[Music] Hello and welcome to the Credit Edge, a weekly Marcus Pugcast. My name is James Crumbi. I'm a senior editor at Bloomberg. And I'm David Havens, a senior credit analyst at Bloomberg Intelligence. This week we're very pleased to welcome Angel of Rufino, head of special situations in North America, as well as corporate special situations in Europe at Bane Capital. Angel of how are you? I'm great. Good to see you guys. Excellent. It's great to be with you and all of you out there. And these are interesting times indeed, Angel of. You've been around the block a few times. You're a Bane. You've been at Brookfield, engaged in music royalties, which is obviously interesting to a lot of different people. Brigade, JP Morgan. So I'm sure that you've got a lot of thoughts about what's going on in the marketplace today and what is accurate and what's inaccurate about private credit. Well, there's certainly a lot to talk about. I'll venture my best to give you a view and we'll chat it out. As you say, David, we are going through a bit of a storm at the moment with Blue Al in the spotlight and growing concerned about private markets, particularly their exposure to software loans. Jamie Diamond got everyone on edge last year with comments about cockroaches and has weighed in again this week saying, "Lenders are doing dumb things to try and juice returns. He's also making comparisons to pre-crisis credit excesses." So let's start there. Angel, how worried should we really be about credit markets right now and how serious is the software problem? Well, let's break it down into a few pieces. So credit markets are large. I think are reasonably healthy. That's not to say they're priced correctly, but they're reasonably healthy. We've gone through a long period of de-leveraging of corporate balance sheets, a lot of cash on balance sheets, leverage levels, as I noted, have come down substantially over the past few years. So buy and large, a pretty good economy, real GDP growth, North to 2%, probably North to 2.5% this year by some forecasts. Things seem reasonable. The issue lies, I think, within some specific subsectors, the overlay of what AI can be doing to business models that are tried and true in the past and may change in the future. And certainly then the context of pricing, where does value actually lie within the credit markets today? Last I checked, we're sitting roughly a little over 300 on a spread to worse basis. So certainly near the tights, not at the tights, but tight. And I don't think that reflects the tails we're seeing in the market today. Certainly as a function of just what is going on in the AI ecosystem, you brought up software, we can get into that and debate that out. But price, credit does feel price for perfection. And it also has had a long tail of money come into it over the last five years, really, on the back of insurance-related investment. And anytime we get into a world of structured credit, you start to see behaviors that price credit at different levels than it may have been in the past, which can lead to disruptions. So I do think we're at a period where the economy overall is I noted is feeling fine. We will go through cycles, credit, price for perfection. And then let's let's talk a bit about some of the sector-specific risks we're seeing. Yeah, that sounds good. Let's we'll definitely want to get into software and the implications that AI may or may not have on software and tech. But before we get into that, just given what sort of come up over the past week or so, with gates going up and an awful lot of adverse press about restrictions of withdrawals from funds, which by the way, to me as a credit analyst, I look at the ability to withdraw funds and have restrictions on the withdrawal of funds is actually a positive thing from a credit perspective because it does reduce the risk of a run on the bank at some of these some of these private BDC funds. But what I want to sort of suss out from you is there seems to be maybe a bit of dissonance between the way that maybe some some parts of the retail market are viewing private credit and the way that the institutional side is viewing things. So what's your perspective on that? Well, you're bringing up the right dynamic and we haven't had this amount of retail money in a private asset class. And really, I don't think in history. Typically, retail invested in credit through liquid products. So when they wanted their money, they got it out whether it was overnight through a mutual fund or an ETF, instantaneously, the dynamic of being gated as you know, it is going to be new to people. There's a couple things to push and pull out there. I think on on the perspective of a retail investor, they tend to move where money goes, whether it's going into an asset class or going out in the asset class. It is a bit of a herd mentality. You brought up the positive nature of gates. I kind of laughed at that because I think it really depends on which side of the coin you're on. It's certainly in some ways healthy for how it can manage liquidity and risk coming in and out of an asset class. But if you're if you're that investor who wants their money back, it's going to be pretty uncomfortable. And I think we'll ultimately test what it means to be a retail investor at scale in a private asset class. Right. We just again haven't haven't seen that. So it is a bit uncertain. The way people think about it from a private perspective is that they believe substantial locked up money is underlying the system to date. And then that should keep it it sound. I