Beyond Stocks and Bonds: Exploring Private Credit and Direct Lending With Philip Hasbrouck (Ep. 73)

Are you ready to overcome the complexities and burdens that come with your success? Join the team at Centura Welp Advisory in the Live Life Liberated Podcast. Now on to the show! Hello and welcome to Live Life Liberated with the team from Centura Welp Advisory. Chris Osman is in hot seat with the mic, and he's got a guest, Chris, what's going on today? Hey Eric, great to be here. So today we're going to talk about private credit. Private credit? And you brought a pro on, so who'd you bring on the show? Today I have with me a Phil Hasbro from Cliffwater LLC. All right, well I know I'm going to learn a ton, take it away, my man. All right, thank you Eric. And as just mentioned today, we're really going to be talking about private credit, more specifically, really digging into direct lending. And ultimately our goal for today's podcast is to provide an overview into what is direct lending and how it may be beneficial to utilize in today's environment. We'll go over a little bit about today's environment as well. And then also discuss what we find extremely important, especially when looking at alternative investments and that's due diligence as due diligence is imperative when it comes to selecting investments, both for sponsors such as Cliffwater, which will explore in a minute, as well as on behalf of Centura. So before introducing Phil and turn over to him to give a little background on Cliffwater as well as himself, I wanted to give a little backstory in terms of how we derived at finding Cliffwater and going to rewind back to really the tail end of the third quarter of 2022. As we start looking forward into the horizon, we, the investment committee at Centura really challenged the investment department to go out and find a private credit solution to offer to our clients. They gave a very strict criteria. They wanted to find a very diversified and conservative offering. But they also wanted to participate in the upside. So we were looking for superior risk-adjusted return profile, especially relative to competitors and peers. One to have an attractive economics or a low entry point from a cost perspective for our clients to access private credit. And then given where we are in the cycle, we really wanted to have an evergreen solution that provided some sort of liquidity, whether you know, one could capitalize on immediately being invested in this environment and receiving higher income, but should economic conditions worsen to the extent that clients feel a little nervous, such as a significant financial crisis. A great financial crisis would were to occur. Clients wouldn't be left on the bag and being in an ill-liked offering. So that's that's the stage. And we believe that we found just that offering and checks all those boxes with Cliffwater and their Cliffwater Direct Lending Fund. So with that, I'm honored to have Phil Hasbroke as my guest today, Senior Managing Director at Cliffwater LLC, and he's also the co-head of Cliffwater's Asset Management Business. Phil, great to have you on. Hey, Chris. Thanks for having me on. Good to speak with you today. Yep. Phil, would you please give a background as well as an introduction to who is Cliffwater? Sure. So Cliffwater was founded in 2004. And when the firm was founded, I mean, almost 20 years ago now, the initial concept back in '04 was we're going to offer very large institutional investors, advice on alternative investments specifically, private equity, private debt, real estate, hedge funds, and so on. And at the time, there wasn't a lot of information for investors to do their own due diligence and we added a lot of value, helping large pension plans and sovereign wealth plans, invest in alternative investments, you know, really for the first time. As we move forward 15 years, 2019 arrives, and we'll get into the details throughout this presentation on what inspired me, but I had an idea that Cliffwater should become a fund manager and not just an advisor to these very large institutional investors. And I joined the firm to help us build a private debt or private credit fund business. And that has largely shifted our focus as a firm. We still advise on about $100 billion for very large institutional investors, but day to day, our most immense focus right now is on this fund business. And you know, today our Cliffwater Corporate Lending Fund, which is in tourism, invested in as assets exceeding $10 billion, making it one of the largest private debt offerings in the market for evergreen funds. Great. Now, thank you for that introduction, Phil, really appreciate that. And with that, let's get started. So before we really jump in private credit, we want to give a very brief background or economic overview to really set the stage in a describe how private credit could really serve as a hedge against rising interest rates, which going back really to a year from now, March actually marks the one year anniversary where the Fed started raising rates. And since then, we've really been in this push pull