar plus private credit deals done. Ever
Speaker 4: since twenty twenty one, one hundred plus, and we have
Speaker 4: Blackstone have done most of them. So what does that mean.
Speaker 4: We have the scale of capital to actually solve the
Speaker 4: problems for our clients. We have the breadth of team
Speaker 4: to go out and cover the market and bring these
Speaker 4: solutions direct to our bart worst. And then the other
Speaker 4: thing that's happened is the expansion of private credit beyond
Speaker 4: what a lot of people think of it as, which
Speaker 4: is middle market sponsored back back lending, into what we
Speaker 4: call the real economy. Right, taking what is a two
Speaker 4: trillion dollar market today and thinking about a thirty plus
Speaker 4: trillion dollar addressable market when you think about areas like
Speaker 4: private investment, grade real assets, asset back finans, and so
Speaker 4: the other big piece of this is just the massive
Speaker 4: expansion in the addressable market that's come about.
Speaker 2: So I take the point about you know, customized financing
Speaker 2: solutions and bringing investors closer to capital and all of that,
Speaker 2: but at the same time, like the concern is that
Speaker 2: as the space grows, competition for deals increases, and that's
Speaker 2: when you start to see not just potentially lower spreads,
Speaker 2: but also more leverage. And we have seen, you know,
Speaker 2: some first leans that are now UNI tranches and things
Speaker 2: that would normally spark a little bit of worry. Is
Speaker 2: that something that you're seeing in the market.
Speaker 4: It's funny. Look, I've been doing private credit for two decades.
Speaker 4: I think to the deals that we were first doing
Speaker 4: in private credit twenty years ago, and I would tell
Speaker 4: you I don't know that a single one of them
Speaker 4: would pass our investment committee today. They were small, they
Speaker 4: were cyclical, they were basically the stuff the banks wouldn't do.
Speaker 4: Fast forward to today. Think about the average direct lending
Speaker 4: deal we do. It's a two hundred million dollar EBITDAV business.
Speaker 4: It's forty percent loan to value. Pre GFC loan to
Speaker 4: values on deals were sixty five percent plus. And so
Speaker 4: when I think about the risk posture of a senior
Speaker 4: secured loan today, it feels pretty good relative to history.
Speaker 4: And then that needs to be combined with the fact
Speaker 4: that this opportunity in investment grade private credit, I would say,
Speaker 4: is the fastest growing opportunity we see in credit at Blackstone.
Speaker 2: Right, So this is the other new thing that's happening
Speaker 2: is ig private credit. So you know, private credit extended
Speaker 2: to companies with very good balance sheets, not junk graded,
Speaker 2: has become more of a thing. It's going mainstream, and
Speaker 2: a lot of that is driven by AI is ands
Speaker 2: and tech related issuance. Talk more about what you're seeing
Speaker 2: in that space.
Speaker 4: Well, I think that's a big part of it. Right.
Speaker 4: Anytime you see a significant need for capital, which we
Speaker 4: obviously see in the data center build out, and then
Speaker 4: connected to that all the energy, power and infrastructure that
Speaker 4: needs to accompany that, you see huge capital needs and
Speaker 4: markets that need that much capital need to access all
Speaker 4: available options, and that includes public credit, but that also
Speaker 4: includes private credit. Morgan Stanley put out a piece late
Speaker 4: last year that estimated that eight hundred billion dollars of
Speaker 4: private credit alone is needed to finance the digital infrastructure
Speaker 4: build out over the next five years. Okay, so that's
Speaker 4: a massive number. I think what gets missed when people
Speaker 4: think about the financing element of financing a data center,
Speaker 4: for example, is we're financing fifteen to twenty year take
Speaker 4: er pay contracts with some take pay contract meaning think
Speaker 4: about a triple net lease contract, matter what your usage is,
Speaker 4: no matter what your operating costs are, you're getting a
Speaker 4: fixed sum every single month from your tenement. And they
Speaker 4: can't get out of that contract. Okay, okay. And you're
Speaker 4: getting that from some of the highest quality credit counter
Speaker 4: parties in the world, right, Hyperscalers are the tenants in
Speaker 4: most of the data centers today. And so as I
Speaker 4: sit with my credit hat on, if I can lend
Speaker 4: against some of the best counter parties in the world
Speaker 4: against a known, defined stream of cash flows, and I
Speaker 4: can do that with one hundred and fifty to two
Speaker 4: hundred basis points of excess spread versus like rated public credit.
Speaker 3: Yeah, well, so explain that. So we the most credit
Speaker 3: worthy companies in the world are these cash flow gushers,
Speaker 3: the big tech companies, et cetera. What is the I
Speaker 3: still don't quite get what is the advantage for them
Speaker 3: of the private credit market spreads as you mentioned, are wider.
Speaker 3: They can access the bond market. They do it all
Speaker 3: the time, or they certainly can. So what is what
Speaker 3: is private credit solve for the metas of the world
Speaker 3: and the apples of the world, such that they can't
Speaker 3: borrow versus the public credit market.
Speaker 4: Customization, speed, certainty, flexibility, bringing that solution direct to the borrower.
Speaker 4: Sometimes there's certain elements in terms of the timing or
Speaker 4: whatever the case may be that requires a private solution.
Speaker 3: Confidentially, you just explain that a little further, Like what
Speaker 3: is it about these projects specifically when you say like customization.
Speaker 2: If people say customization all the time, give us a specific.
Speaker 4: Exam Yeah, okay, Well, sometimes there's a construction element. Okay,
Speaker 4: So you need to fund over time as opposed to
Speaker 4: funding all of your capital day one. That's a good example, right.
Speaker 4: Sometimes you need to structure in a certain way in
Speaker 4: terms of the timing of the cash flows. That's another example.
Speaker 4: So there are things that are needed that don't necessarily
Speaker 4: increase credit risk, but they don't fit the cookie cutter
Speaker 4: mold of a straight away investment grade public on.
Speaker 2: So this might be a difficult question to answer. But
Speaker 2: when you look at your own portfolio, your own very
Speaker 2: large portfolio, can you give like a rough estimate of
Speaker 2: how much AI exposure has increased over the years.