think that is side and true and really going to encompass a largest part of the credit markets. But as we see the retail money keep piling up, which has been the three-year trend, you're going to start to test the limits of what that really means and how that ultimately bleeds into sales of portfolios, what that means to marks and an asset class that has been insulated by the fact that the marks are private. So a lot to unpack there. Let's let's see and pull out a few of those strings. But that's high level how I think about it. I mean, just also just sort of dig deeper into the software point because you know, Bain, along with a lot of other alternative asset firms, have been very active lending to software over the last say five years and there were some quite you could say aggressive loans made say five years ago when when rates were near zero and you know leverage was quite high in some of those deals. But is this a real sort of reckoning for that sector right now? Are there really bigger problems that we should be worried about? Look, I do think everybody has to take a step back and think about how the business model is going to exist, coexist with AI and change. I do believe that a lot of the money in these SaaS products is sticky. It will serve a purpose and it really sets up for people who don't want to necessarily build these programs, the software themselves. So I think there's a role for it in the future. But what's clear to me is that growth rates are going to change. I think the pricing dynamic is going to be challenged. If you show up and you're going to ask for your typical year over year price increase, I would expect that to be a challenging conversation and that will ultimately a ner to the multiple and thus the enterprise value that these credits can support. We did see a period with very over leveraged software valuations that bled into the private credit markets and a lot of that is going to be coming due is you cycle through the five year seven year maturity stack of those vintage buyouts that are coming to the forefront. So I do think we are going to see real pressure in this space. It won't be as bad as it is appearing to be today and what's being discussed and of course is front and center and feels emotional for people. But I do think we're going to see real stress in the market and this is typically the way credit cycles have been playing out over the last decade. If we go back two or three decades, you tend to see big macro induced cycles that really took down the market as a whole. I've been investing now for 23 years. I only remember one cycle in my real investing career like that, which was the GFC. The last call it 15 years or so of credit cycles have been very sector specific whether it was energy. So I think software will be no different and we will see a full credit cycle as the reckoning really comes to resize capital structures to the earnings power of these business models. But it won't be as bad as it's it's built to be right now. Do you have any idea what the default rate might be in that sector when we're talking about sort of low, you know, four to five and leveraged loans is that kind of what we'd see for the so my guess is it's going to it's going to be significantly more than that. Multiple it could you could see this peak at you know, high single digits, low double digits. That wouldn't surprise me by by any means. But it's really hard to put a lens to that without having a full grasp of the entirety of the market. Maybe just a quick follow on to the software discussion. What are the pros and cons from a credit perspective of software? You know, like the sort of we hear a lot in the press and just sort of general discussion out there. Oh software is going to get killed. But software is kind of a lot of defenses, doesn't it? You know, the the nature of the contracts, the mission critical element and some of the software. Even though AI may be able to do things that the existing software can do, it might be difficult to root it out because the way that it's integrated into systems. I agree with that look. I mean, at the end of the day, there's a reason and people often take these type of big broad based valuation techniques to the extreme. But there's a reason why software businesses are often talked about as a as a ARR multiple, right? So there is a reoccurring revenue component of that. I think what's a challenge now is, is the business model even going to support reoccurring revenue if somebody else can do it for you, you know, cheap or faster. And you don't need an intermediary. If you think about the other aspects that are interesting about software as a sector historically, it's upwards of 90% gross margins. It's pure free cash flow conversion. So you have a really pure business model, which is why it attracted so much money from the LBO community, just given the kind of perfect KPIs it supports for a buyout. If you wanted something and it was perceived to have secular growth, low cap acts, high free cash flow conversion, reoccurring revenue. I mean, you're checking every box that somebody who is looking to do a buyout would typically want to see. The question is how many of those features will continue? I think for sure the business models are not going to change if they exist in their normal form as we historically know them from that cash flow conversion from the high gross margin percentage. But how much of that is taken in house is built by individuals themselves, by companies themselves is up for question. I do believe that a lot of this software