environment between inflation and the Fed, you know, we had inflation peak in mid June last year, over 9% over 40 year highs going back to the early 80s. And really if you look at the Fed, their goal is to really provide price stability. And they're looking to choke inflation back down towards their target. That's a 2% target. Now in order to do that, they're going to use two mechanisms to really make financial conditions restrictive. They want to choke demand to bring prices down. So they're going to increase rates, which we saw them go from essentially zero to just under 5% today, so to meet here next week where they're also anticipated or sorry, the week after next mid March to where they're expected to raise rates again and also communicate that they'll likely keep rates elevated for a long period of time. The other mechanism, they are reducing their balance sheet at a clip of $95 billion a month, which is much larger than any other tightening cycle when it comes to balance sheet reduction that the Fed has ever engaged in. You'll look back to April of last year when their balance sheet assets peaked. They have now reduced that balance sheet by 626 billion. It seems like a lot. And it is, however, there's still $4.2 trillion above where they were pre-COVID. Because that is a cause of a lot of the inflation, the government pumping trillions of dollars into the economy and exacerbating that issue. So now trying to tighten it by pulling it back out. We have seen the economy slow to quarters last year when negative. Second half was positive in both quarters from a growth standpoint, but definitely started to see some crack start to surface. Consumer spending, especially in the fourth quarter, has started to diminish or at least moderate, which isn't 70% of our economy. So that does have a great bearing on the overall growth that we experience. Once was a silver lining, as we started experience economic contraction, is now, seems perhaps a source of the source spot and that's the labor market. Now at 54-year lows, at 3.4% unemployment, that and there's two job openings for every one unemployed person, approximately, and wage growth has also been a negatively persistent as well as that has come in higher than the Fed like to see. All this supports the Fed continually to raise rates. That's why we also saw bonds, the public trade bond market, as measured by the Barclays aggregate, actually produce a lot of worse last year. So is the worst performance that the Barclays Ag has ever experienced down over 13%. It was the first time that it produced two consecutive negative year returns. It's also the first time it can it sold off or corrected more than 10% simultaneously with equities. And that is because of as interest rates rise, the price of the bonds typically fall. And that really leads into our discussion today and why private credit could be very useful investment in portfolios and produce a superior yield. And that's because most private credit, particularly direct lending, is floating rate. So as interest rates increase, it also as does the interest with that loan helping offset some of that loss. So with that fill, let's dive in. I'd love to start with exploring what is private credit. So and specifically, what is direct lending within private credit? Sure. So let's go back in time, 20 years, a lot of things in the world were different. But let's presume that what we would call a middle market company, some private company the United States that makes between $1,500 million. million dollars a year, probably not a publicly traded company, but again a big profitable company. Besides, they want to buy a competitor, or perhaps a private equity firm wants to buy one of these private companies. Well, these kind of transactions, acquisitions, as we call them, would typically be financed with some level of debt, so to make it really simple, and what persists today is, if one firm, if one middle market company is buying another, and it's a billion dollar purchase, they might borrow 500 million, and then they might put down 500 million in equity, or in cash. So think of this the same as if a real estate investor was buying an office building. They might say, "Hey, I want to get a mortgage for half the purchase, and then I want to put half down in cash." And so we call this leverage finance, or middle market finance. So again, 20 years ago, your bank would probably be very responsive. You could call a bank of America a Wells Fargo to do this for you. Over the last 20 years though, regulation on banks is tight and quite a bit, and as we saw during the global financial crisis, we don't want our banks in the United States taking a lot of what we would say balance sheet risk. So post 2008, this lending activity changed. And banks went from saying, "Hey, I can use my balance sheet to make that loan to finance that acquisition for you for that company," to saying, "Yeah, I can still finance it for you, but I'm not actually allowed to give you the money. I actually need to go loop that money together from hundreds of mutual funds around the country, and it's