Speaker 4: Well, that's a fascinating question, right, because I tend to
Speaker 4: think about AI exposure pretty broadly, Right, because I think
Speaker 4: AI will impact not just data centers and the direct right,
Speaker 4: you know, first derivative impact, but the second derivative impact,
Speaker 4: the third derivative impact.
Speaker 2: So you're looking at companies that could be disrupted as.
Speaker 4: We're looking at it all and we have been looking
Speaker 4: at all and this is this is part of working
Speaker 4: at Blackstone right, Like, we have unbelievable insights into what's
Speaker 4: going on all around the globe in all of these markets,
Speaker 4: not just within our credit business that has five thousand
Speaker 4: plus barwords, but our private equity business, our infrastructure business,
Speaker 4: our real estate business. We happen to own a couple
Speaker 4: of the largest data center developers in the world. We
Speaker 4: have a huge operating team that helps companies implement AI capabilities,
Speaker 4: help them play offense and defense when needed. And so
Speaker 4: we leverage all of these resources. And I think about
Speaker 4: AI impact across almost every business in our portfolio, the
Speaker 4: varying degrees, But I think you have to be front
Speaker 4: footed in thinking about that as an investor.
Speaker 2: What about direct exposures, I forget about I take the point,
Speaker 2: but like, the reason I'm asking is because there are
Speaker 2: some concerns around concentration limits at places like insurers.
Speaker 4: Yeah, Look, we have over five hundred billion dollars of
Speaker 4: assets and credit at Blackstone, and I would tell you,
Speaker 4: like the amount of direct data center exposure is a
Speaker 4: small minority that it would not rise to the level
Speaker 4: of something where any of our clients would feel like
Speaker 4: they have concentration.
Speaker 3: What about in terms of I guess said like formal
Speaker 3: concentration limits. Just in terms of like on a day
Speaker 3: to day business right now or over the last year,
Speaker 3: how much of new new activity would you say is
Speaker 3: related to either sort of data centers or maybe some
Speaker 3: of the power the power financing that is also needed
Speaker 3: for data centers.
Speaker 4: Look, I would tell you it's a material portion of
Speaker 4: what we're doing because it is such a capital intensive,
Speaker 4: credit intensive part of the market. But when I think
Speaker 4: about everything we're doing across our business and credit, it
Speaker 4: doesn't it doesn't screen as something that's you know, significantly overweight.
Speaker 4: Like if I think about what we're doing in our
Speaker 4: private investment grade business, that's a real asset strategy broadly
Speaker 4: defined right that includes obviously digital infrastructure and includes energy
Speaker 4: and power, but it includes residential mortgages, which is a
Speaker 4: massive asset class. It includes equipment, finance. We just announced
Speaker 4: a deal recently to do an aircraft engine partnership, and frankly,
Speaker 4: I'd say the single biggest thing that it includes is
Speaker 4: what we call corporate solutions, and these are large scale,
Speaker 4: customized private credit partnerships with public investment grade companies. And
Speaker 4: so recently we did a deal with Rogers up in
Speaker 4: Canada where we did a five billion dollar financing for
Speaker 4: them against their network infrastructure back haul. We then did
Speaker 4: a deal late last year with Cempra Infrastructure to help
Speaker 4: them build out an LENNG project. And we're seeing that
Speaker 4: not just in the US, we're seeing that globally. We
Speaker 4: announced the deal yesterday in fact, with Ahold, the European
Speaker 4: supermarket company, to help expand their logistics footprint. And so
Speaker 4: I would tell you the biggest theme I see across
Speaker 4: our private investment grade business is this notion of what
Speaker 4: we call corporate solutions.
Speaker 2: What's it like sourcing deals at the moment? So Blackstone
Speaker 2: obviously very big, So I imagine people are coming to you constantly.
Speaker 2: But at the same time, I'm one of the things
Speaker 2: we heard when the private credit market was very, very hot,
Speaker 2: was there's a lot of competition for deals, right, and
Speaker 2: everyone wants in on certain financing transactions. So what's it like?
Speaker 4: You got to ticket market by market, right, we were
Speaker 4: just talking about private investment, great corporate solutions, some of
Speaker 4: these big infrastructure credit areas. I would tell you in
Speaker 4: that market there is more demand for capital. Then there
Speaker 4: are players like Black Zone with the scale to actually
Speaker 4: meet those needs. And so that is a market where
Speaker 4: I would tell you we have robust deal activity, and
Speaker 4: that is a market where I see a lot of
Speaker 4: excess spread. I know you mentioned earlier that spreads are tight.
Speaker 4: That's an area where I would say spreads are actually
Speaker 4: quite attractive. Right. If you think about public IG spreads
Speaker 4: today are eighty basis points, if you can make two
Speaker 4: hundred and fifty basis points it like for like credit
Speaker 4: rated risk like, that's a lot of relative excess spread.
Speaker 4: And that's happening because the demand for capital relative to
Speaker 4: the supply of capital is quite attractive, and that's showing
Speaker 4: up for us as lenders. I'd say in the direct
Speaker 4: line market, that's a market where spreads have tighten in
Speaker 4: sympathy with the liquid subinvestment grade markets, but the excess
Speaker 4: spread remains. Right, that excess spread of a couple hundred
Speaker 4: basis points persists. I think what is helping is you
Speaker 4: are seeing this increase in deal activity. We saw very
Speaker 4: strong M and A activity in the back half of
Speaker 4: last year. If I look at our Q four pipeline,
Speaker 4: it's actually up twenty five percent versus what it was
Speaker 4: at this time last year, and so I think we
Speaker 4: are optimistic about a strong recovery and deal activity that
Speaker 4: will help on your point in terms of sourcing deals
Speaker 4: in that market specifically, I think the other thing that's
Speaker 4: really important, and you asked this question around how do
Speaker 4: we scale a business. Part of it is not just
Speaker 4: waiting and sitting for the phone touring. A huge part
Speaker 4: of what we do is think about the thematic areas
Speaker 4: within all of Blackstone, not just credit that we want
Speaker 4: to deploy capital in and digital, infra, energy and power.