serves a real purpose. A lot of it is not that expensive. There's subscriptions that are very embedded in broad corporate ecosystems. We're talking a couple hundred thousand dollars a year. You have to think about just what is the maintenance to hire an engineer to do that. How does it actually play out in a day-in-day out basis? It's no different than consuming a service. So to think that at the end of the day, we're all just going to decide that because we have an agent who can do this for us that we want to leverage that for everything with no intermediary. I don't believe that will happen. Do I think that the price tag for it will come down? Sure. Do I think the leverage associated with contract renewals, duration of contracts are going to change yes. All those things will make it a less attractive investment for both sponsors and for lenders. And thus anybody who has significant exposure to it via their historical investments is going to have to really think about that. And we're going to see challenge refinancing's for sure. If you just look multiples of come down for your average business, something around 19 times EBITDA. Now we're sitting around 14-15 times. So when you start to lose 20 plus percent of your EV overnight, that's going to be challenged. The next time you show up and need to get money, especially when people are historically overallocated to the asset class. So they're not going to be proactively looking to add. And the fear we're seeing right now, a lot of it's about the unknown and the private nature of private credit makes everyone a bit, they assume the worst is it necessarily worse in private credit because when we talk to private credit people they say they've got more access to documents, they see more information, they have better covenants, all this stuff. But is the software problem worse, essentially in private credit? No, I think that is something that's often over debated and over push. This notion that private credit is some significantly more mishandled or worse asset class. I mean, you have the same dynamic and broadly syndicated loans, as you do in private credit. Often you have better liquidity dynamics in a 10-year locked up, draw-down fund. So there's a comment on that earlier. I do think there are barriers to kind of manage some of that. I think this dynamic exists at large. This is just classic credit cycle where a sector received undue attention and enormous amounts of money. There's now been a flying ointment, if you will, which is challenging the perception today. Let's call it that. It's the perception today of what the longevity of that asset class and of that sector will be over time and that's going to have real implications for leverage capital structures. Leverage cuts both ways, right? It's fun on the way up. It's really painful on the way down. And this is going to have some real, real issues over the coming years. As you know, credit does have a strong bid. The spreads are very tight. There is more demand evidently than supply. But is there potential for this to spread in terms of contagion across credit markets? If the software thing really does spiral? Yeah, so I mean, we've been seeing the headlines and every day it seems like there's another sector that comes under storm from the AI risk associated with it. I do think there's a lot of baby with a bath order here. Certain sectors like software have real acute issues that are going to need to be addressed. There's others, whether it's registered investment advisors, that I think are getting undue pressure, where there's a real relationship required. There's a nuance sell in that is going to be a longstanding driver of that relationship and how the business model is monetized over time. So as always, there will be opportunity. I think there hasn't been a lot of discussion around just what is going to happen from the opportunity that this kind of panic, if you will, if it's full scale panic yet, but there is a lot of noise. I'll call it that in the markets right now we'll bring. And so we're very focused on that. Where can we look to see the opportunities that stem? But I do think that this will be largely contained to a few specific sectors. I don't think credit at large is going to see massive increases in defaults. Where I started and I do want to go back to is I do think credit is priced for perfection here. So when I look at credit in general, we have the luxury of being able to do things in public markets and private markets. We're largely origination business, really partnering with families, founder-led companies, sponsors, and public companies. But when I look at the things we can do, there's just a lot more interesting things that touch partnership capital that has a more equity orientation rather than setting up for what will always be. Credit is a fixed return product. And when you start to see spreads around that 300 with the tails the way they sit today, the risk reward just isn't there. Right. I want to get into that subject of hybrid capital. But before we sort of get there, just want to close on one thing on what we're talking about. Now the risks to private credit are the risks to the sector. And I've had fielded lots of questions from a lot of different investors and terminal users about this whole software issue. And then obviously over the last week, all of this fun withdrawal discussion from private BDCs has come up. But in my view, the biggest risk confronting private credit and credit markets in general is a deep and extended recession, which I think is pretty much the way