1 00:00:00,040 --> 00:00:01,840 Ladies and gentlemen, welcome to the business Brew. 2 00:00:01,880 --> 00:00:05,440 I am your host Bill Brewster. This episode features Larry 3 00:00:05,520 --> 00:00:09,760 Hosenthaler of first Eagle discussion on private credit 4 00:00:09,760 --> 00:00:14,040 here. And I found it to be quite good 5 00:00:14,160 --> 00:00:18,960 and candid and I was unsure of how it would go coming into it. 6 00:00:18,960 --> 00:00:23,640 I have sort of a natural aversion to things that have 7 00:00:23,640 --> 00:00:25,600 like private in the in front of them. 8 00:00:25,600 --> 00:00:30,040 However, I found Larry to be measured, honest, and I'm quite 9 00:00:30,040 --> 00:00:33,640 happy to be featuring him. So this episode was recorded on 10 00:00:33,640 --> 00:00:35,960 February 3rd. We'll try to get it out quickly. 11 00:00:36,360 --> 00:00:39,520 Got some compliance stuff to work through, but hope you enjoy 12 00:00:39,520 --> 00:00:42,480 the episode. And none of this is investing 13 00:00:42,480 --> 00:00:45,400 advice. All of the information in this 14 00:00:45,400 --> 00:00:48,760 program is for informational and entertainment purposes only. 15 00:00:49,040 --> 00:00:51,840 Please consult your financial advisor before making investment 16 00:00:51,840 --> 00:00:53,760 decisions and do your own research. 17 00:01:13,240 --> 00:01:16,080 All right, ladies and gentlemen, excited to be joined by Larry 18 00:01:16,080 --> 00:01:19,840 Hosenthaler today. Larry, you want to introduce 19 00:01:19,840 --> 00:01:21,720 yourself and tell the people what you do. 20 00:01:22,080 --> 00:01:25,960 Yeah. So I am a portfolio manager for 21 00:01:26,200 --> 00:01:31,280 what we refer to as FEAC First Eagle Alternative Credit, quite 22 00:01:31,280 --> 00:01:35,560 a mouthful, but we are basically a corporate lending team that 23 00:01:35,560 --> 00:01:39,400 sits within First Eagle, which is kind of our parent company. 24 00:01:39,800 --> 00:01:44,120 And 1st Eagle flies a little below the radar, pun intended. 25 00:01:44,120 --> 00:01:47,280 But we have about 100 and 150 billion of assets under 26 00:01:47,280 --> 00:01:49,480 management. And actually the organization, 27 00:01:49,760 --> 00:01:52,880 if you go back to the roots of First Eagle has existed since 28 00:01:53,200 --> 00:01:56,680 the 1860s. But really from AUS soil 29 00:01:56,680 --> 00:02:00,400 perspective, we started to build out a mutual fund business in 30 00:02:01,040 --> 00:02:06,640 the late 1960s, early 1970s. So a bit of a pioneer within the 31 00:02:06,640 --> 00:02:08,919 world, actually a value investing, which I know is 32 00:02:08,919 --> 00:02:11,080 something you talk a lot about on your show. 33 00:02:11,440 --> 00:02:14,360 And so we specifically had this kind of niche that we kind of 34 00:02:14,360 --> 00:02:17,680 focus on, which is corporate credit basically below 35 00:02:17,680 --> 00:02:20,280 investment grade. Corporate lending is what we do. 36 00:02:20,280 --> 00:02:23,720 So my team runs about 20 billion of assets. 37 00:02:23,720 --> 00:02:26,440 We have about 55 people on our investment team. 38 00:02:26,840 --> 00:02:30,120 So we kind of live and breathe the world of private credit 39 00:02:30,120 --> 00:02:32,720 every day. What was the transition from 40 00:02:32,720 --> 00:02:36,920 sort of, I guess, traditional equity value investing to 41 00:02:36,920 --> 00:02:39,840 credit? So it's interesting as a firm, 42 00:02:40,080 --> 00:02:44,360 First Eagle has obviously felt that the change is coming from 43 00:02:44,400 --> 00:02:50,080 the world of passive ETFs. In fact, First Eagle recently is 44 00:02:50,080 --> 00:02:52,640 kind of reacting to that by launching their own kind of ETF 45 00:02:52,640 --> 00:02:56,160 products for their equity team and really just trying to bring 46 00:02:56,160 --> 00:03:00,880 some of the principles of value investment to different asset 47 00:03:00,880 --> 00:03:03,120 classes. So like as an example, what we 48 00:03:03,120 --> 00:03:06,120 do, we're kind of like the mortgage on the House, we're the 49 00:03:06,120 --> 00:03:10,480 first lien senior secured loan within the capital structure. 50 00:03:10,800 --> 00:03:14,760 So there's a lot of emphasis on downside protection, being 51 00:03:14,760 --> 00:03:17,120 conservative, staying out of trouble. 52 00:03:17,320 --> 00:03:19,840 So you know, those are all themes that obviously from kind 53 00:03:19,840 --> 00:03:24,000 of a value equity tilt are kind of common, common factors. 54 00:03:24,440 --> 00:03:27,320 And so the thinking was let's kind of take the brand of first 55 00:03:27,320 --> 00:03:31,040 Eagle, which is a conservative kind of organization and and try 56 00:03:31,040 --> 00:03:35,680 to get into newer areas that obviously are higher growth than 57 00:03:35,680 --> 00:03:38,440 managing large cap value equities at least the last few 58 00:03:38,440 --> 00:03:41,720 years. So in the last several years or 59 00:03:41,720 --> 00:03:46,720 so, First Eagle has acquired a few businesses that have this 60 00:03:46,720 --> 00:03:51,040 kind of specialization. So my team was came over to 1st 61 00:03:51,040 --> 00:03:54,400 Eagle about five years ago. We were formerly part of THL 62 00:03:54,400 --> 00:03:56,800 Thomas H Lee, the private equity firm. 63 00:03:56,800 --> 00:03:59,800 We were kind of their credit arm and and joined First Eagle about 64 00:03:59,800 --> 00:04:03,320 five years ago. Napier Park, which focuses on 65 00:04:03,320 --> 00:04:07,120 more like CL, OS and, and, and, and different types of credit 66 00:04:07,120 --> 00:04:11,160 strategies about a year after. And then most recently actually 67 00:04:11,520 --> 00:04:14,200 first Eagle acquired a team that I've actually worked with in my 68 00:04:14,200 --> 00:04:18,920 prior organization, John Miller, who runs a high yield municipal 69 00:04:19,040 --> 00:04:21,959 debt team. So just trying to come up with 70 00:04:21,959 --> 00:04:24,920 the different, different ways we can add value within some of 71 00:04:24,920 --> 00:04:28,640 these not necessarily niche year, but kind of smaller asset 72 00:04:28,640 --> 00:04:30,720 classes and obviously the equity world. 73 00:04:30,880 --> 00:04:35,440 Yeah, I have. I have noticed a, a general 74 00:04:35,440 --> 00:04:41,440 increase in the amount of pitches for the merit of of 75 00:04:41,560 --> 00:04:45,280 private credit specifically in people's portfolios. 76 00:04:45,800 --> 00:04:50,000 And I can't help but like I've I've got that value investor in 77 00:04:50,000 --> 00:04:52,720 me too. So I, I feel like whenever a 78 00:04:53,000 --> 00:04:56,320 product gets pushed through a distribution channel, I get a 79 00:04:56,320 --> 00:05:00,840 little bit wary of it. It is my spider sense correct? 80 00:05:00,840 --> 00:05:03,400 Or am I sort of? Do I have a bias there that I 81 00:05:03,400 --> 00:05:05,080 should maybe think about differently? 82 00:05:05,360 --> 00:05:10,080 So there's definitely a lot of marketing involved in in kind of 83 00:05:10,080 --> 00:05:14,600 the optics of the asset class. So if you take a step back, 84 00:05:15,040 --> 00:05:20,040 lending to companies is it is really not very new. 85 00:05:20,040 --> 00:05:24,600 But on the flip side, it hasn't been going on for 50 years. 86 00:05:24,640 --> 00:05:28,120 If you think about it, the, the genesis of kind of what we do 87 00:05:28,120 --> 00:05:31,480 today, I would say started to take formation in, in the kind 88 00:05:31,480 --> 00:05:35,960 of mid to late 1980s when you had Drexel Burnham, Michael 89 00:05:35,960 --> 00:05:38,760 Milken. Junk bonds became kind of an 90 00:05:38,760 --> 00:05:43,080 asset class that people would kind of willingly allocate to, 91 00:05:43,480 --> 00:05:45,720 you know, before that, these were the, the bonds that went 92 00:05:45,720 --> 00:05:49,480 bad, but you wouldn't voluntarily invest your money 93 00:05:49,480 --> 00:05:53,600 in, in junk bonds. In fact, even today, we refer to 94 00:05:53,600 --> 00:05:56,160 it as below investment grade, meaning it's like it's not 95 00:05:56,160 --> 00:05:59,320 worthy of investment, but obviously credit and below 96 00:05:59,320 --> 00:06:02,400 investment grade credit is, is an asset Class A lot of people 97 00:06:02,400 --> 00:06:04,320 allocate money to willingly today. 98 00:06:04,960 --> 00:06:09,160 And so I think about the, the loan market, which more 99 00:06:09,160 --> 00:06:12,480 specifically a lot of the facilities people are using in 100 00:06:12,480 --> 00:06:15,680 private credit tend to be loans versus bonds. 101 00:06:15,880 --> 00:06:19,800 There's less registration process needed, lower barriers 102 00:06:19,800 --> 00:06:21,000 to entry. You don't need to get them 103 00:06:21,000 --> 00:06:22,760 rated. There's no Q sips. 104 00:06:23,080 --> 00:06:25,320 So they kind of lend themselves to smaller companies. 105 00:06:25,960 --> 00:06:30,080 And I would say in the kind of kind of early 90s to mid 90's, 106 00:06:30,080 --> 00:06:33,800 the loan market was kind of maybe 5 to 10 years behind the 107 00:06:33,800 --> 00:06:37,040 high yield bond market. So if you look at the loan 108 00:06:37,040 --> 00:06:39,800 index, it's now the UBS index, used to be the Credit Suisse 109 00:06:39,800 --> 00:06:42,120 index. It only goes back to 1992. 110 00:06:42,560 --> 00:06:46,560 The high yield bond indices go back to 1986 for the most part. 111 00:06:46,560 --> 00:06:49,440 So it's 686 to 8 years behind high yield. 112 00:06:50,000 --> 00:06:53,920 And initially the loan market was kind of focused on smaller 113 00:06:53,920 --> 00:06:55,640 issuers. Bigger issuers would go to the 114 00:06:55,640 --> 00:06:59,080 high yield bond market. But over time the loan market 115 00:06:59,080 --> 00:07:03,720 grew and so companies started to use both loans and high yield 116 00:07:03,720 --> 00:07:07,440 bonds to a lot of this stuff gets created to, to finance 117 00:07:07,600 --> 00:07:10,920 leveraged buyout activity. So you look at like the RJR 118 00:07:10,920 --> 00:07:13,600 Nabisco deals and some of the, the big deals that started to 119 00:07:13,600 --> 00:07:16,400 get done out of the LBO market, They would started to finance 120 00:07:16,400 --> 00:07:20,920 both with bonds and loans. And as the market grew, you 121 00:07:20,920 --> 00:07:24,080 started to see a secondary trading market develop just like 122 00:07:24,080 --> 00:07:26,800 high yield. I could call Citibank or JP 123 00:07:26,800 --> 00:07:29,960 Morgan or Goldman Sachs and I could trade these loans in the 124 00:07:29,960 --> 00:07:31,920 secondary market. And when that happened, it 125 00:07:31,920 --> 00:07:33,920 really opened up a lot of a lot of doors. 126 00:07:34,160 --> 00:07:39,200 Now you could have loan mutual funds, ETFs came along and the 127 00:07:39,200 --> 00:07:42,880 primary buyer are CL OS, which are these structured products 128 00:07:42,880 --> 00:07:47,960 that think of it as like a a big pool of assets that go to back a 129 00:07:47,960 --> 00:07:51,080 bunch of tranches of bonds and that pool of assets is a is a 130 00:07:51,080 --> 00:07:53,680 big pool of loans. So then you started to see the 131 00:07:53,680 --> 00:07:56,120 development of the CLO market in kind of O four O 5. 132 00:07:56,120 --> 00:07:58,920 And then all the sudden, the loan market became really liquid 133 00:07:59,320 --> 00:08:04,120 and it moved up and down a lot. And initially that was a good 134 00:08:04,120 --> 00:08:05,880 thing. Now I have some liquidity, some 135 00:08:05,880 --> 00:08:07,800 transparency. You have banks trading this 136 00:08:07,800 --> 00:08:09,160 stuff. The market's grown a lot. 137 00:08:09,760 --> 00:08:11,920 But then I would say what happened is in in the global 138 00:08:11,920 --> 00:08:16,480 financial crisis, the loan market saw a ton of volatility. 139 00:08:16,480 --> 00:08:20,080 You had all this for selling in, in this kind of illiquid market. 140 00:08:20,600 --> 00:08:24,560 So Long story short, loans sold off like 30% during the global 141 00:08:24,560 --> 00:08:26,880 financial crisis. Then they snap back very quickly 142 00:08:26,880 --> 00:08:28,520 because all this stuff is senior secured. 143 00:08:29,240 --> 00:08:31,960 Yeah, I was going to say, what were the recovery rates on I, I 144 00:08:31,960 --> 00:08:35,200 would imagine fairly good. Yeah, I mean recovery rates even 145 00:08:35,240 --> 00:08:38,600 they've trended lower still probably $0.50 on the dollar and 146 00:08:38,600 --> 00:08:41,600 that's for a defaulted loan. Global financial crisis, the 147 00:08:41,600 --> 00:08:45,240 average price of loans was 60. So I mean, literally, if every 148 00:08:45,240 --> 00:08:47,960 loan in the market defaulted, the market was still arguably 149 00:08:47,960 --> 00:08:50,960 cheap, just the kind of backing out the implied default rate. 150 00:08:51,520 --> 00:08:56,560 And, and so then I would say what really happened, what, what 151 00:08:56,560 --> 00:08:59,760 really catalyzed this recent push was, was COVID. 152 00:09:00,520 --> 00:09:04,040 So during COVID, your average syndicated loan fund was down 153 00:09:04,040 --> 00:09:06,560 about 20% in a really short period of time. 154 00:09:06,560 --> 00:09:09,760 We're talking the last two weeks of February, 1st few weeks of 155 00:09:09,760 --> 00:09:14,080 March, and you started to have these new private credit funds 156 00:09:14,080 --> 00:09:16,640 that were out there, whether they were BDCS or interval 157 00:09:16,640 --> 00:09:19,320 funds. And those funds, the one 158 00:09:19,320 --> 00:09:22,840 difference between these private loans that these funds are 159 00:09:22,840 --> 00:09:25,960 making and the syndicated loan is there's no secondary trading 160 00:09:25,960 --> 00:09:28,960 market. So you make a loan to a company. 161 00:09:29,200 --> 00:09:31,680 And we could talk a lot about some of the important benefits 162 00:09:31,720 --> 00:09:33,680 of direct lending from an investment perspective. 