going to take me six months to put the deal together." And by the way, I may not be successful in getting it done for you. So as a consumer, the same way you think of a bank today, potentially somewhat cynically, I can't really count on them for anything. Corporate borrowers started to observe the same thing, which is the bank can no longer lend to me the actual money they have. Regulation requires them to syndicate every offering out to other investors. They're slow and they're unreliable as a result. And what happens in a capitalist system, the private market comes up with a solution. An asset management firms start saying, "We won't make those loans directly." So you have the largest groups in the country like BlackRock or Blackstone or KKR or Apollo or you name it. All these groups start saying, "Hey, we're going to start a business to do the lending that banks use to do." And we're going to be very responsive and we're not going to put the borrower through a lot of pain and we're going to be fast and reliable and we're going to displace the banks who are now slow and unreliable. And what was born is what's now a trillion dollar plus industry that we call direct lending. So what's that word direct mean? That word direct simply means that the bank is not creating some loan to sell off to the market. That'd be indirect. In fact, here the borrower is simply facing off with a single lender most of the time. And that single lender will lend to them directly without a bank involved and hold that loan for its entire life. So the private credit market, if you read about it, the private debt market, normally what it refers to is direct lending. And again, direct lending is asset managers displacing banks and financing corporate acquisitions. Great. Now, very good definition. They'll really appreciate the back history as well. I think very helpful. And I wanted to spell a few myths if we may. People hear the words private and alternatives and they immediately assume there's more risk than investing in similar public market assets such as maybe it's the leverage loan market, high yield bonds. Do you believe that's the case that just because it's alternative or private that potentially there's more risk that a investor is exposed to? Yeah, the risk that comes with that word private, the Christmas team can help you with his ill liquidity and how it fits into your overall liquidity needs as an investor. So yeah, you do need to be able to part with your money for potentially a longer term than you would with liquid assets. Now, the risk we mostly focus on is risk of loss. And as Chris alludes to this is probably misspelled and people because they're less familiar with private markets or potentially because transparency is lower, there's an immediate presumption of higher risk. When in reality, we don't think the risk is higher and maybe lower than you might imagine and we can give you some examples to make you think about this. If you look over the last 30 years, investment grade corporate bonds have annual credit losses of nearly zero percent. So on the surface, an investor would say, well, geez, that's awfully safe. No credit losses due to defaults or zero. But the issue you have with investment grade corporate bonds, for instance, last year was that you have a lot of interest rate risk. So even though you had no credit risk, you had a lot of interest rate risk and that might have led to double digit losses. And now you also are dealing with low returns in general. So again, the first thing to establish is there's credit risk and there's interest rate risk. And with direct lending, you do not have interest rate risk. These are floating rate loans. So if rates go up, you don't need to worry about duration causing you losses as it would with traditional bonds because your coupons or your yield is going to adjust higher. So the risk you need to worry about is credit risk, which is effectively principal losses due to companies defaulting. And inevitably over time defaults will occur. The key is to keep defaults as small as possible. So wrapping your head around, okay, maybe my yield is 10% in this asset today. What should I expect from my credit losses? This is how you want to write a return. So how risky is private credit or direct lending? We measure going back to 2004 that annual credit losses for direct lending is right about 1% per annum. So if you're yielding 10 and you own the whole market, assume that you're going to lose one point of yield and end up at around 9. If you pick good managers, if you're willing to be a little bit more conservative and not reach for extra yield, we've seen you can keep credit losses closer to 25 or 30 basis points or 1/3 of 1% approximately. So it is possible to be more or less aggressive doing direct lending. So how do I put these credit losses into context and how risky this is? Is it riskier than investment grade bond investing? Well, your risk of credit losses is higher. Yes, but you're also getting twice as much yield and you have no interest rate risk. So it kind of turns on its head, what is risk? What do I care about? If