that it always is. Do you think that's the right view or do you have a different view of that? No, I think that's right. If we generally look, you haven't ever seen a full-blown credit cycle that was multi-sector that didn't start with a recession. Right. Or some exogenous shock. Even something like the pandemic was relatively short-lived. Grabbed a lot of stimulus money came into kind of calm the situation. But I think that's the right comment that a macroeconomic driven shock or recession is what's going to drive a credit cycle. And I think it's hard to look at what we see today and really paint forward how we see it the deeper recession or recession at least for anything in the next 12 months. As we said, GDP is growing nicely. You're going to have some tax stimulus that comes through to consumers. Corporate start generating cash and still growing. There's an overlay that we can discuss on their tail cases for AI as it disintermediates industries. But I think it's really hard with conviction to ever say that you can make a large-scale bet on that. Do I think you can play in the tails? Somebody tells me they want to buy receivers on short end of the curve because they think the fed could need to cut rates or they want to buy CDX on IG credit. All these things make sense with the right payouts because what a lot of investors are paid to do is to manage the tails. But when you look at the evidence in front of us today, I don't see the ingredients for a full scale recession to drive a credit cycle. I just don't see it today. One of the things that has sort of come out of this old blue-else situation is the loans are being sold on to other parties including their own insurance company. But CLOs seem to be also another buyer of this stuff, raising the idea that CLO is a particularly risky. CLOs have been, I have to say, one of the favorite trades of every investor that's been on the show. I know you have a big CLO business, but is there any kind of potential risk there for the CLOs in terms of these loans being sold out of BDCs and put into other pools? I mean, look, that was a negotiated transaction. I assume I wasn't in the details on how that that actually got caught from a pricing perspective. But what I would say is CLOs have historically been, to your point, a popular trade because it's been a good business model. Right? It's been well-insulated. Even if we go back to the GFC, recoveries were really strong. As you start to get to your more levered tranches, I do think what we're seeing in a sector like software where people have 10, 13, 14% exposure to the sector could start to pose problems for some of those thin, levered equity tranches that were starting to price around 11% didn't make a lot of sense to us. So we've thought that was a really interesting trade a couple years ago. Last couple years, we've become much less so. But that's where you will see some of these problems start to incubate. I think the more senior tranches of the CLO are going to fare just fine. Okay. So looking sort of broader at private, I know you look at asset-based finance, which is a huge area of growth, also investment grade, private credit. I just kind of wanted to, in that context, get your sense of what that actually means because we have so many discussions around what this market. Some people say it's a 40 trillion market and it involves just about everything you can see around you. But to, to, to, to, babe, what does, what does this actually mean? Yeah. So we think about our, our business within special situations is really divided into, into two halves. We have corporate capital solutions and we have asset-based capital solutions. So let's, let's talk about the asset side, which is what you're referring to. We define that really is everything that touches a cash flow producing real good or tangible, or tangible asset. So you're right. That, that is a massive market. There are very, very views on how big it is, but let's just say that they all will note that the market is very large. It's an extremely big pool that was historically dominated by bank balance sheets. And as a result, just the way we saw with corporate credit of tightening, regulation, stuff started moving off bank balance sheet and going into the private markets. That's really been the advent of ABF as, as people call it nowadays over the last four or five years. I think what's, what's funny is for many investors that have been doing this 20 plus years, we, we often, you know, snicker and say, this is just structured credit. We used to call it structured credit. Now, it's called ABF. Yes, it's broadened around the edges. And I think like all asset classes, it's evolved with technology, some of the more unique fancings we've seen around GPUs, some of the structured fancings around data centers. This is all just financial technology that is growing with a with a broad based asset class over time. So starting with that hierarchy of huge market, tangible cash flow, driven asset investing, we think of it really where we could put mezzanine debt or kind of core debt against a really stable and cash flow generating asset or secondarily create the residual equity underneath that at an attractive yield. Why that appeals to us is it's an equity like return, but underwriting a credit like profile. And that is the aviation leasing asset class where we have a $10 billion plus business. That's the royalties you and I were chatting earlier about in music and health care and others where you can create really interesting derivative credit returns several hundred basis