163 00:09:33,680 --> 00:09:36,160 But from a marketing perspective, one of the 164 00:09:36,160 --> 00:09:38,480 phenomenon was that these things just didn't move. 165 00:09:38,480 --> 00:09:42,360 COVID only lasted six weeks. So your average syndicated loan 166 00:09:42,360 --> 00:09:45,320 fund was down 20%. The average direct lending fund 167 00:09:45,320 --> 00:09:48,480 was down about four, yeah, and then ended the year higher. 168 00:09:48,480 --> 00:09:50,840 So people, the marketing guys looked at that and they went, 169 00:09:50,840 --> 00:09:52,320 oh, this is great, yeah. And the. 170 00:09:52,320 --> 00:09:55,240 And the people at pensions that allocate looked at it and they 171 00:09:55,240 --> 00:09:57,720 said, hey, my volatility is lower too. 172 00:09:58,000 --> 00:10:00,440 Yeah, and there's. Nice incentive dance. 173 00:10:00,720 --> 00:10:04,080 There's a lot of good reasons that you don't want to have 174 00:10:04,080 --> 00:10:08,040 these loans just exposed to the whim of the market and the big 175 00:10:08,040 --> 00:10:11,160 mutual funds are selling it. So now I need to mark so a lot 176 00:10:11,160 --> 00:10:15,280 of pensions understand the optics of what's going on 177 00:10:15,280 --> 00:10:18,320 between the mark to market or lack thereof and the actual 178 00:10:18,320 --> 00:10:20,560 risk. But quite frankly, I think in 179 00:10:20,560 --> 00:10:24,840 the retail market, you mentioned distribution are are fear and 180 00:10:24,840 --> 00:10:26,960 suspicion. What's happening is people look 181 00:10:26,960 --> 00:10:30,680 at a NAV, it looks a lot like a money market fund with an 8 to 182 00:10:30,680 --> 00:10:32,640 10% yield and they go, oh, this is great. 183 00:10:32,720 --> 00:10:34,960 Why would I ever buy the syndicated loan fund that does 184 00:10:34,960 --> 00:10:37,800 this if I can buy the fund that does this? 185 00:10:38,040 --> 00:10:41,160 But underneath, they're just three to four to five times 186 00:10:41,160 --> 00:10:44,840 leverage corporate loans that look a lot more similar than 187 00:10:44,840 --> 00:10:46,680 different from an investment perspective, from an 188 00:10:46,680 --> 00:10:50,360 underwriting perspective. But the optics of one asset that 189 00:10:50,360 --> 00:10:54,000 marks the market every day and one that doesn't is enticing. 190 00:10:54,000 --> 00:10:56,640 So I think that's a lot of the reason you're seeing a lot of 191 00:10:56,640 --> 00:11:00,960 focus on private credit is the optics of that stability, which 192 00:11:00,960 --> 00:11:04,000 again, if there's good reasons for it, but there's also some 193 00:11:04,000 --> 00:11:07,480 risk that if you don't manage expectations, people don't quite 194 00:11:07,480 --> 00:11:08,840 exactly know what they're buying. 195 00:11:08,840 --> 00:11:10,840 They're just looking at the NAV and going, oh, this is great. 196 00:11:10,840 --> 00:11:14,000 It has less valve than the AG quite frankly. 197 00:11:14,080 --> 00:11:15,680 Yeah. What are some of the good 198 00:11:15,680 --> 00:11:21,080 reasons that you're citing? So if you looked at 199 00:11:21,280 --> 00:11:24,760 fundamentally what, what started to to drive some, some focus 200 00:11:24,760 --> 00:11:27,240 towards what we call middle market lending. 201 00:11:27,720 --> 00:11:30,000 Everyone has their own definition in middle market, but 202 00:11:30,000 --> 00:11:32,840 these are like sub billion dollar enterprise value type 203 00:11:32,840 --> 00:11:35,280 businesses, which is it's a it's a wide range. 204 00:11:35,640 --> 00:11:40,920 And so the first thing I would say that kind of drew focus to 205 00:11:40,920 --> 00:11:43,680 the middle market was there just more issuers out there. 206 00:11:44,160 --> 00:11:47,440 But if there's almost so many like for us the average EBITDA 207 00:11:47,440 --> 00:11:51,000 of the companies that we tend to write direct lending loans to is 208 00:11:51,000 --> 00:11:56,800 around 25,000,000. So think about we're doing 5075 209 00:11:56,800 --> 00:12:00,080 million, $1,000,000 loans. And so there's obviously more 210 00:12:00,080 --> 00:12:05,520 businesses doing 25,000,000 of EBITDA than doing 400 million of 211 00:12:05,520 --> 00:12:08,760 EBITDA to the point where you could probably make the argument 212 00:12:09,000 --> 00:12:13,240 it it might even be 100 acts. There's about 1500 issuers in 213 00:12:13,240 --> 00:12:16,240 the syndicated loan market. You look at the index. 214 00:12:16,600 --> 00:12:21,040 So it's a pretty finite group of issuers versus there might be 215 00:12:21,040 --> 00:12:24,600 150,000 issuers in the US that fit that definition. 216 00:12:24,640 --> 00:12:28,160 You're doing less than 50 million of EBITDA, but you're 217 00:12:28,160 --> 00:12:30,560 big enough that a private equity firm might take you out. 218 00:12:30,680 --> 00:12:35,360 And so you just have more more issuers to engage in 219 00:12:35,360 --> 00:12:37,480 transactions with? I was going to ask what 220 00:12:37,480 --> 00:12:42,480 percentage is sponsor owned? So for us, everything we do is 221 00:12:42,480 --> 00:12:44,400 sponsor back. We could talk a little bit about 222 00:12:44,400 --> 00:12:47,280 kind of everything we do goes back to mid trying to control 223 00:12:47,280 --> 00:12:50,640 risk and for us everything we do is spot. 224 00:12:50,640 --> 00:12:53,000 The only exception is if, if there's a public company in the 225 00:12:53,000 --> 00:12:55,960 syndicated market, you might find companies that actually are 226 00:12:55,960 --> 00:12:58,520 New York Stock Exchange listed. There's very few of them today. 227 00:12:58,520 --> 00:13:01,960 But at different points in time, there's been 25% of the loan 228 00:13:01,960 --> 00:13:06,160 market have in particular, I'd say telecom names, guys that 229 00:13:06,160 --> 00:13:08,680 have a lot of hard assets might have some loans. 230 00:13:08,760 --> 00:13:10,960 The airlines, all the big airlines have had loans at 231 00:13:10,960 --> 00:13:14,920 different points in time. And so, but the vast majority 232 00:13:14,920 --> 00:13:18,080 is, is private equity owned. And then in the, in the direct 233 00:13:18,080 --> 00:13:21,840 lending market, you could, you could do a transaction with, 234 00:13:21,840 --> 00:13:24,760 let's say, a business that's been family run for generations. 235 00:13:24,760 --> 00:13:27,760 And the problem you have is I don't know exactly what the 236 00:13:27,760 --> 00:13:30,600 value of the business is. I'm I'm kind of beholden to the 237 00:13:30,600 --> 00:13:33,520 family to try to help me frame out what that value is. 238 00:13:34,040 --> 00:13:37,880 And I just don't know exactly what my subordination is. 239 00:13:37,880 --> 00:13:40,120 I don't know how much equity is in the business to absorb 240 00:13:40,120 --> 00:13:42,640 losses. And the really nice thing about 241 00:13:42,640 --> 00:13:47,560 a sponsor transaction is the PE sponsor comes in, they say we're 242 00:13:47,560 --> 00:13:51,240 we're buying the company for $75 million. 243 00:13:51,240 --> 00:13:54,320 And typically what happens is they look to finance half in 244 00:13:54,720 --> 00:13:56,640 with guys like us and half in equity. 245 00:13:57,480 --> 00:14:01,160 So the loan was, we would say the loan to value day one is 246 00:14:01,160 --> 00:14:05,200 around 50%. So the private equity firm can 247 00:14:05,200 --> 00:14:07,600 be wrong. They can overpay, but at least I 248 00:14:07,600 --> 00:14:11,600 know I had a professional investor come in, spend months 249 00:14:11,600 --> 00:14:14,440 underwriting the company, they paid for the company and they 250 00:14:14,440 --> 00:14:19,080 absorb all the losses before we have a it's just like the 251 00:14:19,080 --> 00:14:22,160 mortgage on house. The equity goes to 0 before the 252 00:14:22,160 --> 00:14:24,480 lenders are are impaired typically. 253 00:14:24,880 --> 00:14:29,040 So, you know, we try to stick to sponsor back everything within 254 00:14:29,040 --> 00:14:32,160 the direct lending market and even in the the syndicated 255 00:14:32,160 --> 00:14:35,440 market, pretty much everything we do there, there's APE sponsor 256 00:14:35,640 --> 00:14:39,920 sitting beneath you. So we've seen some horror 257 00:14:39,920 --> 00:14:44,800 stories in the past few months even of a big manager like us 258 00:14:44,800 --> 00:14:47,040 that lent money to a family business. 259 00:14:47,040 --> 00:14:51,200 And then you find out they use money to buy a yacht or invest 260 00:14:51,200 --> 00:14:54,680 in the Prosecco vineyard. And those things are can always 261 00:14:54,680 --> 00:14:57,320 happen, but they're less likely to happen when you have a 262 00:14:57,320 --> 00:14:59,880 private equity sponsor with significant equity sitting 263 00:14:59,880 --> 00:15:01,360 beneath you in the capital structure. 264 00:15:02,960 --> 00:15:05,560 That's interesting. How do you think about the risk 265 00:15:05,800 --> 00:15:11,400 of like the, I guess the incentives of private equity are 266 00:15:11,400 --> 00:15:15,160 to keep doing deals, right? So as valuations continue to go 267 00:15:15,160 --> 00:15:18,720 up, it's like how do you think about just sort of managing the 268 00:15:18,720 --> 00:15:21,760 cycle and where we are in the cycle and where you're lending? 269 00:15:22,000 --> 00:15:25,560 Yeah, I think spreads have clearly tightened in as you've 270 00:15:25,560 --> 00:15:30,520 had a lot of capital chasing a, a finite, a finite number of of 271 00:15:30,520 --> 00:15:34,960 transactions. I, I think within our market, 272 00:15:35,680 --> 00:15:38,240 the, the kind of what I'll call the lower middle market, but 273 00:15:38,240 --> 00:15:42,600 smaller, smaller deals that if I could generalize tend to not 274 00:15:42,600 --> 00:15:46,480 just be pure GDP plays, but tend to have something kind of 275 00:15:46,480 --> 00:15:49,240 thematically that the private equity sponsor is looking to 276 00:15:49,240 --> 00:15:51,760 exploit. Could be something as simple as 277 00:15:51,760 --> 00:15:54,360 like taking a fragmented business and trying to scale it 278 00:15:54,360 --> 00:15:56,640 up. Could be we've done deals for 279 00:15:56,640 --> 00:15:59,320 like think about landscaping businesses, a commercial 280 00:15:59,320 --> 00:16:03,000 landscapers or registered investment advisors, financial 281 00:16:03,000 --> 00:16:06,720 advisors, HVAC servicing, orthodontic clinics, things of 282 00:16:06,720 --> 00:16:09,800 that nature that you're, you're trying to create some scale 283 00:16:09,800 --> 00:16:14,920 basically versus just kind of a more wide Moat GDP play you tend 284 00:16:14,920 --> 00:16:17,360 to find within the bigger, the bigger cap structures. 285 00:16:18,000 --> 00:16:22,480 So it's all about trying to find private equity sponsors who have 286 00:16:22,480 --> 00:16:27,240 sourced the right deals. And even even with that, I would 287 00:16:27,240 --> 00:16:30,080 say that deal making has been constrained just because 288 00:16:30,080 --> 00:16:33,680 borrowing costs have obviously been elevated and the fact that 289 00:16:33,680 --> 00:16:37,400 they're coming down even marginally makes the math work a 290 00:16:37,400 --> 00:16:40,120 lot better if you can find the right transaction. 291 00:16:40,560 --> 00:16:43,640 But having said that, we again, one of the reasons we tend to 292 00:16:43,640 --> 00:16:48,640 like the lower middle market is it gives us a lot more looks and 293 00:16:48,640 --> 00:16:51,760 more transactions. So I mean, we probably, and we 294 00:16:51,760 --> 00:16:54,480 end up passing on nine of the 10 deals that we bring to 295 00:16:54,480 --> 00:16:58,320 investment committee. And even within that, most deals 296 00:16:58,320 --> 00:17:01,400 that we get phone calls over don't make it to investment 297 00:17:01,400 --> 00:17:02,920 committee. So if you think about kind of 298 00:17:02,920 --> 00:17:06,119 the filter or the funnel, you, you end up having to pass on a 299 00:17:06,119 --> 00:17:09,000 lot of deals. And it might not be that you 300 00:17:09,000 --> 00:17:10,400 don't like the private equity sponsor. 301 00:17:10,400 --> 00:17:13,040 In fact, you want to encourage these guys that, look, I'm 302 00:17:13,040 --> 00:17:15,280 sorry, we passed on 9 deals in a row. 303 00:17:15,560 --> 00:17:18,319 We like you guys and we like generally your view on things. 304 00:17:18,319 --> 00:17:21,480 Please come, come back to us because what you don't want to 305 00:17:21,480 --> 00:17:27,119 have happen is you don't want to have to sacrifice protections. 306 00:17:27,200 --> 00:17:30,080 We're talking about a lot of the things that brought money to 307 00:17:30,080 --> 00:17:33,600 private credit to begin with is that typically we're the only 308 00:17:33,600 --> 00:17:37,520 lender to the company or there might be one other junior lender 309 00:17:37,520 --> 00:17:39,560 with us. So it's not us and 30 other 310 00:17:39,560 --> 00:17:42,520 people. So what that does is it allows 311 00:17:42,520 --> 00:17:46,080 you to really effectively write the credit agreement to, to 312 00:17:46,080 --> 00:17:50,800 customize the deal documentation based on where you see risk and 313 00:17:50,800 --> 00:17:52,520 making sure that you get made whole. 314 00:17:53,000 --> 00:17:56,600 So one of the ways people bend if they don't see the right 315 00:17:56,600 --> 00:18:00,680 deals is they'll bend on making deal documentation more borrower 316 00:18:00,680 --> 00:18:02,680 friendly and less lender friendly. 317 00:18:03,040 --> 00:18:05,160 So it's kind of a multi variable equation. 