the objective is to beat the rate of inflation, I would argue it's much less risky. You know, if the objective is to take zero credit losses, it's a little more risky, but with no interest rate risk, it becomes less risky again. Because you brought it up, Chris, high yield bonds, for instance, are kind of a vehicle that's similar, kind of a 1980s direct lending technology, I would argue. Annual credit losses on high yield bonds are about 1 1/2% versus direct loans at 1%. And that data goes back to 2004 again, it's long lived. So the losses are a little higher on high yield bonds, but here's a catch. Again, high yield bonds have interest rate risk, and they're also very volatile. So I think this in a weird way is not as risky as an asset class, as most might imagine, because there's a lot of price stability. There's not a lot of volatility. You know some credit losses are going to occur, but you're okay with that because you're diversified and you have a lot of yield to offset those losses. And so over time, we see really attractive premiums you can earn without interest rate risk. Now, that's all a lot of kind of data-driven stuff I shared, and hopefully I didn't go too far. I know I don't have anything in front of anyone to follow, but I'll share one more idea with you. The way high yield bonds, or a traditional leverage loan or a bank loan now, gets built and executed is a borrower calls a bank. And they say to the bank, "Hey, I've got six months, I want to borrow at the lowest possible rate, go out, create a loan or a bond, and go out and sell it to a hundred different funds at the lowest rate possible." And so the underwriting the bank does and creating the instrument. They don't like care that much. They're not holding any of that risk. As we like to say, they're not eating their own cooking, or they have no skin in the game, they're just trying to create an instrument to sell it to the market. That is how a bond is created, or a leverage loan is created. Keep in mind with the direct loan, you have a single lender, sometimes lending over a billion dollars to a single borrower. And the same way, if you were making a loan and selling it off to everybody else, you wouldn't put the same care into it, is if you were creating a mass of loan and you had to hold all that risk, and you could never trade it and you had to live with it forever, you might be a lot more detailed, and a lot more worried about risk if you had to eat all your own cooking and if you had a lot of skin in the game. So one reason the credit laws, as we think, have been pretty low in direct lending, and one reason the yield has been pretty high, is because the creator of the loan is saying, "Hey, I'm stuck with this thing, it needs to be worth it for me. That's a big difference than the liquid or syndicated market. That's a great description and explanation, Phil. I want to talk about some of the drivers in private credit, and we found, as interior of that, a lot of the success, and I would say, conversely even failure, really can be driven back to superior deal sourcing and underwriting skills. Can you walk us through Cliffwater's approach to managing and navigating the private credit universe to address both sourcing as well as underwriting to produce results while at the same time mitigating risk? Sure. So, big picture, we have about 30 investment professionals analyzing these lenders and the loans they're making. We have about 300 lenders and any given year call us, seeking capital application. So, Cliffwater to be clear, our goal is not to go out and find you the best loans and to call a bunch of companies off of the money. Our goal is to plug Centura and its investors into the dozen best lenders in the market and give you a hyper-diversified portfolio that no one lender could replicate. So, we spend a lot of our time underwriting the lenders and their platforms. One thing we're going to look at is their long-term track records. A lot of these firms have been in business for 15, sometimes even 20 years, doing limited niche business, even pre-financial crisis. And so, the number one thing we're going to look for is credit losses. If there's managers who've consistently generated high credit losses, we're going to be less inclined to allocate capital of them, because anyone can produce yield, but producing yield without credit losses is the name of the game. Once we're looking at a subset of managers who've proven really low credit losses over time, we want to understand how they've done that. And we're going to do loan-by-loan diligence and try to get a sense for how they've been able to source more conservative loans, or how they think about risk at different times in the market and business cycles. And we have a bias towards more conservative lenders. Now, this makes our job a little easier. We don't go to the market and say, "We have the highest returning fund with the most yield." We say, "Hey, we'll give you what we think is the most consistent. We'll give you what we think is resilient and we'll get you through the cycles." And we will not be the number one performer