points of spread wider. And what's nice is you're actually devoid of a lot of what we're talking about on this corporate side. We see that in other parts of our business, but in the asset side, there's there's different risks to manage different opportunity. But it's basically us. Is it ABS, but it's just private? Is that the difference? Yeah, well, I mean, look again, people will define ABF as both public and private. So there's the more syndicated approach of the historical desks, curitized loans and bonds that are coming to market. Then there's the before a two market, which is private IG, you reference that. Those are loans that are privately placed against corporates. That could be some of your largest corporates in the world. That could be more midsize corporates, but generally are falling in that IG bucket. And then there's this entire universe that is developing. There are some of the larger shops are trading this data associated with it. And there are individuals like ourselves who are interested in helping put a package together where we are effectively putting a structured security together for a large corporate where we ultimately own that first loss residual tranche, but your risk is really to an excellent IG investment grade credit. And there are substantial buyers for the senior part of that risk. There are other players like ourselves who will want to own the more junior tranches. We saw that with the meta financing against the large data center deal. There's been a number of use cases for this. And it's going to grow rapidly over the coming years. Who are the end users for the yield that these products are able to generate? And when you say end users, I mean, I think it's too fold. So there are total return investors like ourselves who are interested in what I'll say is that residual equity in a large scale private IG trade. The end user from a counterparty perspective is anyone who wants equity treatment from a rating agency, which has been able to be achieved through some of the structuring year without getting a balance sheet levered with more debt. So it's an efficient form of capital structured to achieve a ratings outcome, but still facing a counterparty with tremendous credit worthiness. And so I don't get worried. You know, often when we go down the path of structured credit and we can all go back to the CDO days and CDO squares and anytime you start to get into this derivative financial technology, things get a little murky and I think we should all perk up and think about the risks. But when you're facing some of the largest corporates in the world and in many ways borrowing their balance sheet to achieve a highly structured deal meets their objectives meets the return profile of an investor. I don't see a lot of risk in these private IG trades. I think that's actually one of the more sound parts of the market. And this this private IG market, it seems to run into the tens of trillions of dollars. Maybe can just sort of provide some of your thoughts on the dimensions of the addressable market and where that market exists. Is it mainly the US? Is it a global market? It's certainly a global market. We've seen a lot of these investments in Europe, Nellas as well as the US. We haven't seen a lot of an Asia yet but it will come to that market. We're a big player there and we're talking to folks about it. So I think that the addressable market is going to be tremendous. I think what will happen is pricing associated with this will compress materially as we've seen spreads generally 150 to 250 basis points wide of the observable tradable debt of some public tradable debt of some of these large corporates of which they were handing to investors for the ease of purpose, the structuring expertise to come and deliver a $5 billion, $10 billion, $20 billion deal. As this technology gets more and more familiar as it works its way through corporate boards and management teams and more and more investors step up to want a participate, we should see those spreads shrank significantly. I've been surprised at the sustainability they've had over the last 18 months. We're just starting to see them compress the last six. But we talked about companies like Verizon which everyone knows yields at 19% or something which just seems too good to be true. But on the other side is that why would Verizon's CFO even entertain such a financing when they can go to the IG bond market in Borough at very very tight spreads? Yeah, I don't know the specific deal you're talking about there but case in point I think when people often hear some of the yields associated with this they're thinking about that first lost tranche that I'm discussing. So if you originate I'm just throwing a number out there a billion dollars and it's at a certain spread to a private or to a IG companies publicly visible bonds, then you can go and place the senior risk so you have this unlevered spread you're getting for a billion dollars of risk. You can tranche that up as you would like maybe you put 80% in your insurance company or by the way you sell that to investors who want that risk they just like being able to get a large allocation of it they see it priced attractively versus those publicly traded bonds. The investor that keeps that first lost residual 15% thick piece let's say is often earning something in the midteens. And so from a Verizon CFO perspective he's just focused on the unlevered cost of capital to his business. The ratings treatment how it integrates with the balance sheet is he able to build his business with