Speaker 4: Those are good examples in the investment grade space, but
Speaker 4: there are also examples in the subinvestment grade space life sciences,
Speaker 4: utility services. And what our team does is we proactively
Speaker 4: identify these companies and pitch them customized solutions. And because
Speaker 4: we have the scale of capital to actually solve that problem,
Speaker 4: we can do that. We did a deal late last
Speaker 4: year with a company called Signant Health in a life
Speaker 4: sciences space. The billion dollar plus transaction that we led.
Speaker 4: How did we do that? Well, we had financed their
Speaker 4: number one competitor. We had followed this loan because we
Speaker 4: had held it in our liquid book, and so we
Speaker 4: had the idea, Hey, let's call this company and say
Speaker 4: you should do a private loan. And that's where the idea,
Speaker 4: aation comes, and that's where the differentiation in the market comes.
Speaker 4: A lot of people can pick up the phone, not
Speaker 4: a lot of people can create their own ideas and
Speaker 4: actually effectuate them. And I think that's something we're uniquely
Speaker 4: good at.
Speaker 3: Everything is just sort of like scale empower laws and
Speaker 3: compounding return from having grown and having that network the
Speaker 3: big get bigger. It's really such an extraordinary thing and
Speaker 3: we see in tech, but we also clearly see it
Speaker 3: in finance. I think with like you know, the percentage
Speaker 3: of market share, that a cruise to the biggest players
Speaker 3: clearly an advantage. Obviously, want to talk more about the
Speaker 3: industry overall, going back to you know, Tracy mentioned, we're
Speaker 3: so it's so over we're so back, we're so so cycleed.
Speaker 3: So at the end of last year, there were two
Speaker 3: things there were like two like kind of blow ups
Speaker 3: in but both were both related to auto. So tree clore,
Speaker 3: I don't know if I'm pronouncing it.
Speaker 2: Try That's one of those words where I feel like
Speaker 2: very stupid pronouncing it the right way.
Speaker 3: Yeah, I M yeah, And I'm like, should I just
Speaker 3: say try color?
Speaker 2: Yeah?
Speaker 3: So there was a pre color and then first brands,
Speaker 3: which I'm pretty sure pronouncing correctly, and then there was
Speaker 3: like so that was like in the auto space, and
Speaker 3: then there was all this stuff that went viral for
Speaker 3: about five minutes, something about the chips and maybe they're
Speaker 3: going to depreciate faster than people expected. Bunch of people
Speaker 3: are going to be holding the bag and I want
Speaker 3: to back get that out aside, you get those blow
Speaker 3: ups in the auto area. Jamie Diamond comes out with
Speaker 3: the cockroaches. What was your read on that moment? Was
Speaker 3: there reason to think that there are more Creek colors?
Speaker 3: I just want to say that, I like saying you
Speaker 3: do well, thank you, more three colors out there.
Speaker 4: I would tell you when all of that was going down,
Speaker 4: we were scratching our heads. And the biggest reason we
Speaker 4: were scratching our heads were all of those examples were
Speaker 4: bank led BEG syndicated bag underwritten deals that somehow got
Speaker 4: confused with private credit. And this is the biggest frustration
Speaker 4: for us, because we looked at those deals and we said, hey,
Speaker 4: one of the advantages of private credit is you can
Speaker 4: actually do private level due diligence, you can get access
Speaker 4: to management team, you can do weeks of work, you
Speaker 4: can get private access to information. And so one of
Speaker 4: our observations there was there was this misconception, and that's
Speaker 4: why we think it's so important to continue to educate
Speaker 4: on the distinctions between public credit and private credit, and
Speaker 4: those situations were public credit. I think the other thing
Speaker 4: that I think people maybe don't appreciate is while private
Speaker 4: credit has gotten a lot of attention recently, private credit
Speaker 4: has been around for a long time. You can look
Speaker 4: at twenty year returns in private credit and you can
Speaker 4: see that they've outperformed liquid credit by several hundred basis
Speaker 4: points over twenty years through cycles. Also, you can look
Speaker 4: at the fact that realize losses over that twenty year
Speaker 4: period for the industry have been one percent. And so
Speaker 4: I think we look to the data, we look to
Speaker 4: the clarification, But then I think the last thing That's
Speaker 4: also important to highlight here is defaults happen in some
Speaker 4: the best bit great credit. And I think this is
Speaker 4: the other thing that I think gets missed. People see
Speaker 4: a headline about a credit issue. We have thousands of
Speaker 4: credit in our portfolios. Some of them are going to
Speaker 4: have issues. That is normal. If you look at the
Speaker 4: long term default rate in the leverage loan market, in
Speaker 4: the public high yield market, it's three percent. These things happen.
Speaker 4: We account for them in our underwriting, we account for
Speaker 4: them in how we mark our portfolio, and most importantly,
Speaker 4: we have the resources to deal with those situations. We
Speaker 4: have operating people, We've got a big workout team, and
Speaker 4: if we do have challenges in our book, I think
Speaker 4: to your point on scale, Joe, having the strength of Blackstone,
Speaker 4: the resource and intellectual capital of Blackstone to actually support
Speaker 4: those companies and drive good outcomes for our investors overturn,
Speaker 4: that's what matters.
Speaker 3: I take your point about the twenty year returns, but
Speaker 3: you know, twenty years ago the private credit industry barely existed, right,
Speaker 3: and then we've basically had a seventeen year bullmarket except
Speaker 3: for five minutes and twenty twenty eight a seventeen year
Speaker 3: bull market in risk assets. So I don't think it's
Speaker 3: crazy to say, like, yes, the returns the real they deliver,
Speaker 3: the faults are low. Defaults happen, but I don't think
Speaker 3: it's totally crazy to wonder if you're at turning points,
Speaker 3: because there's to some extent you can only take a
Speaker 3: twenty year track record so far if seventeen years of
Speaker 3: them were in more or less a NonStop bull market.
Speaker 4: So here's what I see. First off, what I think
Speaker 4: will happen in the market is that you will continue
Speaker 4: to see private credit grow, and you will continue to
Speaker 4: see strong private credit performance. That said, you're right, if
Speaker 4: I look forward versus looking back, I think it's reasonable
Speaker 4: to believe that you will see more dispersion in the
Speaker 4: asset class. You will see some players underperform, you will
Speaker 4: see some players have higher losses. I don't think that
Speaker 4: means the entire asset class will face challenges because the model,
Speaker 4: like we started with that Amazon analogy that still persists,
Speaker 4: the excess spread versus liquid markets, that is durable, the
Speaker 4: way our clients access private credit, and all of these
Speaker 4: new areas beyond direct lending. We're at the very very
Speaker 4: beginning of that very, very long road, and so I
Speaker 4: think the long term thesis for private credit is intact.