every year, but when things get tough, we'll be insulated because we took a little less risk than everybody else. So we're looking for kind of top performing managers or higher performing managers during bad times. We're willing to take a little less risk to be reliable and to avoid credit losses. And we use a lot of data and we've hired a lot of people away from lenders to just try to understand the loans and the risk that different managers are assuming. The last thing I'd say that we're always looking for is I started off saying we want managers with great track records. Well, be wary of the manager they put together an exceptional track record 15 years ago, but their firm is vastly different today. Maybe they're managing 100 times more money today. They're doing a very different kind of lending than they were before. And so they've built a track record doing conservative things and are now taking a lot more risk today. The value of us having a team of talented underwriters, many who came from lenders, is we can catch those things. We can say, you know, they've never lent in the sector before. They've never made loans such a high loan to value before. And we can try to catch these things and look for what we call style drift. Where managers basically separate from how they've produced returns in the past, trying to adjust for a new environment where they're taking a different risk. So Chris, to sum it up, we're right underwriting managers, mostly how you are. We're looking back at their history. We're trying to understand their operations procedures, how they keep competing the market and everything else. And then we're trying to say, hey, are they still doing it that way today? Or am I buying a different program? And the good news is for our fund, we've identified really about 16 lenders and 12 in a big way, who we have a lot of confidence in, and who we think are going to continue to provide very safe returns from investors. It's that conservatism that consistency, and I would say overall alignment, that we found when really exploring Cliffwater between Centera, that really solidified our choice and checked all the boxes. So really hats off to the approach and the subsequent results. Looking at the evolution of over time and access to alternatives, we've seen a real evolution in terms of the vehicles, which asset managers offer this access. And when you look at the Cliffwater corporate lending fund, Cliffwater chose to go with an interval fund structure, versus what many private credit managers choose, and that's the BDC. So first off, can you explain really the differences? What is a BDC? And what is the differences between really a BDC and interval fund? And why Cliffwater thought the interval fund was a superior chassis? Great, yeah, so maybe I'll start with what an interval fund is. So an interval fund is a mutual fund in every way, except for one. And that is that you can only get out of the fund one day per quarter, and that there are limitations into how much liquidity will provide each quarter. So again, how is it similar to a mutual fund? You get a price daily, you can buy the fund daily, you get $10.99 to act reporting, you don't have a lot of the complexity that comes with alternatives. It feels like a mutual fund. There's no subscription documents. And again, the one thing that Centura can help you manage is if you do have liquidity needs, you just need to plan and understand that the liquidity windows are every 90 days. There are also limits to the liquidity. So if we go back to Q1 of 2020, when everyone was quite concerned about the coronavirus and market spiraled, we actually had to limit how much investors could take out of the funds. Now, this may be more encouraging when you hear the detail. If you'd asked us for $100 in March of 2020, we would have given you 87 cents of the, sorry, $87 of $100 or 87% of what you asked for, then the remaining 13% you could get 90 days later. So it's important just to understand with interval funds, we want investors to have all their liquidity because it's a better experience for everyone. And when times are good, or even when times are a little shaky like last year, we were still able to get people 100% of their capital. But if there's a global pandemic and no one knows anything about this virus and we're all in the bunker, you know, when you call us that time, if everyone's calling, we don't want it before us to sell these assets, you might get limited on your liquidity. And again, that doesn't mean you're not going to get anything in Q1 of 2020. It was 87% of requests. So again, we like these interval funds because while there are some liquidity details overall, we think they're pretty investor friendly and that it's easy to execute and administratively easy for the advisor and easy for the client. A BDC is a business development company. And this is a type of fund that was actually created by Congress without going into all the details because the concept was, hey, lending to middle market businesses is good for America. And we want to create vehicles that are easy for investors to