318 00:18:05,160 --> 00:18:08,120 You have to look not just at the transaction itself, but what's 319 00:18:08,120 --> 00:18:10,600 the pricing, IE the spread. And then what does the credit 320 00:18:10,600 --> 00:18:13,680 agreement look like? Because we're definitely seeing 321 00:18:14,040 --> 00:18:17,120 as you've had this much money chasing deals in private credit, 322 00:18:17,120 --> 00:18:21,040 not surprisingly, a lot of this stuff starts to get watered down 323 00:18:21,040 --> 00:18:23,720 a bit. The really fat pitch pricing 324 00:18:23,720 --> 00:18:25,400 looks all of a sudden not so fat. 325 00:18:25,400 --> 00:18:28,200 And the really strong covenants you had two years ago, all of a 326 00:18:28,200 --> 00:18:31,960 sudden maybe you don't have in, in parts of the market more 327 00:18:31,960 --> 00:18:35,000 leverage. So we feel like we're we 328 00:18:35,000 --> 00:18:37,680 operating like I'll call the old school kind of traditional 329 00:18:37,680 --> 00:18:40,960 direct lending market, the lower middle market, everything still 330 00:18:40,960 --> 00:18:43,560 has covenants spreads on a relative basis. 331 00:18:43,560 --> 00:18:46,520 So we think we can be a little bit choosier. 332 00:18:46,520 --> 00:18:49,920 But having said that, I don't think any manager out there is 333 00:18:49,920 --> 00:18:53,400 super happy with the amount of deal flow and the terms. 334 00:18:53,400 --> 00:18:55,640 I think you just you have to be much more selected now, just 335 00:18:55,640 --> 00:18:57,560 given kind of where the pendulum has swung. 336 00:18:59,120 --> 00:19:05,240 Why has the growth in private credit, why are banks not taking 337 00:19:05,240 --> 00:19:08,440 up some of this slack? I mean, I like I worked at BMO 338 00:19:08,440 --> 00:19:10,640 and they've got a sponsor group, right? 339 00:19:10,640 --> 00:19:12,640 I don't know that they're covering Blackstone, but I would 340 00:19:12,640 --> 00:19:16,280 imagine that that banks are getting looks at similar type 341 00:19:16,280 --> 00:19:18,280 deals. Why is there an opportunity for 342 00:19:18,280 --> 00:19:20,200 private credit to take this kind of share? 343 00:19:20,440 --> 00:19:22,640 I think there's two things going on. 344 00:19:23,240 --> 00:19:27,600 I think that part of the tagline for private credit in terms of 345 00:19:27,640 --> 00:19:33,160 why does this fat pitch exists, a lot of that has been that it's 346 00:19:33,160 --> 00:19:35,960 a function of the banks aren't lending anymore, which which is 347 00:19:35,960 --> 00:19:37,800 partly, partly true, I would say. 348 00:19:37,800 --> 00:19:42,840 So on the one hand, I would say for what we do, it hasn't hurt 349 00:19:42,840 --> 00:19:45,320 the fact that the banks are just not playing in this market, 350 00:19:45,320 --> 00:19:49,360 whether it's even providing like delayed draw facilities or 351 00:19:49,360 --> 00:19:52,640 revolving credit facilities are kind of like safer aspects of 352 00:19:52,640 --> 00:19:56,480 corporate lending versus a term loan where everything's funded 353 00:19:56,480 --> 00:19:59,880 day one and it's likely used to fund a leveraged buyout. 354 00:19:59,880 --> 00:20:03,360 The banks are not typically lending money for leveraged 355 00:20:03,360 --> 00:20:06,480 buyouts to software companies like like we might be doing. 356 00:20:06,480 --> 00:20:10,080 So it's not necessarily the entirely that the banks aren't 357 00:20:10,080 --> 00:20:13,080 lending any more. And so now this business is 358 00:20:13,080 --> 00:20:17,160 ending up in our hands. Now the private credit umbrella 359 00:20:17,200 --> 00:20:20,680 is a big and growing umbrella and includes a lot of different 360 00:20:20,680 --> 00:20:23,440 things. And I would say that the private 361 00:20:23,440 --> 00:20:27,400 credit managers. Are starting to take business 362 00:20:27,400 --> 00:20:31,240 that usually historically had been done by the banks. 363 00:20:31,240 --> 00:20:37,400 Like one of the examples I use is a lot of the the funds that 364 00:20:37,520 --> 00:20:41,080 you know, that we manage or if you look at like the interval 365 00:20:41,080 --> 00:20:44,680 fund peer group or business development companies, the banks 366 00:20:44,680 --> 00:20:49,360 used to provide leverage for as an example, like mutual funds or 367 00:20:49,360 --> 00:20:52,520 closed end funds. And it was pretty good business 368 00:20:52,520 --> 00:20:55,760 in the sense that let's say you have a billion dollar mutual 369 00:20:55,760 --> 00:20:58,200 fund that has a billion dollars of assets in it, a billion 370 00:20:58,200 --> 00:21:00,520 dollars of loans or a billion dollars of bonds and they're 371 00:21:00,520 --> 00:21:04,080 looking to get a $200 million leverage facility. 372 00:21:04,960 --> 00:21:07,120 So if you look at that from a lending perspective, you say 373 00:21:07,280 --> 00:21:11,480 this is a $200 million leverage facility backed by a billion 374 00:21:11,480 --> 00:21:14,040 dollars of assets. So like at the end of the day, 375 00:21:14,040 --> 00:21:16,280 even though they're below investment grade, to your point 376 00:21:16,280 --> 00:21:18,960 about the recovery values, what are the odds I don't get my 377 00:21:18,960 --> 00:21:20,440 money back? It's it's low. 378 00:21:20,440 --> 00:21:24,520 So it's it's kind of investment grade rated type business and 379 00:21:24,520 --> 00:21:26,400 the banks have largely shunned that business. 380 00:21:26,400 --> 00:21:28,840 So you used to get that loan from Bank of America and now 381 00:21:28,840 --> 00:21:31,800 increasingly you might be getting that loan from one of 382 00:21:31,800 --> 00:21:37,120 our competitors who it's not 300 basis points spread, but it's 383 00:21:37,120 --> 00:21:40,480 100 plus and it's pretty good. It's pretty good, kind of at 384 00:21:40,480 --> 00:21:42,360 credit risk. Why is that? 385 00:21:42,360 --> 00:21:43,640 Is it? Is it just a function of 386 00:21:43,640 --> 00:21:45,880 regulations and how much capital they have to hold? 387 00:21:46,240 --> 00:21:49,480 Yeah, a lot of it is regulation. It's just too onerous now and 388 00:21:49,480 --> 00:21:52,320 there's there's more profitable businesses that they can use 389 00:21:52,320 --> 00:21:56,360 their balance sheet for. So underwriting and other 390 00:21:56,360 --> 00:21:57,760 things. It's just there's much more 391 00:21:57,760 --> 00:22:00,000 spread involved. You think about the fees 392 00:22:00,000 --> 00:22:05,440 attached to doing a leverage facility on a boring mutual fund 393 00:22:05,440 --> 00:22:07,040 or closed end fund it it's not great. 394 00:22:07,040 --> 00:22:09,760 It's nowhere near the types of spread you're going to get on 395 00:22:10,040 --> 00:22:12,480 underwriting a new below investment grade loan or high 396 00:22:12,480 --> 00:22:15,240 yield bond or a new IPO transaction. 397 00:22:15,520 --> 00:22:17,880 So the banks just need to be choosier with what they're 398 00:22:17,880 --> 00:22:20,200 doing. And so we're seeing that also in 399 00:22:20,200 --> 00:22:24,800 like consumer loans now guys are starting to in the private 400 00:22:24,800 --> 00:22:30,680 credit world do things like RV's and auto loans and other types 401 00:22:30,680 --> 00:22:35,360 of kind of ABS transactions that again I I would say is in 402 00:22:35,360 --> 00:22:37,960 fairness kind of a function of the banks just kind of turning 403 00:22:37,960 --> 00:22:40,720 that business away. So a pretty good private credit 404 00:22:40,720 --> 00:22:43,680 manager can come in, do a modicum of underwriting and go, 405 00:22:43,720 --> 00:22:46,160 this is a pretty good. Loan like a warehouse facility 406 00:22:46,160 --> 00:22:49,240 or like direct to private borrowers? 407 00:22:49,600 --> 00:22:54,760 No direct to private borrowers. In a lot of cases these loans 408 00:22:54,760 --> 00:22:56,680 are. I'll tell you, we're sharing 409 00:22:56,680 --> 00:22:59,880 some personal stories before I, I bought my house 4 years ago 410 00:23:00,360 --> 00:23:04,080 and when I look to it was a non conventional mortgage I was 411 00:23:04,080 --> 00:23:07,640 looking at. And when I initially went to my 412 00:23:07,640 --> 00:23:12,120 mortgage broker who I ended up with is a fund who we compete 413 00:23:12,120 --> 00:23:14,880 with everyday interest. They're a very well known 414 00:23:14,880 --> 00:23:16,800 distressed manager out of Los Angeles. 415 00:23:16,800 --> 00:23:19,640 I won't give them free publicity, but you know, and 416 00:23:19,640 --> 00:23:22,800 honestly, I went to Wells Fargo and they didn't want my 417 00:23:22,800 --> 00:23:24,480 business. And I've been banking with Wells 418 00:23:24,480 --> 00:23:25,920 Fargo since I got out of college. 419 00:23:26,280 --> 00:23:31,520 And so I was literally working directly with their mortgage 420 00:23:31,520 --> 00:23:35,880 underwriting team that was part of this very well known credit 421 00:23:35,880 --> 00:23:40,120 manager out of Los Angeles. So again, when I looked at, I'm 422 00:23:40,120 --> 00:23:42,840 probably a little bit biased, but when I looked at the spread 423 00:23:42,840 --> 00:23:45,240 and the risk of my mortgage, I went, I've never missed a bill 424 00:23:45,240 --> 00:23:49,400 in my life and I'm not getting a really big loan versus what my 425 00:23:49,400 --> 00:23:52,040 house is worth. So when I looked at my mortgage, 426 00:23:52,040 --> 00:23:54,880 I thought this is a pretty good, pretty good asset for obviously 427 00:23:55,000 --> 00:23:57,600 rates went up a lot. But from a from a spread 428 00:23:57,600 --> 00:24:01,240 perspective, that day I was surprised that the folks at 429 00:24:01,240 --> 00:24:04,080 Wells Fargo didn't want my business, but some quasi 430 00:24:04,080 --> 00:24:06,920 institutional manager was happy to make me a loan. 431 00:24:07,200 --> 00:24:10,640 Yeah, maybe Wells Fargo's going too far into not wanting too 432 00:24:10,640 --> 00:24:13,080 many ancillary products in every relationship. 433 00:24:13,080 --> 00:24:15,280 You would think a mortgage would be right down the right down 434 00:24:15,280 --> 00:24:18,280 their alley. Yeah, it's really interesting. 435 00:24:18,280 --> 00:24:21,880 So if you go then into the corporate world, which it's a, 436 00:24:22,120 --> 00:24:25,560 it's a much broader spectrum of issuers, in a lot of cases, they 437 00:24:25,560 --> 00:24:29,280 just don't have the underwriting wherewithal to get involved, 438 00:24:29,280 --> 00:24:33,160 especially as you have, as I mentioned, software, technology, 439 00:24:33,160 --> 00:24:36,520 just more complex businesses. The, the banks are going to, are 440 00:24:36,520 --> 00:24:38,920 going to look, look away from that business and maybe try to 441 00:24:38,920 --> 00:24:42,040 get a finder's fee by lining those people up with someone 442 00:24:42,040 --> 00:24:43,960 like us. They're, they're not going to 443 00:24:43,960 --> 00:24:46,960 underwrite that loan. So yeah, it does create a little 444 00:24:46,960 --> 00:24:51,800 bit of extra deal flow to look at that is, you know, not ending 445 00:24:51,800 --> 00:24:56,080 up in the bank's hands. I mean, I, I guess it, I guess 446 00:24:56,080 --> 00:24:59,880 the reason would be like the probability to fault given an 447 00:24:59,880 --> 00:25:04,800 LBO they probably think is higher and then the LGD is 448 00:25:04,800 --> 00:25:07,080 probably higher too. So then they just have to have 449 00:25:07,080 --> 00:25:11,080 so much capital. It's just weird to me like who 450 00:25:11,080 --> 00:25:13,760 does the cash management on these facilities and stuff? 451 00:25:15,200 --> 00:25:17,400 Obviously not like not you guys, right? 452 00:25:17,440 --> 00:25:22,680 I I don't, I don't think. So that's where you know, the, 453 00:25:23,160 --> 00:25:28,640 the systems that are involved in managing loan portfolios are, 454 00:25:28,640 --> 00:25:32,120 are, are fairly high barriers to entry. 455 00:25:32,320 --> 00:25:36,600 Anyone can come in and buy a bond with AQ sip in your 456 00:25:36,600 --> 00:25:39,120 personal account. And it's, it's relatively 457 00:25:39,120 --> 00:25:42,520 doable, But you know, loans are very non standardized. 458 00:25:42,520 --> 00:25:46,680 They have amortization payments, free cash flow sweeps, a lot of 459 00:25:46,680 --> 00:25:48,880 different things that need to be accounted for. 460 00:25:49,240 --> 00:25:52,600 And so the the kind of cash management you obviously I 461 00:25:52,600 --> 00:25:55,520 mentioned have revolving credit facilities, delayed draw term 462 00:25:55,520 --> 00:25:57,760 loans. All of these loans are also 463 00:25:57,760 --> 00:26:01,840 going to have especially within our world leverage based step up 464 00:26:01,840 --> 00:26:04,720 and step down in the coupon. So let's say my leverage is 465 00:26:04,720 --> 00:26:08,040 three times, my coupon might be so for plus 450. 466 00:26:08,360 --> 00:26:11,320 But if the leverage goes above 3 times, it might be so for so 467 00:26:11,360 --> 00:26:12,720 that you. Need you got like a pricing 468 00:26:12,720 --> 00:26:14,680 grid? Yeah, You need a lot of systems 469 00:26:14,680 --> 00:26:17,040 to account for what those interest payments need to look 470 00:26:17,040 --> 00:26:20,520 like, cash management system. So we have a big back office 471 00:26:20,520 --> 00:26:23,200 team that supports our investment team to to kind of 472 00:26:23,200 --> 00:26:26,840 reconcile buys and sells with obviously we trade these loans 473 00:26:26,840 --> 00:26:29,440 too to add another layer of complexity to it. 474 00:26:29,920 --> 00:26:32,520 So. The servicing side, for lack of 475 00:26:32,520 --> 00:26:34,360 a better term, right? Yeah, exactly. 476 00:26:34,400 --> 00:26:37,200 So there there's a, there's a lot of the loan market is still 477 00:26:37,200 --> 00:26:40,400 somewhat arcane. And so there's a lot of, a lot 478 00:26:40,400 --> 00:26:42,880 of that that needs to be kind of managed underneath the hood 479 00:26:42,880 --> 00:26:45,720 within these facilities. But like at the portfolio 480 00:26:45,720 --> 00:26:47,920 company, right, they have deposit accounts and they've got 481 00:26:47,920 --> 00:26:49,600 corporate credit cards and whatnot. 