effectively cat X off balance sheet. That is what they're focused on the corporates less so about how the underlying investors are tronching up the risk and where somebody wants to place it. It is not by any means that somebody's paying 19% on the full slog. Okay, go see that. Thanks. Other than aviation what other sectors do you think good for this kind of business right now? So when we think about ABF as I said we're very active in the royalty space. Last summer we did a big now almost two billion dollar joint venture with Warner Music. We really like the royalty space specifically music. We think that's an AI winner over time. We have a fantastic partnership with the management team there and so have already up size that deal. We are looking to leverage the excellent expertise we have at Bane in healthcare so to do something along the healthcare royalty path similar to what we did with Warner. That's something we're under works on right now. We are very active in digital infrastructure so like many investors see value there. We've been quite cautious in the US so most of the stuff we've done is ironically in Asia or in Europe we just don't quite have a handle on the supply demand imbalance versus the pricing of that risk today in the US. And then we're also looking at things across receivables, finance, fleet leasing. So we can go down the list. We just think this market is really large, really attractive suits well our form of partnership capital where you can think about creative structures and generally I'll get back to that initial point seeing much better relative and absolute value versus performing credit, private or public there are other ways. Well the music royalty which really intrigues me. I'm old enough to remember Bowie bonds which for great for David Bowie but not so great for investors. Why are these different now? What do they work now and what's the play? Yeah I think it's interesting. Many people have that historical tug to the Bowie bond. This asset class and I'll call it that now because that's what it's become has gone through its ups and downs. If we go back to the Napster days people left the music industry for debt. They didn't think that there would be a music industry. There was copyright infringement. How could you possibly get behind something that could be exploited without proper rule of law? And so really everybody retreated and you had a cottage industry that built up in the early days of the DSPs. DSPs are the broader streaming players so call it Apple music Amazon and Spotify and they started acquiring these rights with the view that well people actually are paying for music again. They see value and categorizing it, having it as finger tips, not needing to pirate things. And valuations were cheap as always happens when money runs away. And it actually started growing into something with liquidity and I think liquidity is always the beginning of an asset class where you can actually see two way flow of money in and out. What was interesting during that time was the large music labels which really are the three players Warner music, Universal and Sony were not as active in acquiring these rights. They were very focused on the front label business. So breaking new artists, developing those artists and promoting them. And they had large substantial publishing arms. So the arms that that actually own this content. But it wasn't the focus of their business. So you saw several smaller players actually grow to meaningful players in size and scale. Quite quickly the markets came around to this being a pretty attractive asset class. If you have a long duration asset upwards of 70 years in many cases, stable cash flows, especially in the in the vein of seasoned artists. So somebody like Bob Marley, you can look at it almost as a toll road. There's a recurring revenue associated with it. There's a very clear picture of what tomorrow looks like. And then there's a value ad component where you can take an iconic artist and work with the estate or with that individual to exploit it bring that art to new fans and have a really substantial growth rate. That was on top of the fact that people were paying more for music. So you probably pay quite a lot for a number of video subscriptions. Actually by vinyl records. So there you go. So most people, you know, we're paying 899 or 999 for their streaming service. And what we've seen is consistent price increases, which just annures to the benefits of rights owners. So when you think about checking a box for an asset class, something that developed into a liquid market, it's got long duration cash flows. It's a scarce asset, meaning there's one of each of these artists. Pricing power in your way and a penetration, when I say penetration, that's the volume growth of the industry, meaning more people signing up for Spotify and Apple music every day. That's a pretty great package of attributes to support NASA class. Then I'll tie it all the way back together with the deepening of the asset back markets in wanting to finance this stuff. So if you were an earlier choir of music royalties, an asset that started with 40 or 50% LTV, you know, six or seven years ago, now you're seeing securitizations done that push into the 65. Sometimes it's high 70% LTV. That's just all, you know, annuring to the benefit of the equity owners, the artists that are participating in this big asset class. You know, we're talking billions and billions of transaction volume each year. And as you'd expect, all of the large players have now focused on that. The markets have