access. This is kind of before the days of the interval fund that will do nothing except this middle market lending activity because it's good for the economy. Now, BDCs are a little bit different. If you invest in a public BDC, they're very volatile instruments. They're going to trade like your stocks. So one thing you may come to like about our fund is the volatility is very, very low. If you do a public BDC, it will trade like a public stock. So it'll be as volatile as a stock market may be more. But, you know, here's the paradox. You can have your liquidity daily. Just understand you're going to be down 70% in Q1 of 2020. Whereas in our fund, you'd be down 2%. So public BDCs are one option for investors who need daily liquidity. Private BDCs have become quite popular. Those are similar to interval funds and that they don't have a lot of volatility. The two big differences I would say in private BDCs, one is administrative. So you don't get a daily NAV. You get a monthly NAV. You need to fill out paperwork to get in. The manager can use a lot more leverage. The other big difference is liquidity. So we are required to give you liquidity every quarter. And we make an agreement that at least 5% of our fund's assets will be available to investors every quarter, no matter what. And that's a covenant we cannot breach. Now, if you invest in a private BDC, the manager has the right to cancel your liquidity option altogether. So it's kind of a yeah, I'll give you 5%, unless I decide not to give you 5%. So I think for a lot of managers who want to use a lot of leverage, who want to lock up the capital more, the private BDC is appealing because it gives a lot more optionality to the lender. I think this is it. The Interval Fund gives more power to the investor. And our view, frankly, as a way to get into the market and be relevant was, hey, we need to do something that is more investor-friendly than the market. If the whole market is doing this private BDC's because it's good for the manager, the way we'll become relevant is by doing something marginally better for the investor. So I like the Interval Fund because it's investor-friendly and it makes these conversations easier for us. But it's kind of this hybrid, again, between what feels like a BDC or a private fund and a mutual fund. Yep. I agree. It does. It is definitely a more investor-friendly vehicle than that of the BDC. I want to switch gears a little bit and talk about the current environment. You elegantly outlined why private credit is a good hedge against rising interest rates because you're not exposed to interest rates. However, rising interest rates are double at sword. They're great for investors who want to have a higher level of income from their investment. But at some point, then can become troublesome for the bar work as it's increasing their cost of debt. Do we reach a point where these higher levels of interest become troublesome for both the investor as well as the company? Yeah. Thanks for touching on this. This is the smart topic to think about. So again, on the surface, and we do think this holds, and I'll circle back to it as we go through this, private debt's really attractive right now in portfolios because let's face it, stocks and bonds have become highly correlated to interest rates. So as interest rates rise here, we're seeing stocks and bonds suffer together. We don't know how long that'll last. Everyone always believes the current market theme will last forever, and that's the only thing we know not to be true. If things reverse, funny enough, everyone has the same thesis. Well, if rates go down again, stocks will go up again, and bonds will go up again. So as long as we see this high correlation of stocks and bonds, I think direct lending or private debt becomes extra interesting because investors can say, my stocks and bonds may be underperforming while rates rise. But I at least own one asset class, and there's other strategy centers invested in that are going to benefit to some extent from these rising rates. And again, the reason for that is because these are floating rate loans. So I think the best thing to do is a little bit of math together. So if a company took out a loan a year and a half ago, and they were paying 7%, typically the ratio we're looking for, if someone's going to take out a loan, if a company's going to take out a loan, or they have 7% a year, we need to know they're making three times that amount in earnings. So their earnings need to be $21 if they're introsperred in a $7. So today, that's $7 they owe? Well, that's gone up to 12. Because if you interest rates are up about 500 basis points or 5% roughly, and as a result of that, their borrowing costs are a lot higher. So on the surface, this is really a good thing for the lenders. Because we're getting paid 12 instead of 7 because rates kind of went our way for lack of a better term. Now if that company's still making $21, we're golden. Because, hey, they can still keep, you know, we'll do the math together, but before they were making $14 after they paid the lender, well, now they're still