482 00:26:49,600 --> 00:26:53,760 Like when I was at BMO Harris for a while and that was a not 483 00:26:53,760 --> 00:26:55,960 the corporate credit cards, but the cash management was a big 484 00:26:55,960 --> 00:26:59,440 part of, I mean, that's pretty good business from a return on 485 00:26:59,440 --> 00:27:04,520 capital perspective. So y'all aren't that interested 486 00:27:04,520 --> 00:27:06,760 in that, right? I mean, you're more of like the 487 00:27:07,320 --> 00:27:10,880 loan economics. Yeah, although that's where the 488 00:27:10,880 --> 00:27:13,200 sponsor relationship comes into play. 489 00:27:13,440 --> 00:27:17,440 You'd be sometimes surprised that some of these fairly large 490 00:27:17,440 --> 00:27:20,120 family run businesses, if you look under the hood at their 491 00:27:20,120 --> 00:27:24,320 their cash reconciliation process, it's not up to snuff. 492 00:27:24,720 --> 00:27:28,200 And so typically the private equity firms are going to target 493 00:27:28,200 --> 00:27:31,920 businesses that obviously have their ducks in a row or, or work 494 00:27:31,920 --> 00:27:34,320 with them to try to make sure that they're doing things to 495 00:27:34,320 --> 00:27:38,600 mitigate those type of losses that can, that can kind of to 496 00:27:38,600 --> 00:27:40,480 your point, the devil's in the details. 497 00:27:40,480 --> 00:27:42,640 You can have a fantastic business, but if your, if your 498 00:27:42,640 --> 00:27:45,600 record keeping and cash management is sloppy and you're 499 00:27:45,600 --> 00:27:48,680 running two to three times leverage, all of a sudden the 500 00:27:48,680 --> 00:27:51,080 private equity sponsor can be in a precarious situation. 501 00:27:51,080 --> 00:27:54,360 So you want to make sure that the stupid mistakes are are 502 00:27:54,360 --> 00:27:56,800 mitigated as much as possible. Yeah. 503 00:27:56,800 --> 00:27:59,560 I guess what I'm asking just from the banking side, like do 504 00:27:59,560 --> 00:28:02,760 you have a, do you have a relationship with like JP Morgan 505 00:28:02,760 --> 00:28:06,560 that they are doing the cash management and then sending you 506 00:28:06,560 --> 00:28:09,880 the the reconciliation because the cash management, the actual 507 00:28:09,880 --> 00:28:12,280 treasury management stuff doesn't go through first Eagle, 508 00:28:12,280 --> 00:28:13,320 right? Yeah. 509 00:28:13,320 --> 00:28:16,480 So we typically have fund administrators who who deal with 510 00:28:16,520 --> 00:28:19,520 all of that for us. So JP Morgan is actually fairly 511 00:28:19,520 --> 00:28:22,840 heavily involved in in the fund administration business. 512 00:28:23,240 --> 00:28:26,040 So they're typically the ones especially like with our public 513 00:28:26,040 --> 00:28:28,640 funds that they're going to custody all the assets, they're 514 00:28:28,640 --> 00:28:30,400 going to price those assets daily. 515 00:28:30,800 --> 00:28:33,360 They're going to go through basically like an appraisal 516 00:28:33,360 --> 00:28:36,040 process to make sure that the assets are marked at a fair 517 00:28:36,040 --> 00:28:37,680 price. If there's been any new news 518 00:28:38,000 --> 00:28:40,120 that we're using that information to to kind of 519 00:28:40,120 --> 00:28:43,560 reprice those loans. So all that happens typically 520 00:28:43,560 --> 00:28:45,800 within the administrator of the fund. 521 00:28:45,800 --> 00:28:47,240 Yeah. It's not something you think 522 00:28:47,240 --> 00:28:50,000 about every day, but there's a lot of administrative work and 523 00:28:50,000 --> 00:28:53,600 obviously our funds have have inflows and outflows if they're 524 00:28:53,600 --> 00:28:56,800 getting in some cases daily or quarterly inflows. 525 00:28:57,120 --> 00:28:58,960 And then there's also a redemption process. 526 00:28:58,960 --> 00:29:02,400 So the the fund administrator typically deals with NAV 527 00:29:02,480 --> 00:29:04,440 calculations and things of that nature. 528 00:29:04,440 --> 00:29:09,320 I mean, is it a conversation with the Trump administration's, 529 00:29:10,360 --> 00:29:13,080 I would say advertised stance on regulation? 530 00:29:13,600 --> 00:29:19,200 Do you anticipate more banks entering the market as banking 531 00:29:19,200 --> 00:29:23,520 regulation may decline or is that not really on their radar 532 00:29:24,000 --> 00:29:25,840 of like what they're actually thinking about from a 533 00:29:25,840 --> 00:29:30,560 deregulation standpoint or TBD? Yeah, I think it's very much 534 00:29:30,560 --> 00:29:32,880 TBD. I, I think even if you're a 535 00:29:32,880 --> 00:29:35,960 banking analyst, which I, I certainly have not, I think 536 00:29:35,960 --> 00:29:38,800 there's still a lot of of variables. 537 00:29:38,800 --> 00:29:43,560 And I think for us specifically the types of deals that we work 538 00:29:43,560 --> 00:29:46,840 on, I, I don't necessarily see that, that changing very much 539 00:29:46,840 --> 00:29:53,200 within these higher quality investment grade type type parts 540 00:29:53,200 --> 00:29:56,120 of their business. I, I suppose, you know, at the 541 00:29:56,120 --> 00:29:59,720 margin, certainly a little bit less regulation obviously what's 542 00:29:59,720 --> 00:30:02,240 happened with interest rates on the margin. 543 00:30:02,240 --> 00:30:05,080 I would imagine that some of that businesses, some of that 544 00:30:05,080 --> 00:30:08,360 business does come back to the banks, but it, I would say it's 545 00:30:08,360 --> 00:30:11,920 a fraction of the overall market in terms of what guys are 546 00:30:11,920 --> 00:30:14,600 focused on today. I think longer term the big 547 00:30:14,600 --> 00:30:18,840 opportunity for private credit is investment grade, higher 548 00:30:18,840 --> 00:30:20,960 quality. It's just a much larger 549 00:30:20,960 --> 00:30:24,040 opportunity set. But the reality is the spread 550 00:30:24,040 --> 00:30:25,720 attached to a lot of those assets. 551 00:30:25,760 --> 00:30:28,480 I, I'm not quite sure how scalable that's going to be. 552 00:30:28,680 --> 00:30:31,280 That's a private credit manager who wants to earn their fees can 553 00:30:31,280 --> 00:30:34,560 deliver a, a 4% return to to investors. 554 00:30:34,600 --> 00:30:36,920 I'm not sure that that's necessarily going to be 555 00:30:36,920 --> 00:30:39,880 something that is going to attract the type of capital 556 00:30:39,880 --> 00:30:43,120 that's certainly the eight 910% yields have the last few years 557 00:30:43,120 --> 00:30:44,000 or so. Yeah. 558 00:30:44,360 --> 00:30:48,080 Well, what the If the average fee rate is 2%, you're making 559 00:30:48,080 --> 00:30:49,520 four. You're giving a lot to fees, 560 00:30:49,520 --> 00:30:52,720 right? Yeah, no, absolutely. 561 00:30:53,160 --> 00:30:56,840 And the types of transactions that these guys are working on 562 00:30:56,840 --> 00:31:01,200 too, we always say underwriting $100 million enterprise value 563 00:31:01,200 --> 00:31:05,280 business and a billion dollar business is not necessarily 10 564 00:31:05,280 --> 00:31:08,880 times the amount of work. And yet I'm charging fees based 565 00:31:08,880 --> 00:31:10,720 on the size of the loans I underwrite. 566 00:31:10,840 --> 00:31:14,640 And so we've seen loans just in the last couple weeks that are 567 00:31:14,680 --> 00:31:18,480 $5 billion loans. So you do the math. 568 00:31:18,480 --> 00:31:22,960 If I'm getting one, one and a half, 2% on a $5 billion loan 569 00:31:22,960 --> 00:31:26,400 for three or five years, there's, there's a reason some 570 00:31:26,400 --> 00:31:28,360 of these guys are buying NHL hockey teams, right? 571 00:31:28,360 --> 00:31:32,080 It's a very lucrative business. And so to the early point, I 572 00:31:32,080 --> 00:31:35,320 think there's always going to be concern around are people more 573 00:31:35,320 --> 00:31:38,480 focused on the end result for clients or are they, are they 574 00:31:38,480 --> 00:31:40,560 really trying to put this money to work? 575 00:31:40,960 --> 00:31:45,160 And and so no doubt the the amount of fees attached to 576 00:31:45,240 --> 00:31:49,840 private credit looks like hedge fund light type fees versus the 577 00:31:49,840 --> 00:31:52,800 fees you would typically find attached to a syndicated loan 578 00:31:52,800 --> 00:31:56,720 fund or a CLO. So what fees are those? 579 00:31:57,000 --> 00:32:01,640 Pardon the ignorance. So there's different frameworks, 580 00:32:01,640 --> 00:32:03,520 I would say. So if you're talking about the 581 00:32:03,520 --> 00:32:07,040 institutional world, what people typically refer to as like a 582 00:32:07,040 --> 00:32:10,480 closed end fund or like a drawdown fund, those funds 583 00:32:10,480 --> 00:32:16,960 typically charge anywhere from, I'd call it 1% on equity, so 584 00:32:16,960 --> 00:32:20,560 kind of invested capital. And then they'll typically use 585 00:32:20,560 --> 00:32:22,760 leverage. So they might use anywhere from 586 00:32:22,840 --> 00:32:26,440 one or two turns of leverage. So instead of having, so for 587 00:32:26,440 --> 00:32:28,800 every dollar of invested capital, I might have $3 of 588 00:32:28,800 --> 00:32:32,320 investments post, post leverage. Now they don't charge on the 589 00:32:32,320 --> 00:32:34,520 leverage, they just charge on the equity. 590 00:32:34,720 --> 00:32:38,480 But then they charge a performance fee, which you know, 591 00:32:38,480 --> 00:32:43,520 I would say average is probably 1212 1/2 percent above a hurdle 592 00:32:43,520 --> 00:32:47,440 rate, which the hurdle rate is usually around 5 or 6%. 593 00:32:48,080 --> 00:32:54,160 So in a, if I assume kind of a eight to 10% type IRR, the the 594 00:32:54,160 --> 00:32:57,560 fees can be pretty attractive. And then the other construct 595 00:32:57,560 --> 00:33:00,680 that you tend to find are interval funds are another 596 00:33:00,680 --> 00:33:03,760 popular vehicle for for private credit. 597 00:33:04,120 --> 00:33:09,000 Now what interval funds tend to do is they tend to charge fees 598 00:33:09,000 --> 00:33:12,200 on what we call managed assets, which is it basically includes 599 00:33:12,200 --> 00:33:15,000 the leverage, but they use a lot less leverage. 600 00:33:15,000 --> 00:33:18,960 So, you know, let's say I have $100 million fund, it uses $20 601 00:33:18,960 --> 00:33:22,680 million of leverage next to it. I'll get paid on the 20 million. 602 00:33:22,680 --> 00:33:26,000 So I get paid on what's in the administrator's account, which 603 00:33:26,000 --> 00:33:28,440 is 120 million. It's the equity plus the now, 604 00:33:28,680 --> 00:33:30,280 but I don't get performance fees. 605 00:33:30,840 --> 00:33:34,600 So what both of those are kind of designed to do is to 606 00:33:34,600 --> 00:33:37,120 basically incentivize the manager to produce returns. 607 00:33:37,440 --> 00:33:40,640 One does it be an incentive fee and one does it. 608 00:33:40,800 --> 00:33:44,320 In other words, one does it by trying not to disincentivize the 609 00:33:44,320 --> 00:33:46,760 manager to use leverage. The manager obviously has to do 610 00:33:46,760 --> 00:33:49,600 more work to put leverage on. So what you're trying to do is 611 00:33:49,600 --> 00:33:52,520 you're obviously trying to incentivize the manager to to 612 00:33:52,520 --> 00:33:56,080 not be shy to use leverage because they get paid on on 613 00:33:56,080 --> 00:33:58,360 those leveraged assets, if that makes sense. 614 00:33:58,360 --> 00:34:01,400 Yeah, it does. So for every invested dollar, 615 00:34:01,520 --> 00:34:05,240 you're probably looking at fees anywhere from 1 1/2 to 2% I 616 00:34:05,240 --> 00:34:09,600 would say, depending on the private kind of BDC structure as 617 00:34:09,600 --> 00:34:12,400 well tends to be a little bit higher fee than you find 618 00:34:12,400 --> 00:34:14,120 typically within the interval funds. 619 00:34:14,960 --> 00:34:20,560 In an interesting way, like as the like SOFR goes higher, your 620 00:34:20,560 --> 00:34:22,320 percentage of fees should go down, right? 621 00:34:22,320 --> 00:34:24,719 Because a lot of this is is floating rate. 622 00:34:25,400 --> 00:34:27,480 Yeah. So that's been one of the fair 623 00:34:27,480 --> 00:34:30,239 criticisms around the, the hurdle rates typically don't 624 00:34:30,239 --> 00:34:32,800 change. So everyone comes out, they have 625 00:34:32,800 --> 00:34:34,800 a 5% hurdle rate and that's in the document. 626 00:34:34,800 --> 00:34:37,040 It's kind of onerous and fairness to change that number 627 00:34:37,040 --> 00:34:39,560 around. And you some of the pushback I 628 00:34:39,560 --> 00:34:42,760 get is if the risk free rate is 525 and you guys are getting 629 00:34:42,760 --> 00:34:46,600 paid on everything over 5, that's am I making things a 630 00:34:46,600 --> 00:34:50,840 little bit too easy on you? But then on the flip side, as so 631 00:34:50,840 --> 00:34:53,920 far as trended back below 5, now all of a sudden it's a little 632 00:34:53,920 --> 00:34:57,440 bit harder to hit those hurdles. And I think over time, we're 633 00:34:57,440 --> 00:34:59,960 lucky we don't, we don't have to forecast interest rates, but our 634 00:34:59,960 --> 00:35:02,840 view would be that the economy is doing pretty well. 635 00:35:02,840 --> 00:35:06,880 We have a hard time getting to a thesis that the Fed is going to 636 00:35:06,880 --> 00:35:10,280 have to lower by three or four more times this year just based 637 00:35:10,280 --> 00:35:13,280 on kind of what we see today. So our kind of view has been 638 00:35:13,280 --> 00:35:16,760 that rates are obviously have come down a little bit, but 639 00:35:16,760 --> 00:35:19,360 they're they're not likely to go back to 2%, which obviously 640 00:35:19,360 --> 00:35:22,560 would make that 5% hurdle rate a little bit trickier to hit, even 641 00:35:22,560 --> 00:35:24,640 if I assume a 4% spread. Yeah. 642 00:35:25,840 --> 00:35:27,400 Well, in thoughts bound to be wrong. 