Speaker 4: By the way, you don't see massive ways of defaults
Speaker 4: outside of recessions, and it doesn't feel like to me
Speaker 4: we're headed into a recession. When I look at corporate
Speaker 4: earnings growth, when I look at where consumers are, when
Speaker 4: I look at fiscal and monetary stimulus, none of that
Speaker 4: points to recession to me. And so when I look forward,
Speaker 4: I don't see I don't see this big turning point
Speaker 4: for the industry. I see continued growth in the industry.
Speaker 4: But what I do see is more dispersion, which is
Speaker 4: a good thing. If you think about all established asset classes,
Speaker 4: you have top growd tile managers and you have bottom
Speaker 4: quartile managers, And so I think the asset class will
Speaker 4: be a lot more about who is better at originating deals,
Speaker 4: who is better at managing challenges in their portfolio, Who
Speaker 4: has the broadest aperture to identify areas within credit broadly
Speaker 4: defined where clients can deploy, where there is excess spread,
Speaker 4: where there is better risk adjusted returns. I think that's
Speaker 4: the era we're heading into, and I would say we
Speaker 4: strongly embrace that era.
Speaker 2: Okay, so you don't see lots of defaults coming up,
Speaker 2: But what about liability management exercises or just restructuring debt,
Speaker 2: because this is something that comes up occasionally. If you
Speaker 2: look at default rate for private credit, I think officially
Speaker 2: it's below two percent something like that, But if you
Speaker 2: add back in the liability management exercises that we've seen
Speaker 2: at places like First Brands, it goes higher. I think
Speaker 2: it goes to like five percent or something like that.
Speaker 2: Would you expect more companies to be restructuring debt as
Speaker 2: this dispersion effect maybe feeds through well.
Speaker 4: I think there's two pieces I want to unpack there. One,
Speaker 4: this whole notion of liability management. It really is a
Speaker 4: public market phenomenon, and it exists in the public markets
Speaker 4: because public credit documents are really weak, right. They don't
Speaker 4: have the same covenant protections that you have in private credit,
Speaker 4: and so you can have debt layered in front of you,
Speaker 4: you can have collateral strip That's what's happened in a
Speaker 4: lot of these situations in the public markets. Fortunately, in
Speaker 4: private credit, the documents are more protective, and so I
Speaker 4: think you will see less of that aggressive behavior in
Speaker 4: the private credit markets certainly versus the public credit markets.
Speaker 4: The second thing I would say, Tracy, is the default
Speaker 4: is just the beginning. What really matters to clients are losses,
Speaker 4: right because the strength of a private credit document allows
Speaker 4: you to get to a table and negotiate with the
Speaker 4: owner for maybe more equity. Sometimes we have to take
Speaker 4: control of the company and we can use all of
Speaker 4: the resources of Blackstone to improve that company and actually
Speaker 4: deliver a strong outcome for our clients. And so I
Speaker 4: think those are the two points I would focus on. Yes,
Speaker 4: you will see defaults, but the question is over time,
Speaker 4: what is the loss experience for investors? And that's something
Speaker 4: I think we have a lot of conviction in.
Speaker 3: Okay, So the other thing, besides the first brand and
Speaker 3: first brands and three color blow ups you just want
Speaker 3: to keep saying more times, was this anxiety about you know,
Speaker 3: the quality of some of these data sunderfining, like, oh,
Speaker 3: the chip's going to be as valuable as people think,
Speaker 3: and you know, actually it was just looking up, like
Speaker 3: from the credit default swabs on Oracle actually basically continuing
Speaker 3: to hit new highs. Core Weave, which is another one
Speaker 3: that people are watching a lot that's actually come in
Speaker 3: a bit, So maybe I don't know, people are chilled
Speaker 3: out a little bit. But from the capital provider the lenders,
Speaker 3: what is the appetite right now for AI or related
Speaker 3: infrastructure financing in the wave of some of these hiccups,
Speaker 3: and what we see in the CDs market for what
Speaker 3: might be some proxies for this kind of stuff.
Speaker 4: Look, I think the nature of the risk matters, right.
Speaker 4: I don't want to paint it with a broad brush,
Speaker 4: because you hit it. The type of collateral matters, who
Speaker 4: your counterparty matters. For us, whether we're financing chips, we're
Speaker 4: financing a data center, we don't want to take residual
Speaker 4: value risk, right, I don't view that as credit risk.
Speaker 4: So if I can invest in chips, if I can
Speaker 4: invest in a data center that has investment grade counterparty risk,
Speaker 4: and my debt will fully be repaid inside of that
Speaker 4: contractual agreement, whether it's triple net or whatever, and I
Speaker 4: don't have to take residual value risk. I don't care
Speaker 4: what that data center's worth in year twenty five. I
Speaker 4: don't care with those chips are worth in year seven.
Speaker 4: That's really good risk. I think when you confine it
Speaker 4: to that which is what we are doing. I think
Speaker 4: that's quite attractive. Will folks take that next layer of risk?
Speaker 4: They might, but you need to make it.
Speaker 3: See any pullback like some of the you know, the
Speaker 3: less triple net whatever they like, could say okay January
Speaker 3: twenty twenty six versut January twenty twenty five, any anxiety
Speaker 3: because we know that there is still incredible demand for
Speaker 3: the buildout. Right it's this multi year, multi trillion dollar thing.
Speaker 3: From your perspective right now, how strong is the capital
Speaker 3: base for that buildout? Has it changed at all?
Speaker 4: I think when you have the contractual protections that I'm highlighting,
Speaker 4: I think the demand is there now.
Speaker 3: Might there been some change to twenty twenty five?