making $9 after they pay the lender. And this is the beauty of credit investing. Who's losing money in this transaction, the equity? This is why stocks and equity and private equity are more dangerous than being a lender. Because the lender gets paid first. So in the waterfall, right now, the lenders are really having the laugh while the equity is having a tough time having to transfer their earnings over to higher debt loads. If you go into about enough recession, or if rates go high enough, these companies could come under more stress. So just kind of throw some numbers around, Chris. I don't think anyone's forecasting this, but let's just say that rates go to 10%. Like we saw during the Paul Vogue or area, and, you know, let's say company earnings really fall. And that company making $21 a year is now making $14 a year. You know, you might have a situation where the company owes $15 and interest payments, but they're only making $14 that year. And that's where you kind of have this crossover point where you say, geez, if I'm the lender is a really good thing, become a bad thing because there's too much of it and that's a yield. And the way this gets worked out is two ways. First, this company generally wants to survive. And if you're the equity holder, you're saying, hey, rates aren't going to be this high forever. Eventually, we're going to be inflation. I don't want to lose my equity. And that's what happens if you don't pay your debt. The lenders take over the company. So borrowers tend to fight tooth and nail to keep these companies alive, and they'll restructure, and you're already seeing some of that in the news. When you see these companies doing all these layoffs and all these other things, that's related them trying to support their earnings. So companies do take action during tough times if their earnings are down, they don't sit idle. They fight to keep these companies and it's their job to make adjustments to pay the lender. Now, if things get to a strenuous enough point where we'll often see Chris, is the equity holders, whether it's private equity or public equity, they'll say, hey, hey, hey, I need a meeting with the lender. And they can sit down together and we saw this during COVID when a lot of gyms and fitness centers got shot. There was an opportunity for the equity investor to say, look, this COVID thing's not my fault and I wasn't planning on it and everything shut down and I can't make any money. And this business is going to lose a lot of money, but it will be relevant again someday. And I as the equity holder, I'm prepared to reach into my pocket and to put a fresh 50 million dollars into this business to keep it alive. But I need your help, Mr. lender. I can't have you charging us 10% right now. I need you to charge us 8%. And maybe I'll give you a little bit of equity to go along with it or I'll make it up to you later. But I'm going to support this company and I need you to help too. And a good lender will have that conversation and collaborate. And this is part of the beauty circling back Chris of direct lending. You can sit down with one lender and one equity holder and everyone saying, let's get to the other side of a tough time, let's do it together. When you're in the liquid bond market, you've got like hundreds of holders of this debt and you're hurting cats trying to make a deal. So to come around to it and I know this has been long-winded, we want rates to go higher, you know, far strategy, we recognize it will put more stress on borrowers. Those things get worked out, but first order higher rates of income is good for this strategy. And even if your credit losses go up a little bit, your income is moving up so rapidly as rates go up, we think it's going to more than cover any credit losses. So overall, as we think about the world today, I guess in my heart of hearts, I'm hoping rates stabilize or go down and we can go back to an economy where we don't worry about inflation so much, but if rates do keep going up, know that we have confidence that it's in that positive for the strategy, even if there's more strain on that borrower. Well, fascinating stuff, Phil, I really appreciate all the math and I think we would all agree a little reprieve from inflation. And personally, the lower interest rates would be welcome, but it's good to know that the strategy, regardless, should still fare well. I could talk with you all day about this, Phil. But we are running out of time and want to thank you for graciously coming on and agreeing to be our guest and introduce the satirical world to private credit and direct lending and cliff water. So thank you so much, Phil. It was a pleasure. Thank you, Chris. Great job, Phil. I'm just going to echo what he said. Great information. Thank you so much for being on the podcast, Chris, of course. Thank you for facilitating and running the show. And our last thank you always goes to you, the listening audience. Thank you so much for tuning in and listening to the live life-liberated podcast with a team from Centura Walth advisory. 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