643 00:35:27,400 --> 00:35:30,000 I have this this recurring thought that with savings rates 644 00:35:30,000 --> 00:35:33,160 where they are as as interest rates are higher, I actually 645 00:35:33,160 --> 00:35:36,360 think it's kind of stimulative. At the same time, I think it 646 00:35:36,560 --> 00:35:38,160 decreases the amount of investment. 647 00:35:38,160 --> 00:35:39,800 So I think it's kind of inflationary. 648 00:35:39,800 --> 00:35:43,880 And then if the Fed hikes and I'm close to right, it's almost 649 00:35:43,880 --> 00:35:47,520 like a self fulfilling prophecy that rates go higher and higher. 650 00:35:47,520 --> 00:35:50,680 I, I actually think lower rates are, are better for inflation, 651 00:35:50,680 --> 00:35:53,120 But we will see if that's crazy talk or not. 652 00:35:54,040 --> 00:35:56,960 Time will tell. It's certainly not conventional 653 00:35:57,120 --> 00:36:01,000 through how they look at things. No, no, I would say overall, you 654 00:36:01,000 --> 00:36:02,760 know, I'm a credit guy. We are credit guys. 655 00:36:02,760 --> 00:36:06,800 And so we tend to be kind of glass half empty kind of cynical 656 00:36:06,800 --> 00:36:09,080 by nature. Because if you think about it in 657 00:36:09,080 --> 00:36:10,920 our world, it's all about staying out of trouble. 658 00:36:10,920 --> 00:36:12,920 It's not about finding the next Elon Musk. 659 00:36:12,920 --> 00:36:14,560 It's really about avoiding losers. 660 00:36:14,560 --> 00:36:17,240 It's kind of how you outperforming in credit. 661 00:36:17,640 --> 00:36:21,120 So I think anyone certainly on our team, if you had asked us a 662 00:36:21,120 --> 00:36:24,000 few years ago, hey, the Fed's going to raise rates to 5 1/2 663 00:36:24,000 --> 00:36:25,640 percent, what's going to happen to the economy? 664 00:36:25,640 --> 00:36:28,920 We would have been dead wrong and said, oh, boy, that's really 665 00:36:28,920 --> 00:36:30,720 going to. That's really certainly within 666 00:36:30,720 --> 00:36:33,800 the companies that we are involved in who were by nature 667 00:36:33,800 --> 00:36:36,440 floating rate issuers. Yeah, the economy's held up 668 00:36:36,440 --> 00:36:38,920 really well. Operating results whether I'm 669 00:36:38,920 --> 00:36:43,440 talking margins, top line are certainly a lot better than I 670 00:36:43,440 --> 00:36:47,120 think we all would have assumed just given how how quickly the 671 00:36:47,120 --> 00:36:50,280 Fed jacked up rates. Yeah, Yeah. 672 00:36:50,520 --> 00:36:55,680 I think the last four years have kept everybody humble at least 673 00:36:55,680 --> 00:36:57,120 should have. Who knows. 674 00:36:57,680 --> 00:36:59,640 So you had mentioned interval funds. 675 00:36:59,640 --> 00:37:01,520 For those that don't know, do you mind talking about the 676 00:37:01,520 --> 00:37:04,040 difference between an interval fund and sort of a standard 677 00:37:04,040 --> 00:37:05,440 product, for lack of a better term? 678 00:37:06,760 --> 00:37:09,280 Yeah. So the way I would describe an 679 00:37:09,280 --> 00:37:13,680 interval fund is if it's almost like a mutual fund, it has a 680 00:37:13,680 --> 00:37:17,720 daily NAV, it'll have a ticker symbol with share classes that 681 00:37:17,720 --> 00:37:20,600 kind of look and feel very similar to a mutual fund. 682 00:37:21,240 --> 00:37:25,000 But the redemption process basically consists of you 683 00:37:25,000 --> 00:37:27,880 typically get quarterly redemption windows that are 684 00:37:27,880 --> 00:37:30,600 about a month. And so that the sponsor like us 685 00:37:30,600 --> 00:37:32,600 will go out to investors and just say, hey, here's a 686 00:37:32,600 --> 00:37:36,880 reminder, your redemption window starts April 15th and, and ends 687 00:37:36,960 --> 00:37:40,240 May 15th. And so you, you basically call 688 00:37:40,240 --> 00:37:43,880 your financial advisor and, and they put in a redemption notice. 689 00:37:44,440 --> 00:37:50,880 And the interval fund is designed to redeem up to 5% of 690 00:37:50,880 --> 00:37:53,200 the NAV of the fund every quarter. 691 00:37:53,960 --> 00:37:57,360 And without getting into too much weeds, I think it's 692 00:37:57,360 --> 00:38:00,440 important to mention that most interval funds have the ability 693 00:38:00,680 --> 00:38:04,120 with a very quick approval from the board to go an extra 2% 694 00:38:04,120 --> 00:38:08,200 higher, meaning you can, you can redeem up to 7% of the net asset 695 00:38:08,200 --> 00:38:10,000 value. So what that does on the one 696 00:38:10,000 --> 00:38:15,160 hand is it allows the fund to control the flow of assets, you 697 00:38:15,160 --> 00:38:17,320 know, much better than a mutual fund. 698 00:38:17,760 --> 00:38:19,760 You know, in theory you could pull as much money as you want 699 00:38:19,760 --> 00:38:23,800 out on a nightly basis. So they can be very painful for 700 00:38:23,800 --> 00:38:27,640 even like liquid, quote UN quote liquid loan funds, syndicated 701 00:38:27,640 --> 00:38:30,640 loan funds, they can get hammered without flows and 702 00:38:30,640 --> 00:38:33,760 there's no imminent buyer. And it could be very tough for 703 00:38:33,760 --> 00:38:36,640 short periods of time, especially like a COVID or a 704 00:38:36,640 --> 00:38:39,120 2022. So at the interval fund is 705 00:38:39,120 --> 00:38:43,040 designed to protect that and then it also obviously gives the 706 00:38:43,040 --> 00:38:45,200 fund the ability to own illiquid assets. 707 00:38:45,200 --> 00:38:47,760 So you can own assets that you're not going to have to sell 708 00:38:47,960 --> 00:38:51,240 because you can control them by having kind of packaging them 709 00:38:51,240 --> 00:38:55,200 next to liquid assets. So what a lot of managers do is 710 00:38:55,200 --> 00:38:57,520 they have, you know, and you typically you can look on the 711 00:38:57,520 --> 00:39:00,240 fun fact sheet and kind of see, OK, these are the private 712 00:39:00,240 --> 00:39:02,160 assets, these are kind of the illiquid assets. 713 00:39:02,160 --> 00:39:04,720 And then they have other things sitting beside those liquid 714 00:39:04,720 --> 00:39:08,520 assets typically is part of the investment strategy, but often 715 00:39:08,520 --> 00:39:12,080 times it's to provide liquidity. If we have outflows, these are 716 00:39:12,080 --> 00:39:16,280 things we can sell to JP Morgan to fund those those redemptions. 717 00:39:17,320 --> 00:39:21,000 Now what I will say is if you think about it, you're maxed at 718 00:39:21,000 --> 00:39:23,840 the five and seven. So in theory, if if everyone 719 00:39:23,840 --> 00:39:27,600 tries to sell at the same time, the fund is going to get more 720 00:39:27,600 --> 00:39:30,160 than 5 or 7% redemption requests. 721 00:39:30,480 --> 00:39:32,240 So then everyone gets kind of prorated. 722 00:39:32,240 --> 00:39:34,720 So if you get 10% request, everyone gets kind of half of 723 00:39:34,720 --> 00:39:38,560 what they asked for. And so it's really interesting 724 00:39:38,560 --> 00:39:42,680 if you go back a few years ago, interval funds, financial 725 00:39:42,680 --> 00:39:44,640 advisors did not like interval funds. 726 00:39:44,800 --> 00:39:47,080 They just like the idea of getting their money out on a 727 00:39:47,080 --> 00:39:50,320 daily basis. But over the last few years, the 728 00:39:50,320 --> 00:39:55,000 ability to package less liquid assets that again, we could talk 729 00:39:55,000 --> 00:39:57,920 about the fundamentals, the kind of advantages of some of those 730 00:39:57,920 --> 00:40:00,320 illiquid assets. But I think the reason you have 731 00:40:00,320 --> 00:40:02,960 a lot of retail advisors allocating to those funds that 732 00:40:02,960 --> 00:40:07,000 have illiquid sleeves is. It smooths out the Nava lot, 733 00:40:07,000 --> 00:40:11,160 which yeah, it's a good thing, but it's also you need to manage 734 00:40:11,160 --> 00:40:17,240 expectations and the other structure that people typically 735 00:40:17,240 --> 00:40:20,960 use for private credit, which is arguably just as popular as a as 736 00:40:20,960 --> 00:40:23,280 a business development company or a BDC. 737 00:40:24,240 --> 00:40:27,760 So BDC's there are several different kind of forms of a 738 00:40:27,760 --> 00:40:29,880 BDC. The most I would say the fun 739 00:40:29,880 --> 00:40:32,560 that's been around the longest or exchange traded BDC's. 740 00:40:32,560 --> 00:40:35,360 So there's, there are BDC's that are literally New York Stock 741 00:40:35,360 --> 00:40:37,400 Exchange listed. So it's almost like a closed end 742 00:40:37,400 --> 00:40:39,360 fund. You can buy the share price and 743 00:40:39,360 --> 00:40:41,400 then it has this, this, this portfolio. 744 00:40:41,840 --> 00:40:45,680 More recently, the real growth in BDC's has come from unlisted 745 00:40:45,680 --> 00:40:49,240 BDC's. So it's a 40 act fund, It's 746 00:40:49,240 --> 00:40:52,480 structured just like ABDC, but it's not listed on an exchange. 747 00:40:53,120 --> 00:40:56,760 So the redemption process for BDC and unlisted BDC is a lot 748 00:40:56,760 --> 00:41:00,080 like the interval fund. You do it basically with the BDC 749 00:41:00,080 --> 00:41:05,000 sponsor and it's similar in the sense that it's typically 5% per 750 00:41:05,000 --> 00:41:08,680 quarter. But the, the BDC is a little bit 751 00:41:08,680 --> 00:41:12,680 different in the sense that if the, if the board of directors 752 00:41:12,680 --> 00:41:15,360 believes that it's not in the bench best interest of 753 00:41:15,360 --> 00:41:19,600 shareholders, they can suspend the redemption on ABDC. 754 00:41:20,200 --> 00:41:24,760 So you have like a 2022 or a COVID and some of the REITs, 755 00:41:25,400 --> 00:41:27,440 REITs are kind of a similar structure to ABDC. 756 00:41:27,640 --> 00:41:31,960 A REIT can kind of shut off the redemption process if they think 757 00:41:31,960 --> 00:41:33,960 that there's been a dislocation in the market. 758 00:41:34,040 --> 00:41:37,560 Yeah, Blackstone, right? Yeah, whatever, Barry sternly 759 00:41:37,640 --> 00:41:38,440 wrote. I'm. 760 00:41:38,440 --> 00:41:41,480 Pretty sure he gated it. What I always say is like, did 761 00:41:41,480 --> 00:41:43,400 you read the document? Because if you read the 762 00:41:43,400 --> 00:41:47,040 document, you would know like this can happen in an interval 763 00:41:47,040 --> 00:41:49,640 fund. There's really no like we're not 764 00:41:49,640 --> 00:41:52,000 going to do it this quarter. The interval fund kind of has to 765 00:41:52,000 --> 00:41:55,680 redeem up to 5% per quarter even if it's not the right time. 766 00:41:55,680 --> 00:41:58,680 So there's, it's a bit of a nuance, but I think it's 767 00:41:58,680 --> 00:42:01,200 important for people to understand that with these BDCS, 768 00:42:01,200 --> 00:42:05,320 you do have a little bit less liquidity than you might with an 769 00:42:05,320 --> 00:42:07,920 interval fund. So you really have to take kind 770 00:42:07,920 --> 00:42:10,600 of like AI don't know what the right number is, but a little 771 00:42:10,600 --> 00:42:12,640 bit of a long term view. I don't know if it's two years, 772 00:42:12,640 --> 00:42:15,520 three years, but you definitely don't want to use those 773 00:42:15,520 --> 00:42:18,080 structures if it's money that you think you might need. 774 00:42:18,080 --> 00:42:21,160 It's really longer term capital that you say, do I really need 775 00:42:21,160 --> 00:42:23,680 that money daily? That is starting to kind of 776 00:42:23,680 --> 00:42:26,400 gravitate towards some of those some of those semi liquid 777 00:42:26,400 --> 00:42:29,200 structures. Yeah, the interval fund is 778 00:42:29,200 --> 00:42:34,200 almost it's like a way to get a liquid E liquid exposure without 779 00:42:34,200 --> 00:42:38,640 the lock up of like a 10 year fund or something basically and 780 00:42:38,640 --> 00:42:40,320 you can put your money to work right away, right? 781 00:42:40,920 --> 00:42:44,160 Yeah, it. Waiting on called capital. 782 00:42:44,160 --> 00:42:47,960 No, it takes daily, daily inflows, which again is part of 783 00:42:47,960 --> 00:42:50,720 the reason that you want to have some liquid assets in there is I 784 00:42:50,720 --> 00:42:54,440 don't want to have to originate a loan to put that money to work 785 00:42:54,760 --> 00:42:57,280 every week or two. So you, you could say, look, 786 00:42:57,280 --> 00:43:01,200 let's just go buy a little bit of XYZ big public liquid loan 787 00:43:01,640 --> 00:43:03,440 only for a few months. And then when we see the right 788 00:43:03,440 --> 00:43:06,480 transactions in the direct lending origination pipeline, we 789 00:43:06,480 --> 00:43:09,240 can sell those loans and, and, and kind of allocate. 790 00:43:09,240 --> 00:43:12,040 So it helps you manage your flows a little bit better by 791 00:43:12,040 --> 00:43:15,920 having some liquid assets. The BDC does it much more on a, 792 00:43:16,000 --> 00:43:18,840 a monthly, quarterly basis. So they're not taking in money 793 00:43:18,840 --> 00:43:20,920 every night. So they tend to have more of a 794 00:43:20,920 --> 00:43:24,760 focus on just those private assets versus the interval 795 00:43:24,760 --> 00:43:26,840 funds. If done correctly, you should 796 00:43:26,840 --> 00:43:29,200 always have some liquid assets that you're using there to 797 00:43:29,200 --> 00:43:32,480 manage your inflows and obviously your outflows. 798 00:43:32,720 --> 00:43:36,520 Yeah, that makes sense. You'd mentioned as as a credit 799 00:43:36,520 --> 00:43:39,720 person you're you're naturally averse to losses, which makes 800 00:43:39,720 --> 00:43:41,200 sense. So like if I were to look 801 00:43:41,200 --> 00:43:44,160 through your portfolio, are there themes or what are you 802 00:43:44,280 --> 00:43:48,560 thinking about to avoid the loss in in what you're lending to? 803 00:43:49,240 --> 00:43:52,040 So I mentioned earlier that everything we do is sponsor 804 00:43:52,040 --> 00:43:53,880 back. That's that's one of the things 805 00:43:53,880 --> 00:43:56,040 that's pretty objective kind of black and white. 