Speaker 4: I would tell you that because the demand for capital
Speaker 4: is so significant, okay, and bigger than the supply of
Speaker 4: available capital. When you see that happen, you see spread
Speaker 4: sent to widen. That's a healthy thing. That's a good
Speaker 4: thing for the markets. And I think some of those
Speaker 4: deals that don't have the protections that I highlight, they
Speaker 4: have a harder time getting done in the credit markets,
Speaker 4: and you see them get funded in the equity markets.
Speaker 4: I think both of those things are healthy. I think
Speaker 4: when I take a big step back. There is a
Speaker 4: lot of chatter about this market, but we are firm
Speaker 4: believers in the impact of AI SURE, and I think
Speaker 4: the bigger risk is underestimating the impact of it on
Speaker 4: your broader portfolio. Like I was alluding to before, what.
Speaker 2: Was the fourth quarter actually like for you? And what
Speaker 2: sort of questions were you getting from investors? Because we
Speaker 2: know some other private credit players like Blue Oul got
Speaker 2: a bunch of redemptions, did you see similar pressures?
Speaker 4: Look, anytime you tend to see some of the press
Speaker 4: that you highlighted, it's natural to get questions, and we
Speaker 4: embrace those questions and we address them with the facts
Speaker 4: that I just highlighted. I think for us, we continue
Speaker 4: to see very strong demand for credit. I was around
Speaker 4: the world I think twice in the fourth quarter, meeting
Speaker 4: with our clients around the world, and I would tell you,
Speaker 4: in aggregate, they want more private credit right our institutional clients,
Speaker 4: I think year to day through nine thirty, inflows were
Speaker 4: up over fifty percent versus where they were a year prior.
Speaker 4: We held a forum with many of our big clients
Speaker 4: late last year to discuss relative value and risks in
Speaker 4: the credit market, and Actually it was great for me
Speaker 4: because it was a way I could actually survey our
Speaker 4: clients on their views, and I would tell you they
Speaker 4: continue to be very bullish on private credit. If anything,
Speaker 4: they feel under allocated to private credits and asset class
Speaker 4: and so I think the momentum will continue.
Speaker 3: This sort of touches on one of my favorite things
Speaker 3: to talk about, like sort of portfolio construction. But for
Speaker 3: these mega clients, yeah, they say, okay, we're under allocated
Speaker 3: more of this. What is it that in their broad
Speaker 3: portfolio allocation, the characteristics of private credit are solving for
Speaker 3: them right now?
Speaker 4: Yeah, well, look yield.
Speaker 3: Okay, especially everyone loves yield.
Speaker 4: Right, everybody loves yield. And I think even with spreads
Speaker 4: tighter and with rates coming off a little bit, even
Speaker 4: with that, the yield and credit relative to the earnings
Speaker 4: yield of the S and P is as attractive has
Speaker 4: been over a very long period of time. So credit
Speaker 4: remains attractive. I think when valuations are expensive like they
Speaker 4: are across the world today in most asset classes, being
Speaker 4: defensive at the top of the capital structure really matters diversification, right,
Speaker 4: most of our clients have a lot of credit risk.
Speaker 4: Corporate credit risk. Excuse me, corporate risk in their portfolio,
Speaker 4: whether it's private equity or on the credit side. What
Speaker 4: about real assets. That's why asset back finance, That's why
Speaker 4: investment grade have been so convincing for you know, so
Speaker 4: high conviction for our clients, because it offers that diversification,
Speaker 4: It offers that access to real hard assets that are
Speaker 4: downside protected versus corporate risk. And then I would say,
Speaker 4: the other big theme for our clients around the world
Speaker 4: is something we call multi asset credit. It is this
Speaker 4: notion that credit as a whole is a place I
Speaker 4: want to be deployed into. However, I'm also recognizing the
Speaker 4: fact that markets EBB and flow. Where one market within
Speaker 4: credit is attractive, one might be less attractive. How do
Speaker 4: I partner with someone like Blackstone across everything we do
Speaker 4: over a dozen different asset classes within credit to build
Speaker 4: a diversified, resilient, higher yielding portfolio that allows me to
Speaker 4: pivot to the best opportunities in the market wherever they
Speaker 4: may be.
Speaker 2: Setting aside some of the cockroach phenomenon of late twenty
Speaker 2: twenty five, there was another thing that happened that was
Speaker 2: pretty big for the credit market, and that was the
Speaker 2: withdrawal of the leverage lending guidelines for banks, basically making
Speaker 2: it easier for them to do broadly syndicated loans. Would
Speaker 2: you expect that to increase competition between the banks and
Speaker 2: the you know, BDCs so to speak.
Speaker 4: Look, that one's gotten a lot of attention. I've spoken
Speaker 4: to a lot of my friends at the banks recently.
Speaker 4: I think the reality is on new direct lending deals
Speaker 4: the market, and by the market I mean the private
Speaker 4: equity sponsors. They've largely spoken right like speed, certainty, flexibility, customization,
Speaker 4: all the stuff I hit on. That's a really good
Speaker 4: thing for them, especially when they're buying a company and
Speaker 4: they're in a competitive auction process. Even deals that met
Speaker 4: the leverage loan lending guidelines that were in place over
Speaker 4: the last two years, eighty five percent of them were
Speaker 4: financed privately, right, So even when you had complying deals,
Speaker 4: they were borrowers were still choosing private credit. I'd say today,
Speaker 4: our partnership opportunities with the banks, particularly on the investment
Speaker 4: grade side of what we do, it is more. It
Speaker 4: is bigger than anything I would say that we've seen
Speaker 4: over the last several years. The banks desire to partner
Speaker 4: with us where they keep the client arrangement, they keep
Speaker 4: the servicing, we keep the asset. We are seeing that
Speaker 4: as a global dynamic, especially around some of these longer
Speaker 4: duration asset classes, these hard asset asset classes, and those
Speaker 4: are the exact things that our investors want, and so
Speaker 4: I think that partnership opportunity will continue to grow.
Speaker 2: This is the front of me dynamic that we've spoken
Speaker 2: about before, right, So private lenders are in competition with
Speaker 2: the public lenders, the banks, but at the same time
Speaker 2: we're seeing more partnerships.