isolated the value in many regards of their businesses around the IP. So these are IP content heavy businesses. And I think somebody like Warner is doing a fantastic job as they look to exploit their artists alongside them in a positive manner to just grow them above market rates. It's an interesting corner of the market for sure. Another area of the market that seems to be, seems to be on the tip of everybody's tongue right now are data centers. And where we're going to be going there, what are your thoughts on that as being sort of an attractive class? So I am happy to say we were early in data centers. You know, being made a very substantial investment in the largest Panagene platform, now called Bridge, we've sold part of that as equal to been a phenomenal, phenomenal investment for the firm over many years. We started a platform in Europe about 18 months ago called HScale. So really partnering with with local jurisdictions to bring large, large scale data centers to the HScale community in Europe, we have not done a lot in the US. That was a function of just seeing so much money come in, not having had an established platform there and being somewhat uncomfortable, with just the supply demand equation that we were seeing. And as always, you know, we're contemplative at bay and we like to take our time, we sat and we're just willing to wait and watch this market a little bit. We did make several derivative bets, which have been great, one in a company called Coherent, which provides the optical cables to data centers. So kind of when you get into the picks and shovels conversation, that's been a fantastic investment for our firm, which we recently just exited, a great business, great partnership there. And so we found our ways to play it, but not directly first derivative in the US. So kinds of IG privates, everyone is excited about it, everyone sees the growth potential there, but a lot of the kind of drivers are based on, you know, new investors, the democratization, and that means retail. Retail is not to be happy right now with private credit given what we discussed at the top of the call. How much of this current storm do you think, how much that undermining the potential for growth of this market? Look, I think this continued democratization of alternative assets is going to continue. It is something that should have been available to retail and high-net worth investors. It wasn't easy to access. It was hold into a smaller group of ultra high-net worth investors and, you know, foundation sovereigns. So I think this was inevitable. I think the returns will still prove durable and substantial for people over time. Are there going to be hiccups? Sure. And so I think a lot of this is just about at what point in the cycle, at what point of the penetration of that market, do some of the hiccups hit, right? Earlier, which we are somewhat early, and that will be more challenging as if you're first experienced with something's things you a bit. It's going to just leave a mark and leave you a bit scarred for how you wait in. But I think this market is far too big for anything to hold it back and people will always go to where returns are. Private markets offer substantial returns above any of the public asset classes. And so it's a proper addition to any asset portfolio. Fundamentally, you do have this mismatch. I mean, retail doesn't really need del liquidity bit. They want it. And if they suddenly get told they can't have it, then they're going to get freaked out as they have done over the last few days. So, you know, you'll take you, you're really investing in long-term loans, private loans that don't really trade, you know, you don't really get good marks on them. It's hard to really suddenly, you know, if there is a demand for ademptions to fund that, you know, we saw what will I'll do. They sold some loans. They got out. They did okay. But if that happens again, again, you know, you're selling down to maybe loans that are, you know, you have to take a bit of a discount on. You start to take some losses and then it sort of spirals from there. What do you do with that concept that, you know, the retail money once they liquidity, but this is a product that's long-term and locked up. Yeah, look, you're hitting at the inevitable debate. We have it all the time as we have not rushed into this market. It's been one that we've watched carefully. We wanted to see how early sparks and some trouble would play out. I don't think anybody can really tell you how retail behaves once they're told they can't have their money back. My belief based on everything I've seen is people will always come back to investment opportunity, right? Whether it was high valuations, venture capital in 2021 and they're shortly thereafter, it's not that nobody's coming back to the venture market. People will still make those make those investments and things are very, very cyclical. I think it will chill the growth rate a little bit. You will certainly see that step back from just the rapid pace we've seen the last 24 months in this space. But again, I'll go back to my statement. I think it's inevitable that we will see further penetration here. It's just the question of at what pace, what fits and starts do you have? And really, how do many of these institutions manage their brand around all of this? Because once you bring something like this to retail product, whether it's private credit, whether it's private equity, real estate, this is now a consumer product, right? That's what it's turned into. And there's brand awareness. There's