806 00:43:56,400 --> 00:43:59,400 The other thing I would say that's pretty objective is the 807 00:43:59,400 --> 00:44:03,960 vast majority of all the loans we do are first lien senior 808 00:44:03,960 --> 00:44:07,800 secured term loans, which is kind of the the old facility 809 00:44:07,800 --> 00:44:10,280 that's been used since the dawn of time in the loan market. 810 00:44:10,720 --> 00:44:13,280 More recently, we're seeing a lot of these direct lenders 811 00:44:13,280 --> 00:44:17,480 using what are called Unitronch loans where it's the same credit 812 00:44:17,480 --> 00:44:20,440 agreement, but kind of built into that that loan. 813 00:44:20,440 --> 00:44:24,520 I have some people that are first lien, others that might be 814 00:44:24,520 --> 00:44:26,640 what we call. It's kind of AI always laugh 815 00:44:26,640 --> 00:44:29,160 when I say this. First lien last out. 816 00:44:29,280 --> 00:44:31,480 Which means you're not first lien, you're technically first 817 00:44:31,480 --> 00:44:33,040 lien. Closer to mez, right? 818 00:44:33,520 --> 00:44:36,520 Yeah, but someone gets their money back first, and so that's 819 00:44:36,520 --> 00:44:39,560 meaningful in terms of the risk you're taking when someone gets 820 00:44:39,560 --> 00:44:42,000 their money out first. What is that that matters for 821 00:44:42,000 --> 00:44:45,440 like for, for the security, right? 822 00:44:46,200 --> 00:44:49,120 If your first lien last out, then somebody can't come and 823 00:44:49,120 --> 00:44:51,760 prime you or something. Exactly, Yeah, Yeah. 824 00:44:51,760 --> 00:44:54,720 So again, you're up there in the in the priority of payments, but 825 00:44:54,720 --> 00:44:57,640 you're not first. And then the other thing I would 826 00:44:57,640 --> 00:45:02,240 say, getting into kind of more subjective things, we tend to 827 00:45:02,240 --> 00:45:05,800 really like businesses that have a lot of recurring revenue. 828 00:45:06,560 --> 00:45:09,360 So that could be everything from, like I mentioned, Ras. 829 00:45:09,520 --> 00:45:11,080 If you're a registered investment advisor, you have a 830 00:45:11,080 --> 00:45:13,880 bunch of clients, you charge a fee on assets. 831 00:45:13,960 --> 00:45:17,040 If you don't, if you do a good job by them, I can kind of model 832 00:45:17,040 --> 00:45:19,360 out what your revenue is going to be year over year. 833 00:45:19,880 --> 00:45:24,560 Other things I mentioned also like HVAC servicing, orthodontic 834 00:45:24,560 --> 00:45:28,800 clinics, tax and audit firms that regardless of what happens, 835 00:45:28,800 --> 00:45:32,040 your clients need to get tax and audit work done, just the higher 836 00:45:32,040 --> 00:45:35,120 percentage of recurring revenue. Every business has some 837 00:45:35,120 --> 00:45:38,760 cyclicality, but if I can try to remove that as much as possible, 838 00:45:38,760 --> 00:45:42,040 let's try to do that less leverage. 839 00:45:42,280 --> 00:45:46,160 We're we're seeing a lot of direct lending managers now 840 00:45:46,360 --> 00:45:49,800 refinancing these broadly syndicated loans. 841 00:45:49,960 --> 00:45:52,200 These loans are kind of existing mutual funds today and they're 842 00:45:52,200 --> 00:45:55,520 kind of taking them private. And a lot of these, these, these 843 00:45:55,520 --> 00:45:58,040 loans are getting refinanced into the private markets, these 844 00:45:58,040 --> 00:46:00,920 larger deals because they have a lot of leverage and they can't 845 00:46:00,920 --> 00:46:02,960 get done in the syndicated market. 846 00:46:02,960 --> 00:46:07,200 So these might have 467 times leverage and leverage is 847 00:46:07,200 --> 00:46:10,240 typically how much debt do you have versus how much, how much 848 00:46:10,320 --> 00:46:12,720 EBITDA do you throw off to, to service that debt. 849 00:46:13,200 --> 00:46:16,600 So I would say our direct lending business tends to focus 850 00:46:16,600 --> 00:46:19,040 on deals that are more like 2 to three times leverage. 851 00:46:19,880 --> 00:46:22,280 So they're smaller companies. So I'm taking risks. 852 00:46:22,280 --> 00:46:25,760 On a debt to EBITDA basis, yes, And your EBITDA, the cash 853 00:46:25,760 --> 00:46:29,120 conversion is probably quite good given the businesses that 854 00:46:29,120 --> 00:46:30,600 you're talking about. Yeah. 855 00:46:30,600 --> 00:46:34,240 So in exchange for dealing with these smaller businesses, 856 00:46:34,520 --> 00:46:38,880 you're, you're typically buying day one at a level of cash flow 857 00:46:38,880 --> 00:46:42,680 that it is, is very significant relative to the overall amount 858 00:46:42,680 --> 00:46:44,040 of debt outstanding. Yeah. 859 00:46:44,360 --> 00:46:48,440 And then the other thing I would say too is as the market has 860 00:46:48,440 --> 00:46:54,040 grown, you're seeing a lot more what I'll call creativity, which 861 00:46:54,040 --> 00:46:55,680 again, it's a good thing and a bad thing. 862 00:46:55,680 --> 00:46:58,960 Creativity is great. But I always say like, I always 863 00:46:58,960 --> 00:47:01,400 like to go back to the mortgage on the House analogy. 864 00:47:02,040 --> 00:47:04,760 And like if you tried to use that same framework with the 865 00:47:04,760 --> 00:47:07,480 bank when you try to get a mortgage, what would the banker 866 00:47:07,480 --> 00:47:09,560 on the on the other side of the desk say to you? 867 00:47:09,600 --> 00:47:14,520 So one of the structures or features we're seeing in the 868 00:47:14,520 --> 00:47:16,800 direct lending market today, it's become a lot more prevalent 869 00:47:16,800 --> 00:47:19,800 is what's called a pick or a paid in kind. 870 00:47:20,320 --> 00:47:24,560 So a paid in kind means I'm not paying my interest in cash, I'm 871 00:47:24,560 --> 00:47:30,520 paying my interest in more debt. So, so this again, the people 872 00:47:30,520 --> 00:47:33,120 are going to tell you the good reason that this is happening is 873 00:47:33,280 --> 00:47:35,560 there's a lot of lending right now to very high growth 874 00:47:35,560 --> 00:47:38,880 technology businesses and software businesses, AI. 875 00:47:39,320 --> 00:47:41,920 And so the thinking is if, if the business is really growing 876 00:47:41,920 --> 00:47:43,800 rapidly, you don't want to consume. 877 00:47:43,800 --> 00:47:45,800 Cash and interest expense. Yeah. 878 00:47:45,800 --> 00:47:47,880 And so I want to let the business grow into the cap 879 00:47:47,880 --> 00:47:51,560 structure, the old school kind of loan guy in me would be 880 00:47:51,560 --> 00:47:53,080 saying. Used to say, let's lend to the 881 00:47:53,080 --> 00:47:55,560 cap structure as today in the growth can go to equity. 882 00:47:55,840 --> 00:47:58,600 Yeah. And so, you know, imagine if you 883 00:47:58,600 --> 00:48:01,640 went to the bank and you said, look, I want to put 50% down on 884 00:48:01,640 --> 00:48:03,520 my house. I'm buying in a great community 885 00:48:03,520 --> 00:48:05,680 in Florida that's growing and everybody likes it. 886 00:48:05,960 --> 00:48:09,880 But the only thing is I can't pay my first four mortgage 887 00:48:09,880 --> 00:48:12,280 payments. But then beyond that we're good. 888 00:48:12,280 --> 00:48:13,800 I mean the bank, which is they're not going to make you 889 00:48:13,800 --> 00:48:15,440 the loan. There's there's nothing you can 890 00:48:15,440 --> 00:48:18,000 do to tweak the other variables that the bankers going to make 891 00:48:18,000 --> 00:48:21,960 that loan. So we don't that and then that's 892 00:48:21,960 --> 00:48:26,000 what we call pick as plan A. So a pick can happen if all of a 893 00:48:26,000 --> 00:48:28,240 sudden the business runs into problems. 894 00:48:28,240 --> 00:48:31,160 Typically a pick is built in to say, OK, if you can't pay your 895 00:48:31,160 --> 00:48:34,080 interest, you know, we will allow you to pay it in kind. 896 00:48:34,440 --> 00:48:37,400 But going into a deal day, one that you know the first year is 897 00:48:37,400 --> 00:48:40,840 going to be paid in kind, I don't know, I'm sure some of 898 00:48:40,840 --> 00:48:42,560 these transactions are going to work out well. 899 00:48:42,560 --> 00:48:44,760 If I'm getting paid to take the risk, it might be a good trade 900 00:48:44,760 --> 00:48:48,800 off be kind of guardrails and everything we do has covenants 901 00:48:49,120 --> 00:48:50,360 within the direct lending market. 902 00:48:50,360 --> 00:48:53,800 So things that we try to do just to control risk day one that 903 00:48:53,800 --> 00:48:56,880 other lenders might have a little bit of a different 904 00:48:56,880 --> 00:48:59,200 framework than we do. Yeah, that makes sense. 905 00:49:00,280 --> 00:49:01,720 Yeah, I would. I would think a pick is 906 00:49:01,720 --> 00:49:06,160 traditionally like more mez right than senior secured first 907 00:49:06,160 --> 00:49:09,840 lien type stuff. Yeah, there's definitely a home 908 00:49:09,840 --> 00:49:13,240 for it like distressed lending. Some of the smartest guys in our 909 00:49:13,240 --> 00:49:15,600 world are distressed debt managers and they take a lot of 910 00:49:15,600 --> 00:49:17,120 risks. There's nothing wrong with that. 911 00:49:17,360 --> 00:49:20,080 The question is what am I getting paid to take the risk? 912 00:49:20,080 --> 00:49:23,600 And so as long as the risk return trade off is fair, then 913 00:49:23,600 --> 00:49:27,520 it can be a great investment. But if I'm all of a sudden being 914 00:49:27,520 --> 00:49:30,800 risk into the document and I'm and the spread isn't, isn't 915 00:49:30,800 --> 00:49:33,840 moving commensurately with that, but it's a multi variable 916 00:49:33,840 --> 00:49:36,000 equation that the manager needs to figure out. 917 00:49:36,360 --> 00:49:39,720 And are there things that I just always say no to that even for 918 00:49:39,720 --> 00:49:41,680 another 200 basis points of spread? 919 00:49:41,680 --> 00:49:43,880 I, I just don't do that. You got to find somebody down 920 00:49:43,880 --> 00:49:47,360 the road that does so yeah, within mezzanine and certain 921 00:49:47,360 --> 00:49:50,320 other kind of approaches guys are doing this. 922 00:49:50,360 --> 00:49:53,520 But for us, we've tended to to kind of error on the side of 923 00:49:53,520 --> 00:49:55,480 caution a bit. Again, I think it goes back to 924 00:49:55,480 --> 00:49:57,680 kind of the first Eagle brand too. 925 00:49:57,680 --> 00:49:59,720 I mean, that's part of the reason we ended up here is our 926 00:49:59,720 --> 00:50:02,400 team has been doing this a really long time. 927 00:50:02,520 --> 00:50:06,160 It had guys who I report into and over time they just decided 928 00:50:06,160 --> 00:50:09,000 like these are the things that we, you know, kind of bend on 929 00:50:09,000 --> 00:50:11,560 the things that we don't. How does deal flow work? 930 00:50:11,600 --> 00:50:14,720 And like why do you win deals? You're competing I assume 931 00:50:14,720 --> 00:50:18,520 against Aries and and the other 6th St. or whatever. 932 00:50:18,520 --> 00:50:23,720 Like who is it that a sponsor wants to spread sort of the, the 933 00:50:23,720 --> 00:50:26,560 debt around so that they can rely on the market to come to 934 00:50:26,560 --> 00:50:28,520 them? Or I always get worried that the 935 00:50:28,520 --> 00:50:31,080 answer is we're loosest on covenants and and structure, 936 00:50:31,080 --> 00:50:33,000 right? Which is not exactly the answer 937 00:50:33,000 --> 00:50:35,920 you want out of a debt shop. So curious to hear your. 938 00:50:36,120 --> 00:50:38,840 Answers, yeah. So one thing I will, I will 939 00:50:38,840 --> 00:50:42,640 mention is we don't compete with those types of folks. 940 00:50:42,680 --> 00:50:46,360 I would say most of the household name private credit 941 00:50:46,360 --> 00:50:49,760 managers who people are familiar with the one you just mentioned, 942 00:50:50,680 --> 00:50:53,040 I would say going to generally focus on companies that are 943 00:50:53,040 --> 00:50:57,600 doing 250 million of EBITDA or generally a lot more. 944 00:50:57,760 --> 00:51:01,240 You know these are, so these are, these are much larger 945 00:51:01,240 --> 00:51:05,200 transactions quite frankly. And again, these are the larger 946 00:51:05,200 --> 00:51:08,560 managers who tend to have the big distribution teams who might 947 00:51:08,560 --> 00:51:12,240 have BDC's and interval funds and they're on the platform at 948 00:51:12,240 --> 00:51:15,440 the big wirehouse firms by nature just going to be bigger. 949 00:51:15,440 --> 00:51:17,560 They're going to focus on bigger, bigger deals because 950 00:51:17,560 --> 00:51:21,320 like I mentioned, our team runs about 20 billion and there's 951 00:51:21,320 --> 00:51:24,240 guys who deploy $20 billion in in a couple months. 952 00:51:24,240 --> 00:51:26,160 So, so we're a lot smaller than them. 953 00:51:26,600 --> 00:51:32,880 And so I would say that for US, one of the things that's a 954 00:51:32,880 --> 00:51:36,520 little bit unique is the sense that because you're right, a lot 955 00:51:36,520 --> 00:51:40,200 of private equity firms if we're involved with other lenders in a 956 00:51:40,200 --> 00:51:45,000 deal, the, the likelihood is the private equity sponsor wanted 957 00:51:45,000 --> 00:51:47,800 that. So they're planning on growing 958 00:51:47,800 --> 00:51:51,480 their business over time because that's that's typically the MO 959 00:51:51,480 --> 00:51:54,840 in our world, especially in the lower middle market is we're 960 00:51:54,840 --> 00:51:57,480 coming to you today, we're looking to acquire an HVAC 961 00:51:57,480 --> 00:52:01,880 servicing business. Once we absorb the business and 962 00:52:01,880 --> 00:52:05,320 we are able to kind of prove that we know how to operate the 963 00:52:05,320 --> 00:52:08,520 company, we're going to come to you in six or nine months with 964 00:52:08,520 --> 00:52:11,080 another HVAC servicing business that we're looking to acquire. 