Speaker 3: No, and there's a lot of into something intuitive there
Speaker 3: about you know, wanting to keep that relationship, but also
Speaker 3: this element of like okay, the speed and customization and
Speaker 3: the financing. I have a question actually about management, internal
Speaker 3: management and the art of growing a business. You mentioned
Speaker 3: being proactive, so you're gonna have people on the phone
Speaker 3: and they're like, we did this thing, would you be
Speaker 3: interested in this solution and so forth? If this big
Speaker 3: company you're building it over time, I'm curious, like, how
Speaker 3: do you design a system such that you have lots
Speaker 3: of people working the phones but wanted to grow their
Speaker 3: own books but not lower standards and led garbage into it,
Speaker 3: and how do you think, like, how do you build
Speaker 3: those systems into it so that the person on the
Speaker 3: phone isn't, you know, yeah, bringing in a bunch of
Speaker 3: garbage just to grow volume.
Speaker 4: I love this question. So as I think back at
Speaker 4: the history of our business at Blaspheming Credit, obviously we've
Speaker 4: seen tremendous growth. We've seen tremendous success. A big turning
Speaker 4: point for me personally was COVID, because up until that
Speaker 4: point in time, we ran each of our businesses almost
Speaker 4: as verticals, right we whether it was direct lending or
Speaker 4: asset back finance or liquid credit. We had pms and
Speaker 4: each of those businesses and they ran each of their
Speaker 4: businesses from raising the capital to investing the capital, to
Speaker 4: manage the team almost as a vertical entity. We had
Speaker 4: no horizontal layer. But what COVID taught us when we
Speaker 4: were all at home and our pajamas and the markets
Speaker 4: were going walky, that we needed that connectivity. It would
Speaker 4: be really valuable if one piece of our business was
Speaker 4: really connected with the other piece of our business. And
Speaker 4: so we started building out our CIO office, which I lead,
Speaker 4: as a horizontal layer to connect all of the dots
Speaker 4: and bring tremendous consistency across our teams. And five years on,
Speaker 4: that team is now one hundred and twenty plus people.
Speaker 4: And what that team does day in, day out is
Speaker 4: unifying the fabric of every single one of our investment businesses.
Speaker 4: And so we have a single investment committee that whether
Speaker 4: you are a direct lending deal or an asset back
Speaker 4: dealer or a liquid deal, you go to that same
Speaker 4: investment committee, same underwriting standards, same memo, but most probably
Speaker 4: the same people hearing the deals from all the different
Speaker 4: parts of the Blackstone credit ecosystem to know where are
Speaker 4: the best opportunities. By the way, that investment committee also
Speaker 4: includes Senior represented as a Blackstone outside of credit. What
Speaker 4: are we learning in private equity? What are we learning
Speaker 4: an infrastructure that might influence this decision? The way we
Speaker 4: aggregate and monitor data. We now have one centralized portfolio
Speaker 4: company reporting system, and so at any time we see
Speaker 4: weaknesses in an area, instantly the entire team knows them
Speaker 4: and say, okay, let's pull back origination in this sector
Speaker 4: and let's lean into origination in this other sector. And
Speaker 4: so systemaizing our data, centralizing our processes, being even more
Speaker 4: plugged into the themes we see more broadly at Blackstone.
Speaker 4: That has been a critical part of our journey and
Speaker 4: I think a huge competitive advantage for us going forward.
Speaker 2: I just want to go back to where we started
Speaker 2: the conversation, and I mean really the beginning of the conversation.
Speaker 2: Your job title so CIO for Blackstone Credit and Insurance.
Speaker 2: I think this is really important and underappreciated in many ways.
Speaker 2: But the partnership between insurers and private credit has been phenomenal.
Speaker 2: Like a lot of the private credit growth that we
Speaker 2: are seeing is coming directly from insurers. How important is too,
Speaker 2: I guess be an insurance company if you're in the
Speaker 2: private credit space or have access to that pool of capital.
Speaker 4: Sure. Well, a couple points I want to really hit here.
Speaker 4: One is our business model an insurance because it is
Speaker 4: different than some others. Right, we don't have a captive
Speaker 4: insurance balance sheet. We don't originate insurance liabilities directly at Blackstone.
Speaker 4: All we do is act as a third party asset
Speaker 4: manager on behalf of insurance clients. That's what we do best,
Speaker 4: That's all we want to do. Brick bry Brick. We
Speaker 4: built our client base. It's a fully open architecture model.
Speaker 4: All of our clients sit shoulder to shoulder, and so
Speaker 4: I think that business model is critical. Right. We don't
Speaker 4: want to compete with our clients, and we want to
Speaker 4: make sure that every single one of them gets a
Speaker 4: great experience with us. I think that's a business model question,
Speaker 4: and I think that's an important part of how we
Speaker 4: set up that franchise. The second piece is of the
Speaker 4: why why are insurance companies seeking private credit capital. Well,
Speaker 4: in the case of a life insured, you're writing a
Speaker 4: forty life insurance policy. In case of writing an annuity,
Speaker 4: you're writing a set contract. The best way to manage
Speaker 4: assets against those liabilities are safe, cash paying contractual assets.
Speaker 4: Those assets are exactly what we originate in private credit
Speaker 4: and that excess spread that we've been talking about throughout
Speaker 4: this discussion one hundred and fifty to two hundred basis
Speaker 4: points for investment grade life for light credit that is
Speaker 4: extraordinarily valuable for insurance companies versus just buying traditional liquids
Speaker 4: on the screen. And we've seen US insurance companies adopt
Speaker 4: that in scale with a ton of success. And one
Speaker 4: of the big themes I see going forward is that
Speaker 4: same idea expanding to Europe, expanding to Asia because it
Speaker 4: is such a strong fit for insurance company balance sheets,
Speaker 4: high quality, safe contractual, LNG duration, investment grade assets.
Speaker 3: So I've never worked in insurance private credit, but I've
Speaker 3: worked in the media industry and the digital media industry.
Speaker 3: And one of the phenomenons that you see is company
Speaker 3: starts and they buy various third party solutions off the shelf, like, Oh,
Speaker 3: I'm going to buy a piece of software to run
Speaker 3: my content management system for the website. Then you grow
Speaker 3: and then you grow and you're like, you know what,
Speaker 3: this third party solution doesn't work. I need to build
Speaker 3: my own software for managing my content, et cetera. Does
Speaker 3: what happens, Like, do insurance companies hit a point where
Speaker 3: it's like, you know what, We've enjoyed doing business with you,
Speaker 3: but we actually want to launch our own private credit
Speaker 3: arm and we know that there are some of course,
Speaker 3: there are insurers who are joined at they do all.