people's feelings towards it. There's whether there's trust there. It's a very different relationship than when you're facing a large sovereign or pension, who's sophisticated, who's been through the trenches and understands the cyclicality of markets, what it means to see whipsawing prices. That's just a very, very different dynamic. So I think a lot of it is going to be beholden to communication, how people build that trust, how they handle these hiccups, if you will, that really determines the long-term winners for that asset class. For global investors, you know, particularly in the US, to what extent are you seeing more of a push to diversify geographically? Is there more of a sense that, you know, obviously the US is the biggest market, it matters, but there is a lot of turmoil here. People are getting a bit ruffled. There are opportunities in Europe, the European private credit people tell us that they are better value in relative terms. Do you think that there is a push now to broaden geographically? Absolutely. Look, this is something that we deeply believe in at Bain. If I just go around the world, for instance, we have a mass of franchises I noted earlier in Asia across all of our product asset classes. Just in our special sits business alone, we have 65 individuals sitting on a country-specific basis. So teams from Southeast Asia to Korea, to Australia, to Japan. I mean, it's a very broad-based, deep, deep franchise. Excellent market awareness for what we do. As you also know, it's really a two-pronged market. It's a controlled bio market and a banked market. There is not a lot of private credit in Asia. There's virtually no hybrid capital in Asia. And so we see that as just an extremely fruitful place for us to work with talented founders, public companies, to do these more structured transactions that achieve an outcome for them alongside real operational capabilities. Super deep market for us very active. In Europe, we have another 50-plus-person operation, specifically within special situations I'm referring to now. And we see that market as something that is really getting exciting. I know I've heard that. Many people are talking about it, but it is undoubtedly true that the market historically lags the US by several years in product innovation. And what we're seeing is real demand from corporate sponsors and family-founder-led companies for the same type of solutions that we had historically deployed in the US and in Asia. So when we look at our business today, we're extremely happy that it's three-pronged. It's equally active in all of these regions. We've built it as such with over now 175 people globally to tackle just this with the specific nuances that every country and jurisdiction will come with. But we see massive opportunity globally. So it sounds like you've got a lot going on. Where is the best relative value? Let's say for the next 12 months, if I had a million bucks, where do I put it in credit? Yeah, so relative value is always interesting. I think of Portfolio as always wanting to be diversified. We do love that our businesses is global as I noted and also two-pronged in both the corporate and the asset back. Because like I said, there's always some area that is in short supply of capital. Relative value, I'll describe it for you in two ways. Where I see the largest depth of opportunity today that is maintained its pricing is in structured corporate opportunities in the US. That market is just booming. We've gone from something that was barely an asset class five years ago to now a billion dollar transaction being announced almost every month, sometimes multiple times a month, with players that aren't even really competing against one another. This is just an extremely deep market. It's kind of arrived. And when I say it's arrived, I mean capital that provides real value added partnership. But with all the nuances and bells and whistles of a specific bespoke solution to meet the needs of a counterparty. So love that opportunity and continue to lean in there. We are seeing though just as much interesting opportunity in some of the mid-size stuff we're doing in Asia or some of the stuff we're doing across the sponsor landscape or like we just described what SMBC in Europe. So this is truly a market where we are equally deploying across all three regions. That's not always the case. To your point, sometimes I'll tell you it's skewed very much to Asia or to the US. When we've looked at our deployment the last 24 months, it's been very equally weighted across across all those three regions. Great stuff. Angela Rufino with Bank Capital. Thank you so much for joining us on the credit edge. Thank you. And of course, very grateful to David Havens with Bloomberg Intelligence. Cheers. Cheers. Great being with you both. And for more credit market analysis and insight, read all of David Haven's great work on the terminal Bloomberg Intelligence part of our research department with 500 analysts and strategists working across all markets. Coverage includes over 2000 equities and credits and outlooks on more than 90 industries and 100 market indices, currencies and commodities. Please do subscribe to the credit edge wherever you get your podcasts. We're on Apple Spotify and all other good podcast providers including the Bloomberg terminal at the pod go give us a review. Tell your friends or email me directly at
[email protected]. I'm James Crumbi. It's going to pleasure having you join us again next week on the credit edge. [Music]
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