965 00:52:11,560 --> 00:52:14,080 And so we're going to try to scale these businesses up over 966 00:52:14,080 --> 00:52:18,480 time or an orthodontics firm or a registered investment advisor. 967 00:52:19,000 --> 00:52:23,440 And so they want to have access to, to, to different lenders. 968 00:52:23,800 --> 00:52:27,000 But the other thing that that tends to happen is the initial 969 00:52:27,000 --> 00:52:30,920 transaction might be quite small, but if the private equity 970 00:52:30,920 --> 00:52:33,400 sponsor is successful, they're going to they're going to grow, 971 00:52:33,600 --> 00:52:34,800 they're going to grow the business. 972 00:52:35,200 --> 00:52:38,720 And so I think one of the things that we've been able to do to 973 00:52:38,720 --> 00:52:43,640 potentially put ourselves on a short list of lenders to get 974 00:52:43,640 --> 00:52:47,760 involved in is we don't mind doing smaller transactions 975 00:52:47,760 --> 00:52:53,520 upfront if we then can grow into this larger business with the PE 976 00:52:53,520 --> 00:52:57,600 sponsor because it's it's really beneficial for for both of us. 977 00:52:57,720 --> 00:53:01,040 And it's beneficial for us because there's nothing we love 978 00:53:01,040 --> 00:53:04,760 more than an add on where we worked with the PE firm before. 979 00:53:04,760 --> 00:53:07,680 We know how they behave. We might know how they behave 980 00:53:07,680 --> 00:53:11,480 when things don't go according to plan and what happens when 981 00:53:11,880 --> 00:53:15,240 surprises to the negative kind of happened, how do they react? 982 00:53:15,800 --> 00:53:19,720 And there's nothing better than an add on because we've worked 983 00:53:19,720 --> 00:53:22,560 on a deal with you, you're basically coming back and trying 984 00:53:22,560 --> 00:53:25,600 to replicate a similar transaction with a similar firm 985 00:53:25,600 --> 00:53:28,160 that's in a similar industry. So there's a lot less 986 00:53:28,160 --> 00:53:32,280 incremental work we have to do. And now I can put another 30, 987 00:53:32,280 --> 00:53:35,600 forty, $50 million to work. So add-ons are really great for 988 00:53:35,600 --> 00:53:38,120 us. But again, if you're, you know, 989 00:53:38,120 --> 00:53:41,120 especially some of the the names you mentioned, you know, when 990 00:53:41,120 --> 00:53:44,240 you call them up and you say, hey, we need a $20 million loan, 991 00:53:44,280 --> 00:53:46,520 they're not going to call you back for them to do six weeks 992 00:53:46,520 --> 00:53:48,600 worth of work to deploy $20 million. 993 00:53:49,000 --> 00:53:52,000 Yeah, they're going to go to the smaller, the smaller lenders 994 00:53:52,000 --> 00:53:55,400 like us. But on the flip side, we are big 995 00:53:55,400 --> 00:53:57,440 enough that we can hopefully scale. 996 00:53:57,760 --> 00:54:00,400 So we're not just doing $510,000,000 loans. 997 00:54:00,400 --> 00:54:02,040 We can kind of grow with the business. 998 00:54:02,680 --> 00:54:04,280 And we have a lot of people on our team. 999 00:54:04,320 --> 00:54:08,080 We have 50 about 5055 people on our investment team. 1000 00:54:08,520 --> 00:54:10,840 So that gives us a bit of an edge in that we have kind of 1001 00:54:10,840 --> 00:54:14,680 industry specialists across these different sectors who can 1002 00:54:14,680 --> 00:54:18,080 hopefully add value in terms of structuring the loan. 1003 00:54:18,120 --> 00:54:20,080 They understand the business really well. 1004 00:54:20,440 --> 00:54:22,200 So I know it's a little bit cliche to say it's a 1005 00:54:22,200 --> 00:54:24,600 partnership, but it's a little bit of a partnership. 1006 00:54:24,720 --> 00:54:27,000 Like we like how these guys behave. 1007 00:54:27,000 --> 00:54:31,280 They they're good to work with. So I think you tend to find a 1008 00:54:31,280 --> 00:54:34,280 little bit more of a tighter knit relationship between guys 1009 00:54:34,280 --> 00:54:37,160 like us, the PE sponsors and the issuers. 1010 00:54:37,160 --> 00:54:40,560 Then you might find with even these multi billion dollar deals 1011 00:54:40,560 --> 00:54:43,720 that have become a little bit more commoditized because I 1012 00:54:43,720 --> 00:54:46,680 might not shop the deal to you, but I can also call JP Morgan 1013 00:54:47,000 --> 00:54:48,760 and I can get them to syndicate that risk. 1014 00:54:48,760 --> 00:54:51,160 So there's a little bit more of an arm's length relationship 1015 00:54:51,400 --> 00:54:54,440 within those bigger multi billion dollar transactions. 1016 00:54:54,560 --> 00:54:58,280 And we've seen this is not prevalent, but we've seen a few 1017 00:54:58,280 --> 00:55:00,960 deals recently in the direct lending market where the private 1018 00:55:00,960 --> 00:55:05,840 equity sponsor tried to effectively extract assets from 1019 00:55:05,840 --> 00:55:09,320 the lenders and put it into kind of like subsidiaries where the 1020 00:55:09,320 --> 00:55:11,400 lenders now low no longer have liens. 1021 00:55:11,680 --> 00:55:13,520 So these are like aggressive tactics. 1022 00:55:13,520 --> 00:55:16,760 You tend to see more in the syndicated market that we're 1023 00:55:16,760 --> 00:55:20,440 starting to see a little bit now more in the larger direct 1024 00:55:20,440 --> 00:55:23,800 lending transactions that we really don't see in our market. 1025 00:55:23,800 --> 00:55:26,920 We have private equity sponsors we've worked with 456 deals on 1026 00:55:26,920 --> 00:55:29,640 with. So anyone can do things that are 1027 00:55:29,640 --> 00:55:31,560 unscrupulous. I've worked on Wall Street long 1028 00:55:31,560 --> 00:55:34,240 enough to know that this isn't an industry of angels 1029 00:55:34,240 --> 00:55:37,760 necessarily, but certainly knowing your partner's better 1030 00:55:37,960 --> 00:55:41,320 helps mitigate you from some of that, some of that risk that 1031 00:55:41,320 --> 00:55:45,280 might be more more prevalent within some of these, some of 1032 00:55:45,280 --> 00:55:46,680 these bigger deals. Yeah. 1033 00:55:47,200 --> 00:55:50,240 Well got to know your restricted assets and what not right? 1034 00:55:50,760 --> 00:55:54,440 Yeah, it's definitely an asset class that you really need to 1035 00:55:54,440 --> 00:55:57,640 read the fine print. There's a lot of language now 1036 00:55:57,640 --> 00:56:01,080 founding credit agreements that have come from some of those 1037 00:56:01,080 --> 00:56:03,960 aggressive tactics. So we call them blockers. 1038 00:56:03,960 --> 00:56:07,480 So it's the the aggressive transaction, ABC transaction, 1039 00:56:07,480 --> 00:56:10,760 it's now an ABC blocker that mitigates that risk. 1040 00:56:11,120 --> 00:56:13,520 So the other market's evolving a little bit. 1041 00:56:13,520 --> 00:56:17,200 But definitely the deal documentation within these loans 1042 00:56:17,200 --> 00:56:22,240 can vary a lot. And knowing the details in terms 1043 00:56:22,240 --> 00:56:25,840 of what you own when things don't go according to plan is 1044 00:56:25,840 --> 00:56:29,360 again, ultimately how you kind of protect capital within within 1045 00:56:29,360 --> 00:56:31,760 these loans, whether it's syndicated or a direct lending 1046 00:56:31,760 --> 00:56:35,200 deal. That has been a consistent, 1047 00:56:35,200 --> 00:56:36,560 what's the word that I'm looking for? 1048 00:56:36,560 --> 00:56:41,320 When I talk to people about why there should be outperformance 1049 00:56:41,320 --> 00:56:44,240 in credit versus the index. This is a common thing that 1050 00:56:44,240 --> 00:56:49,760 comes up right, is that the index can get swallowed sort of 1051 00:56:49,760 --> 00:56:54,560 by some of these poor credit agreements where if you're a 1052 00:56:54,560 --> 00:56:57,520 prudent manager, you can avoid some of those. 1053 00:56:57,520 --> 00:57:00,080 And in a game where it's all about avoiding losses, that 1054 00:57:00,080 --> 00:57:01,360 should matter over the long term. 1055 00:57:01,720 --> 00:57:04,200 Yeah, It's interesting. I mentioned earlier that I was, 1056 00:57:04,200 --> 00:57:06,920 when I started to get into investing in college, I'm like, 1057 00:57:06,920 --> 00:57:08,760 where do you go? You go to like Warren Buffett 1058 00:57:08,840 --> 00:57:11,360 and then you kind of branch out from the Buffett books. 1059 00:57:11,800 --> 00:57:14,480 And so I think a lot of people kind of start there. 1060 00:57:14,760 --> 00:57:17,800 So you start to think a lot about active management. 1061 00:57:17,920 --> 00:57:21,520 And obviously with passive management, it's a conversation 1062 00:57:21,520 --> 00:57:25,440 everyone has in our business. And I remember I took a class at 1063 00:57:25,440 --> 00:57:28,840 Columbia Business School with Michael Mobison, who who at the 1064 00:57:28,840 --> 00:57:31,360 time had worked at leg, was working at Leg Mason, you know, 1065 00:57:31,360 --> 00:57:34,080 back in the Bill Miller days. And so this is like, this is 1066 00:57:34,080 --> 00:57:36,600 like where you go to talk about active management, right? 1067 00:57:37,000 --> 00:57:40,160 And we're talking to Professor Mobison about his investments 1068 00:57:40,160 --> 00:57:43,040 and he was talking about how he has a lot of money and passive, 1069 00:57:43,200 --> 00:57:46,640 passive mutual funds effectively in in ETFs and in the equity 1070 00:57:46,640 --> 00:57:49,720 world, obviously sitting at First Eagle and our Global value 1071 00:57:49,720 --> 00:57:51,520 Fund. It's a debate we have every day, 1072 00:57:52,600 --> 00:57:57,560 but if you think about the what we do in the loan market, it's 1073 00:57:57,600 --> 00:58:01,760 it's really very different because all these indexes #1 are 1074 00:58:01,760 --> 00:58:04,720 cap weighted. So you start with the largest 1075 00:58:04,720 --> 00:58:07,320 issuers in the market. So if you look at a cap weighted 1076 00:58:07,320 --> 00:58:12,240 high yield bond index or a cap weighted loan index or, and, and 1077 00:58:12,440 --> 00:58:15,680 a mutual fund that tracks that cap weighted index, they're 1078 00:58:15,680 --> 00:58:17,920 naturally going to own the companies that have more debt 1079 00:58:17,920 --> 00:58:19,840 than everybody else. That's just kind of how you get 1080 00:58:19,840 --> 00:58:21,440 to be the biggest name in the index. 1081 00:58:21,440 --> 00:58:23,640 Now, that doesn't mean that you're going to have more 1082 00:58:23,640 --> 00:58:27,680 leverage, but it can. There was a company years ago 1083 00:58:27,680 --> 00:58:31,920 called Texas Competitive Electric Holdings TXU, which was 1084 00:58:31,960 --> 00:58:35,080 one of the, I think it was technically the largest default 1085 00:58:35,120 --> 00:58:38,360 in, in history if I take both the loans and the high yield 1086 00:58:38,360 --> 00:58:40,600 bonds. And when it defaulted, it was 1087 00:58:40,600 --> 00:58:43,120 not surprisingly the largest name in the high yield index and 1088 00:58:43,120 --> 00:58:44,680 the largest name in the loan index. 1089 00:58:45,240 --> 00:58:49,280 So just starting day one and saying, let me just not start 1090 00:58:49,280 --> 00:58:51,560 with the index. Let me start with the companies 1091 00:58:51,560 --> 00:58:55,720 I like, Punk, the companies I don't like and and just kind of 1092 00:58:55,720 --> 00:58:59,360 start there. What you tend to find is like 1093 00:58:59,360 --> 00:59:02,240 syndicated loan funds versus the index. 1094 00:59:02,680 --> 00:59:04,640 They beat the index pretty handily. 1095 00:59:04,920 --> 00:59:08,360 They have a huge advantage and the ETFs in our market are 1096 00:59:08,360 --> 00:59:13,480 somewhat systematic so that they sell to rebalance to an index 1097 00:59:13,840 --> 00:59:19,080 versus a mutual fund manager who gets outflows is presumably in a 1098 00:59:19,080 --> 00:59:22,320 better position to say, let me sit down with my trader and 1099 00:59:22,320 --> 00:59:27,520 figure out it's 2022 where it's COVID, what do I sell and what 1100 00:59:27,520 --> 00:59:30,600 do I want to sell? And again, that person, it's not 1101 00:59:30,600 --> 00:59:34,760 an ideal world, but I'd much rather a, a, a smart PM and a 1102 00:59:34,760 --> 00:59:37,280 trader sitting there going, OK, what do we do here? 1103 00:59:37,640 --> 00:59:39,480 Can we call JP Morgan? Can we call Citi? 1104 00:59:39,480 --> 00:59:43,200 Can we figure this out versus an index and a computer just going 1105 00:59:43,200 --> 00:59:45,520 boom, just going through and just rotating out? 1106 00:59:46,080 --> 00:59:51,280 So that active versus passive debate I think in the credit 1107 00:59:51,280 --> 00:59:56,400 market is still one that if you really understand the mechanics 1108 00:59:56,960 --> 00:59:59,680 of of our market where you have a lot of money in open and 1109 00:59:59,680 --> 01:00:03,040 mutual funds and ETFs, that could be for sellers, for 1110 01:00:03,040 --> 01:00:05,720 buyers. A trader working at Goldman 1111 01:00:05,720 --> 01:00:09,360 Sachs who has five screens in front of him or her who can see 1112 01:00:09,360 --> 01:00:11,560 flows. It's a professionals business. 1113 01:00:11,560 --> 01:00:15,440 And so an ETF operating in that market is we think we're biased. 1114 01:00:15,760 --> 01:00:18,280 And if I look at results, they tend to bear it out. 1115 01:00:18,680 --> 01:00:21,360 A good active manager should be able to beat an index pretty 1116 01:00:21,360 --> 01:00:23,960 regularly. Yeah, that makes sense. 1117 01:00:24,760 --> 01:00:26,560 That makes sense. Let's see. 1118 01:00:26,560 --> 01:00:31,080 Oh, I, I think y'all can borrow to fund distributions. 1119 01:00:31,080 --> 01:00:33,920 Have you ever done that or is that just kind of like what's 1120 01:00:33,920 --> 01:00:36,280 what's the purpose of that sort of language? 