Speaker 3: Is there a point where it just makes sense for
Speaker 3: them to have their own private credit shop or is
Speaker 3: it sort of case by case whether that makes sense
Speaker 3: for them?
Speaker 4: Well, I think the direction of travel broadly is the
Speaker 4: other way, right. The reason why our business has grown
Speaker 4: so much is because insurance companies have said, hey, lack So,
Speaker 4: you're really good at this. You've got huge, dedicated team,
Speaker 4: You've got tons of expertise. We can't replicate it. But
Speaker 4: that is company by company, and some continue to do
Speaker 4: some things in house. Some have certain strategies where they
Speaker 4: have that expertise and they'll continue to do that in house.
Speaker 4: And we're happy to complement in the areas where we
Speaker 4: can be additive. But I would say the overall direction
Speaker 4: of travel is a realization that we have built out
Speaker 4: this infrastructure, this origination team, this CIO portfolio management franchise,
Speaker 4: this asset allocation framework, and clients want to benefit from that.
Speaker 2: You've mentioned excess spreads throughout this conversation, and I take
Speaker 2: the point that everything is relative. I think I mentioned
Speaker 2: that in the intro. But it is also true that
Speaker 2: spreads on direct lending have fallen over the past years.
Speaker 2: I think we went below ten percent for the first
Speaker 2: time in three years something like that. They used to
Speaker 2: be in the mid to low teens. What do you
Speaker 2: see happening to spreads next year or this year? I
Speaker 2: should say, because it seems kind of concerning to me
Speaker 2: if we're getting more supply but spreads are grinding tighter.
Speaker 4: Yeah, Well, look, I think there's a couple of things there. First,
Speaker 4: you mentioned it, right, bowers do have choice, right, and
Speaker 4: so there is going to be some connection to where
Speaker 4: the liquid markets are. And over time, that two hundred
Speaker 4: basis points spread for privates versus liquids has held, and
Speaker 4: it holds today, and so I think that's one thing
Speaker 4: to watch. And I think that relative value point you
Speaker 4: made is the critical point. I think the second thing is, yes,
Speaker 4: you are starting to see more m and a supply,
Speaker 4: but we're still well off where we were five years ago,
Speaker 4: and so I think there's still a lot more room
Speaker 4: to run. And when I kind of step back and
Speaker 4: I look at the simple math of private equity dry
Speaker 4: powder versus private credit dry powder, private equity dry powder
Speaker 4: outstrips it five to one, Okay, And so I think
Speaker 4: there's still a lot more room to run in the
Speaker 4: supply equation. I think spreads today are pretty stable, and
Speaker 4: I think our clients earning that excess spread versus liquids
Speaker 4: earning that absolute return, it still feels quite good, even
Speaker 4: though it's not the same as it was three years
Speaker 4: ago still feels quite good relative to where equities are
Speaker 4: valued today and other things in their portfolio.
Speaker 3: In private assets in general, one of the popular critiques
Speaker 3: is that, you know, people call volatility laundering. It's like, oh, look,
Speaker 3: I had a rough quarter INCK in my stock portfolio
Speaker 3: and my whatever, but my credit portfolio is flat this quarter.
Speaker 3: And because there were no trades, there were no marks,
Speaker 3: and that makes me feel sleep easier at night. And
Speaker 3: the accusation is, as an industry, you build to some
Speaker 3: extent on this notion of like, here's this asset class
Speaker 3: that just like helps me sleep better at night, it
Speaker 3: doesn't doesn't move, et cetera. You what's the response to
Speaker 3: the volatility laundering claim in private assets generally?
Speaker 4: Yeah, A couple of things there. First, I look to
Speaker 4: a twenty year loss ratio, right, like, you can't hide
Speaker 4: that over twenty years, and I think those stats speak
Speaker 4: for themselves. Second, you're right, like this question around valuations
Speaker 4: have have been out there and private assets and blacks
Speaker 4: One's been around for forty years. We use a best
Speaker 4: in class process with third party valuation provider. We mark
Speaker 4: our book every single quarter, and those third parties are
Speaker 4: the ones that are doing it, and we mark that
Speaker 4: to market company fundamentals, market moves. That all shows up.
Speaker 4: What's funny to me is, you know when we do
Speaker 4: see underperformance in an asset and we mark it down,
Speaker 4: which we do on our watchless assets, we get questions
Speaker 4: about that. People are paying attention to that, yet they
Speaker 4: are also asking us out of the same breath, are
Speaker 4: you actually marking your assets? And so I think if
Speaker 4: you actually look at our portfolio, you will see a
Speaker 4: small subset of the book that isn't doing what we
Speaker 4: expected to do when we mark those accordingly. I think
Speaker 4: that's healthy. I think that's good. I think that provides
Speaker 4: some buffer for our clients, and we'll continue to use
Speaker 4: our third party, well established process to continue to do so.
Speaker 2: You mentioned dry powder earlier, and this is a truism
Speaker 2: of markets, which is dry powder always seems to be
Speaker 2: waiting in the wings, Like no matter where we are
Speaker 2: in the credit cycle, one's talking about dry powder. I'm
Speaker 2: sort of surprised to hear that much the number you
Speaker 2: cited in the private credit space because again we have
Speaker 2: seen phenomenal growth and they're still cash lying around that
Speaker 2: needs to be deployed.
Speaker 4: Look, we continue to see strong flows into the market. Right,
Speaker 4: the product is doing what it's supposed to do, which
Speaker 4: is generate strong, consistent outperformance for clients relative to liquids.
Speaker 4: I think as long as you see that continue, you're
Speaker 4: going to continue to see strong flows across all of
Speaker 4: our client types, whether it's insurance institutions, individuals.
Speaker 3: Question I ask a lot of people today in January
Speaker 3: twenty twenty six, within your organization, are you finding productive
Speaker 3: applications of generative AI tools that make your life easier
Speaker 3: and reduce free up working hours from people who to
Speaker 3: do other things.
Speaker 4: Yeah. Look, this is a huge focus for us, and
Speaker 4: I think I would be lying if I say we
Speaker 4: have the golden ticket today, but we have a lot
Speaker 4: of focus on this area. How do we make our
Speaker 4: business more efficient, how do we make it easier on
Speaker 4: our teams, whether it's building models, knowing what questions to
Speaker 4: ask in their due diligence process, data aggregation and analysis.
Speaker 4: All of this stuff is in motion. It's at various
Speaker 4: stages of development, and I think you will continue to
Speaker 4: see us lean into that significantly. It can never replace
Speaker 4: the investment decision, right, That's still going to be central
Speaker 4: to our process. But I think anytime. We can use
Speaker 4: AI to drive efficiency, and like I said, we have
Speaker 4: tools that allow that to create the start of an
Speaker 4: investment companye memo, the start of a model, aggregate data
Speaker 4: so we can help our team see trends earlier. All
Speaker 4: of these things are in process, and I think more
Speaker 4: and more you'll see higher adoption.
Speaker 2: Could you imagine a future where valuation is done more
Speaker 2: by AI? Because I think about the third party valuation services,
Speaker 2: they're doing matrix pricing, which is basically inferring the market
Speaker 2: value from you know, other clues they can get. Inference
Speaker 2: is like you know, that's AI.
Speaker 4: Basically, I think using AI to support that process. You know,
Speaker 4: where have market spreads moved? Okay, this company's performance was x.
Speaker 4: How does that translate into a mark? I think you
Speaker 4: will see, just like I highlighted on the investment process,
Speaker 4: I think you will see adoption of support tools, driving efficiency,
Speaker 4: driving accuracy, driving scale. At the end of the day,
Speaker 4: you still need a human at the end of that
Speaker 4: to make the decision, but I do think you'll see
Speaker 4: it incorporating more and more into our workfloaws.
Speaker 3: What skills are you looking for when you think about
Speaker 3: recruiting in twenty twenty six and twenty twenty seven, a
Speaker 3: lot of people anxious about what they should what they
Speaker 3: should know, what they should be studying, et cetera. What
Speaker 3: are the skills that today are still clearly valuable and
Speaker 3: will be valuable that you would want to see in
Speaker 3: a new recruit.
Speaker 4: Well, look, first and foremost, the people we look to
Speaker 4: hire upatone, incredibly hard working, genuinely good people motivated by
Speaker 4: you know, taking on more growing Some of these like
Speaker 4: fundamental traits like yeah, that is universal and I think
Speaker 4: that will never change. I think in an environment where
Speaker 4: you're using more and more productivity tools, how do you
Speaker 4: interact with people? People want to you know, do deals
Speaker 4: with folks that they feel like they can trust, they
Speaker 4: develop good relationships. How do you think forward around corners?
Speaker 4: These are the types of critical thinking and communication skills
Speaker 4: that I think are going to be even more valuable
Speaker 4: to layer on to all like the basic stuff we
Speaker 4: have always looked for and the people we bring into
Speaker 4: the firm.
Speaker 2: All right, we're going to have to leave it there,
Speaker 2: But thank you so much for coming on all thoughts.
Speaker 2: Really appreciate it.
Speaker 4: It was my absolute pleasure.
Speaker 3: Thank you guys so much. It was a lot of fun.
Speaker 3: I learned a lot, Thank.
Speaker 5: You, Joe.
Speaker 2: I'm a journalist or podcast hosts. You know, there's a difference.
Speaker 3: No, there's no no word journalists. People always make parties there,
Speaker 3: What do you do? I say, I'm a journalist, all right.
Speaker 4: All right?
Speaker 5: Uh.
Speaker 2: The natural tendencies of journalists is to be a little
Speaker 2: bit more pessimist than an investor. I mean, if you're
Speaker 2: an investor, almost by definition, you have to be optimist.
Speaker 3: I agree, I'm paranoid optimist, that's right.
Speaker 2: But I do see some signs of worry in the
Speaker 2: private credit market. So beyond the cockroaches that we talked about,
Speaker 2: you know, we have more companies doing liability managements. The
Speaker 2: documentation point I found kind of surprising because in our
Speaker 2: previous conversations, certainly in some of the research that I see,
Speaker 2: people say that documentation is declining, so investor protections are
Speaker 2: basically going down, and there's more convergence with the public
Speaker 2: market and things like that. So I take the point
Speaker 2: that like every private credit investor that we have on
Speaker 2: the show is going to say that they're different and
Speaker 2: they're more selective and things like that, and it may
Speaker 2: be true, but overall, if you're seeing documentation go down
Speaker 2: and leverage go up and supply increasing, that seems kind
Speaker 2: of bad.
Speaker 1: Yeah.
Speaker 3: No, I mean look, I think the thing that I guess,
Speaker 3: I mean, all of that sounds very intuitive to me,
Speaker 3: and the attentions. The other thing that, and it's sort
Speaker 3: of related to this, is like how do you maintain
Speaker 3: Like Okay, you think about the fundamental service, right, you
Speaker 3: think about the fundamental service of like speed and customer
Speaker 3: customizability and so forth. And then the tension that exists
Speaker 3: is like, okay, you want to like turn this around, yeah,
Speaker 3: right away, et cetera. And the tension between that and
Speaker 3: like robust documentations and I mean again, twenty year business
Speaker 3: to some extent speaks for itself. But on the other hand,
Speaker 3: like you could see how these things over time would
Speaker 3: come in to especially come into tens such a competitive
Speaker 3: environment exactly. I want to you know what, you place
Speaker 3: a phone call to me because you need money. I
Speaker 3: want to be able to give you an answer right away.
Speaker 2: I'm going to say yes very quickly.
Speaker 3: I want to be able to say yes to you
Speaker 3: to maintain your business, To maintain that line and the
Speaker 3: tensions that could potentially emerge between like our relationship as
Speaker 3: the lender to the borrower versus you know, my relationship
Speaker 3: to my people who want protections, et cetera. You could
Speaker 3: see how those would emerge, for sure.
Speaker 2: Yeah, all right, shall we leave it there.
Speaker 3: Let's leave it there.
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