1121 01:00:36,840 --> 01:00:40,760 So we have never done that. You can. 1122 01:00:40,760 --> 01:00:44,760 So all of these funds have leverage facilities built into 1123 01:00:44,760 --> 01:00:47,400 them and we have the ability to kind of dial up, dial down 1124 01:00:47,400 --> 01:00:51,840 leverage depending on our view of the market, funding costs, 1125 01:00:51,840 --> 01:00:54,160 opportunity, how we could deploy it etcetera. 1126 01:00:54,760 --> 01:00:58,480 And I would say again, going back to kind of our team, kind 1127 01:00:58,480 --> 01:01:02,760 of our desk overall, we tend to try to keep leverage levels low. 1128 01:01:03,240 --> 01:01:07,240 And one of the reasons we do that is certainly in a really 1129 01:01:07,240 --> 01:01:11,640 bad scenario, it's another lever that we can pull to try to get 1130 01:01:11,640 --> 01:01:15,840 our investors redeemed out of the funds without just fire 1131 01:01:15,840 --> 01:01:18,040 sailing assets. So it's obviously it's limited 1132 01:01:18,040 --> 01:01:21,240 the amount you can do that. But if I'm running maximum 1133 01:01:21,240 --> 01:01:25,600 leverage and all of a sudden the market gets really hairy and I'm 1134 01:01:25,600 --> 01:01:28,880 getting outflows, the only way I can fund those redemptions 1135 01:01:28,880 --> 01:01:31,920 dollar per dollar is obviously with selling assets into the 1136 01:01:31,920 --> 01:01:34,760 secondary market. So if I'm running my leverage 1137 01:01:34,760 --> 01:01:38,640 below target, it just gives me a little bit more flexibility to 1138 01:01:38,640 --> 01:01:40,800 use that. It's not something we do 1139 01:01:40,800 --> 01:01:42,160 regularly. We've been pretty lucky. 1140 01:01:42,160 --> 01:01:46,160 The funds have grown certainly since we've launched them and 1141 01:01:46,480 --> 01:01:48,880 it's been a fairly benign market for us. 1142 01:01:48,920 --> 01:01:52,920 A lot of our funds really didn't live through the, at least here 1143 01:01:52,920 --> 01:01:56,160 at first Eagle through the initial COVID time frame. 1144 01:01:56,160 --> 01:01:59,480 So it's been a reasonably benign market X 2022. 1145 01:01:59,800 --> 01:02:02,960 But we always want to be prepared for that worst case 1146 01:02:02,960 --> 01:02:05,880 scenario where everybody wants their money out. 1147 01:02:05,880 --> 01:02:09,320 There's some big macro shock. And so having the ability to 1148 01:02:09,320 --> 01:02:12,800 draw down on some leverage a bit to to help fund those outflows 1149 01:02:12,960 --> 01:02:15,360 just gives us something another kind of leverage that we can 1150 01:02:15,360 --> 01:02:18,160 pull. Yeah, makes sense. 1151 01:02:18,520 --> 01:02:22,000 It's, I don't know, it kind of triggered me to be like, OK, 1152 01:02:22,000 --> 01:02:24,320 well does that create some risk in the portfolio? 1153 01:02:24,320 --> 01:02:26,960 But I understand why you're from your perspective, you would 1154 01:02:26,960 --> 01:02:30,120 definitely want that get get you through a little bit of a 1155 01:02:30,480 --> 01:02:34,000 downturn, right? Yeah, one of the, again, the 1156 01:02:34,360 --> 01:02:39,360 nuances of loans is loans are technically not securities so 1157 01:02:39,360 --> 01:02:44,200 that the settlement process of loans is bond settle, T plus 1158 01:02:44,200 --> 01:02:48,000 one, T + 3. Loans settle on average 1159 01:02:48,000 --> 01:02:52,800 somewhere between T + 5, T +7. And there's really no mechanism 1160 01:02:52,800 --> 01:02:56,280 to force settlement necessarily for loans unless you call the 1161 01:02:56,320 --> 01:02:58,560 agent and kind of for settlement. 1162 01:02:58,840 --> 01:03:02,080 So again, it, it, it's not even necessarily that I can't sell 1163 01:03:02,080 --> 01:03:05,240 the loans. It's I've sold the loans, but I 1164 01:03:05,240 --> 01:03:08,880 may not get the cash for seven to 10 days and I'm getting 1165 01:03:08,880 --> 01:03:11,680 outflows. So obviously with the interval 1166 01:03:11,680 --> 01:03:14,960 fund that is that's mitigated significantly. 1167 01:03:15,240 --> 01:03:17,960 But if I'm talking about like as an example, an open end fund, 1168 01:03:18,080 --> 01:03:21,520 they might use their leverage facility temporarily to try to 1169 01:03:21,520 --> 01:03:25,040 kind of bridge that gap between the the settlement time and when 1170 01:03:25,040 --> 01:03:27,320 the the loan was traded, if that makes sense. 1171 01:03:27,360 --> 01:03:29,800 Yeah, that does make sense. That makes sense. 1172 01:03:30,160 --> 01:03:32,680 All right. In closing, my final question 1173 01:03:33,080 --> 01:03:36,560 is, I mean just generally, we probably touched on it 1174 01:03:36,560 --> 01:03:38,520 throughout the conversation. But if you were to give me an 1175 01:03:38,520 --> 01:03:45,040 elevator pitch on why private credit, given that it looks like 1176 01:03:45,040 --> 01:03:48,520 spreads are are as tight as they've been in a long time and 1177 01:03:48,520 --> 01:03:52,120 it looks like valuations are as high as they've been in a long 1178 01:03:52,120 --> 01:03:54,320 time. Like why is now the time to take 1179 01:03:54,800 --> 01:03:57,040 or to be OK allocating this some risk here? 1180 01:03:57,240 --> 01:04:01,200 So it's interesting, private credit, credit in general tends 1181 01:04:01,200 --> 01:04:05,200 to get kind of lumped up into the fixed income bucket, which I 1182 01:04:05,200 --> 01:04:08,280 understand why that happens. All these loans have maturity 1183 01:04:08,280 --> 01:04:11,440 dates, income is going to drive the vast majority of your 1184 01:04:11,440 --> 01:04:13,520 return. So it's kind of a debt 1185 01:04:13,520 --> 01:04:15,160 obligation. So I I get that. 1186 01:04:15,800 --> 01:04:20,160 But when I think about the risk that we take everyday by by 1187 01:04:20,320 --> 01:04:24,040 lending to these companies, it's very similar to the risk you 1188 01:04:24,040 --> 01:04:27,360 take as an equity investor. We're in essence betting on the 1189 01:04:27,360 --> 01:04:30,840 operating results of these companies that they can continue 1190 01:04:31,240 --> 01:04:33,400 to pay their bills to service their debt. 1191 01:04:33,680 --> 01:04:36,040 So in a lot of ways we do it from the, the other part of the 1192 01:04:36,040 --> 01:04:38,920 of the capital structure. But I'm, I'm kind of making a 1193 01:04:38,920 --> 01:04:42,320 bet that the company performs well, which is in some ways a 1194 01:04:42,320 --> 01:04:45,280 lot obviously what I'm hoping if I buy the equity of a company. 1195 01:04:46,000 --> 01:04:48,920 And so I think relative value becomes really important. 1196 01:04:49,160 --> 01:04:52,920 And there's been obviously a lot of conversation around 1197 01:04:52,920 --> 01:04:56,320 valuations in the equity market and I know our equity team 1198 01:04:56,320 --> 01:05:00,360 wouldn't disagree with this. If I look at the S&P 500 or even 1199 01:05:00,360 --> 01:05:05,520 the equal weighted over the last few years, it's it's up 50 to 1200 01:05:05,520 --> 01:05:08,680 75% depending on what time frame you look at. 1201 01:05:09,160 --> 01:05:12,560 And I look at the earnings yield on the S&P right now or any 1202 01:05:12,560 --> 01:05:16,880 other equity index, it's probably an environment where if 1203 01:05:16,880 --> 01:05:22,720 I assign A6, seven, 8% return to equities long term and they've 1204 01:05:22,720 --> 01:05:26,480 just outstripped that by a huge margin over the last few years. 1205 01:05:26,480 --> 01:05:28,880 I probably want to start to think about a mean reversion 1206 01:05:29,240 --> 01:05:34,120 that maybe equities if I buy an index only return 5 or 6% or 6 1207 01:05:34,120 --> 01:05:38,120 or 7%. And so if I look at credit, one 1208 01:05:38,120 --> 01:05:41,720 of the things I really like about credit is I can kind of 1209 01:05:41,720 --> 01:05:47,240 model out my potential outcomes a little bit easier. 1210 01:05:47,240 --> 01:05:50,360 And what I mean by that is I generate income. 1211 01:05:50,440 --> 01:05:52,960 So I go, OK, the income that this fund generates is going to 1212 01:05:52,960 --> 01:05:54,680 drive my return. So what's the income? 1213 01:05:54,680 --> 01:05:58,920 Maybe it's 8%, nine percent, maybe 10% on some of these 1214 01:05:58,920 --> 01:06:01,600 structures. And then I need to figure out 1215 01:06:03,080 --> 01:06:04,960 the manager is going to make mistakes. 1216 01:06:04,960 --> 01:06:06,640 Even First Eagle. I think we're really good at 1217 01:06:06,640 --> 01:06:09,120 what we do. We have a huge team of really 1218 01:06:09,120 --> 01:06:11,720 smart people. We make mistakes. 1219 01:06:11,920 --> 01:06:15,000 Default losses happen regardless of how good you are. 1220 01:06:15,560 --> 01:06:18,960 And So what I need to figure out is what type of default losses 1221 01:06:18,960 --> 01:06:22,120 should I expect? And we talked a little bit about 1222 01:06:22,120 --> 01:06:25,400 this, but you know, an average default rate for the index is 1223 01:06:25,400 --> 01:06:29,600 around 3%, maybe 4%. And then a recovery rate is 1224 01:06:30,000 --> 01:06:33,920 maybe $0.50 on the dollar. So I go, OK, the manager. 1225 01:06:34,240 --> 01:06:36,240 I'm guessing if I hire a bunch of these different credit 1226 01:06:36,240 --> 01:06:40,280 managers, my default losses should be somewhere around 2% a 1227 01:06:40,280 --> 01:06:43,280 year, a really bad year, maybe a little more, a good year, a 1228 01:06:43,280 --> 01:06:45,760 little bit less. But my return is going to be 1229 01:06:45,760 --> 01:06:50,560 something in that 8-9 percent minus my 2 or 3% for default 1230 01:06:50,560 --> 01:06:52,920 losses. So if I'm thinking about the 1231 01:06:52,920 --> 01:06:57,080 total return of that investment over time, I'm getting equity 1232 01:06:57,080 --> 01:07:00,440 like returns with a lot less risk. 1233 01:07:00,520 --> 01:07:04,840 And what I'll say is not necessarily Mark to market like 1234 01:07:05,040 --> 01:07:07,320 the S&P was down. Obviously today looks like a 1235 01:07:07,320 --> 01:07:11,520 rough day for the stock market. Again, the S&P is down 1% today 1236 01:07:11,520 --> 01:07:14,120 and that fund is flat. I'm talking about long term risk 1237 01:07:14,120 --> 01:07:18,240 over time and what types of credit losses am I going to see. 1238 01:07:18,720 --> 01:07:23,040 And that's where I think for investors who still think the 1239 01:07:23,040 --> 01:07:26,560 economy is doing pretty well, maybe they're a little bit older 1240 01:07:26,880 --> 01:07:31,240 and they don't have the stomach for big volatility drawdown and 1241 01:07:31,240 --> 01:07:35,520 maybe they need income. Credit could help be a proxy for 1242 01:07:35,520 --> 01:07:39,120 equity risk, but certainly helps to augment income from a fixed 1243 01:07:39,120 --> 01:07:43,120 income portfolio. But comparing what we do to AAA 1244 01:07:44,000 --> 01:07:46,600 rated bonds is kind of an apple to an orange. 1245 01:07:46,920 --> 01:07:49,120 If we're going to recession, you're going to wish you on 1246 01:07:49,120 --> 01:07:51,560 those AAA bonds. That's just that's just the way 1247 01:07:51,560 --> 01:07:54,280 that the world works. So I look at things like 1248 01:07:54,280 --> 01:07:57,840 equities and I say, I think that credit offers a really 1249 01:07:57,840 --> 01:08:01,720 interesting relative value, an interesting mix of income, less 1250 01:08:01,720 --> 01:08:03,840 volatility. But ultimately I'm taking the 1251 01:08:03,840 --> 01:08:06,120 same risk. I'm taking the risk that these 1252 01:08:06,120 --> 01:08:08,960 companies continue to do well, but I'm doing it from kind of 1253 01:08:08,960 --> 01:08:12,720 the top of the food food chain. So that's the way I look at 1254 01:08:12,720 --> 01:08:14,320 credit. By the way, I'm, I'm in my mid 1255 01:08:14,320 --> 01:08:18,040 40s and I have a lot of my own personal money invested in 1256 01:08:18,040 --> 01:08:19,479 credit. Historically, I should be in 1257 01:08:19,479 --> 01:08:23,439 equities, but I look at compounding my money and credit, 1258 01:08:23,439 --> 01:08:26,240 different tax consequences. Obviously it's a very 1259 01:08:26,240 --> 01:08:28,600 interesting part of an asset allocation, particularly if you 1260 01:08:28,600 --> 01:08:31,479 think base rates are going to be high and higher inflation has 1261 01:08:31,479 --> 01:08:33,520 the potential to cause volatility in equities. 1262 01:08:33,840 --> 01:08:36,600 So that's kind of that's my maybe not elevator pitch. 1263 01:08:36,600 --> 01:08:38,520 It's a long elevator. But I like that one. 1264 01:08:38,720 --> 01:08:40,800 That's my pitch. Well, that was a good one. 1265 01:08:40,880 --> 01:08:43,680 It was better than I was expecting and I think it was a 1266 01:08:43,680 --> 01:08:46,880 very well said argument, so thank you very much. 1267 01:08:47,240 --> 01:08:48,880 Excellent. All right, cool. 1268 01:08:48,880 --> 01:08:50,840 Well, I appreciate you stopping by. 1269 01:08:50,920 --> 01:08:52,960 Did we miss anything in the conversation? 1270 01:08:53,160 --> 01:08:56,359 I don't think so. We certainly covered a lot and I 1271 01:08:56,359 --> 01:08:58,240 appreciate you having me on this was this was fun. 1272 01:08:58,240 --> 01:09:01,319 Definitely not my my typical Monday morning I'll have. 1273 01:09:01,359 --> 01:09:03,359 To, well, good. I'll have to wear my Tommy 1274 01:09:03,359 --> 01:09:06,080 Bahamas shirt next time. Well, you know, sometimes you 1275 01:09:06,080 --> 01:09:09,200 got to lighten up the mood with the shirt, so that's what I was 1276 01:09:09,200 --> 01:09:10,760 working on. I like it. 1277 01:09:11,760 --> 01:09:14,800 We'll see each other hopefully in in similar shirts. 1278 01:09:15,439 --> 01:09:18,319 Next time, I promise you, you see me, I won't have my hair 1279 01:09:18,319 --> 01:09:19,640 slicked back and won't be wearing a tie. 1280 01:09:19,880 --> 01:09:22,479 That works all right, man. Well, thanks again. 1281 01:09:22,800 --> 01:09:23,760 Absolutely. Thanks, Bill.