- 17 hours ago
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00:00So you have a view of how things have been shifting in terms of the role that private credit is playing in asset allocation.
00:09What are these shifts you're seeing?
00:11Exactly right. It's really exciting.
00:13The shift is really what's happening with banks.
00:16And it's less about banks exiting markets, but banks more looking for optimal allocation of their balance sheet.
00:22So rather than banks making every loan and keeping every loan sitting on their balance sheet,
00:26they're looking for partners, partners who can take some of the loans that they're originating.
00:31So asset managers like PIMCO are coming in, working alongside banks.
00:36They are the ones who face the ultimate consumer, the ultimate household.
00:40But then PIMCO, in their private credit strategies, we can come in and we can take some of their loans into our strategies for our clients.
00:48So banks get a less balance sheet heavy option and our clients get to access some of these high quality private credit claims.
00:58And that way it creates a much more resilient credit market where it's not completely dependent on the banks.
01:03You have more diversified sources of financing, a combination of bank asset managers operating in the credit markets.
01:10And how do you maximize value in an environment where it sounds like public and private are converging even more?
01:18Yeah, you really have to focus on underwriting, underwriting, underwriting, credit, credit, credit.
01:23And we're seeing that in the last few weeks with a few big credit stories in the headlines of some defaults that are happening in the headlines right now.
01:33You know, a lot of people focus on origination and deploying capital and getting the deal.
01:36And that's exciting and that's, of course, important.
01:39I mean, you do have to source the deals, but it's underwriting and making sure are you crossing every T, dotting every I and making sure that you understand the risks that you're taking.
01:49So focusing on underwriting, focusing on analytics in your underwriting is absolutely critical.
01:56So ultimately, we will have a recession at some point.
02:00It's been a while since we've had a real recession, but at some point there will be a recession.
02:04And when that happens, there will be a lot uncovered in terms of bad underwriting.
02:08So something we're very focused on here is, yes, being able to deploy capital in a broad, diverse opportunity set, but focusing on the credit underwriting.
02:17How closely are you watching developments around the U.S. shutdown, the tariff backdrop?
02:23How is that affecting credit markets?
02:24Very, very, very closely.
02:26And our base case, our pretty strong base case is that this gets resolved in some amount of weeks, days or weeks, in a way that won't be too disruptive to the economy.
02:38It is disruptive to the markets at this moment in time.
02:41Of course, we're flying a little blind without data that we normally have, that kind of thing.
02:46But it's manageable for now.
02:47In the low probability event that this lasts for several weeks, that could be pretty disruptive to the economy, could be pretty disruptive to a number of federal workers and all of the economy that depends on that ecosystem.
03:01That could have a real impact, if that happens over time, on the credit market.
03:07So we're focused on it very closely.
03:09We expect that this should be resolved in less time than that.
03:14But it certainly is a downside risk that we're looking at.
03:17Against this backdrop, we also have, to your point about this market convergence, I think products are also getting a bit more sophisticated.
03:27Does it make it trickier to navigate?
03:31Well, it actually makes it better for clients if you have these more sophisticated products that are more aligned with client needs and also more aligned with client liquidity expectations.
03:43So that's, you know, in this convergence of public and private, you have to be aware of some clients need liquidity, some clients need less liquidity.
03:52And to have a more diverse set of products and strategies to be able to offer clients actually helps us match product to client better than would otherwise be the case.
04:02And also match funding to borrower better.
04:05So it works in both ways.
04:07It makes us more effective operators as we lend out into the market.
04:11And it makes clients happier or at least set up to have better strategies more aligned with what they need.
04:18One of the things that PIMCO is very actively involved in is asset-based finance.
04:26Are you seeing that in Asia much or is this more of a Europe story?
04:30We are.
04:31We are.
04:31In fact, I was just meeting with our asset-based finance team here in Singapore.
04:35It was a great catch-up.
04:36But there is so much going on all across the region.
04:39And, you know, historically, asset-based finance, which really is all of the private credit world outside of corporate lending.
04:46So it's residential mortgages.
04:48It's consumer credit card receivables.
04:51It's equipment financing, aviation finance.
04:53Historically, a lot of that has been in Australia, a little bit in Hong Kong, sort of the developed APAC.
05:01What we're seeing is it's branching out.
05:03What we're seeing more and more in Singapore itself, we've seen a number of interesting deals.
05:07In India, there are new deals coming.
05:10In Japan, even, which traditionally has been so heavily banked and where there really wasn't a role for non-bank lenders like a PIMCO.
05:18Even in Japan, we're starting to see opportunities pop up.
05:20So it is this asset-based finance wave is spreading into APAC.
05:24And it's very exciting to see these opportunities.
05:27What about for data centers?
05:28Yeah, so data centers is a really interesting area for our platform.
05:35For PIMCO, data centers are, A, we're lending against the development of data centers.
05:41And so there have been some very big deals in the U.S. recently where PIMCO has been involved.
05:46And that's been quite exciting.
05:47In Europe, which we see as the next frontier of data center development, especially in some of the southern European nations where there just hasn't been a lot of development yet, there we're actively deploying capital in developing data centers.
06:02And in Asia, there's also a lot of need for data center development, particularly outside of the core markets like the megacities in the more developed economies in Asia.
06:15So think about Indonesia, think about Thailand, think about a number of these areas.
06:20They need data centers.
06:22Everyone needs data centers local to where they work and where they live.
06:28And there will be significant needs for development in digital infrastructure in Asia over the next several years.
06:35And PIMCO is actively looking at those opportunities.
06:37Is there some element of competition as well, given how there's so much optimism in this space?
06:43Like, what are your key advantages when you push this to investors?
06:49There's a lot of competition.
06:50There's a lot of capital raise.
06:52There's a lot of people looking for deals.
06:54And I think what you have to do is be a little intellectually honest that not every data center is going to work.
07:01Not every data center is going to work for every hyperscaler.
07:04And you have to be very focused on what exactly is the market, the sub-market, the micro-market that the large tenants need, what exactly is the product that they need, and making sure that you're providing that product to them.
07:15Because otherwise, you know, you could end up with data centers, which ultimately no one really wants, in markets that may be oversaturated or in a location that might be a little too far from power or some other items.
07:30So, really focusing on the micro details of exactly what works in data center infrastructure is what we're all about.
07:37When you look at the APEC environment, you seem quite optimistic.
07:42Does that extend to perhaps working on an APEC-specific fund as well?
07:47Well, we don't have anything specific right now to talk about.
07:50But certainly that's something that clients ask about is whether that could make sense, whether there could be an APEC-specific fund in asset-based finance, in diversified private credit, something like that.
08:01We would expect that over time that will become more and more common as what we're seeing is a global trend of looking for regional alternatives in private credit where people want to allocate by regional and have regional diversification rather than be so concentrated in the U.S., which speaks for the vast majority of private credit right now.
08:25People are really looking, just like in public fixed income and public equities, people are looking for alternatives to the U.S., alternatives to the dollar.
08:33And so, in time, we'll probably see the emergence of more dedicated private credit funds in Asia.
08:40There already are some, and there will be more to come.
08:43Would you be able to put some numbers to the outlook for fundraising maybe three to five years down the line from here?
08:50Well, for right now, it's interesting.
08:53Fundraising in private credit is a little slow.
08:56And now, in direct lending private credit, so that corporate space in private – and that's because private equity is itself so slow.
09:05The deal-making is not really happening.
09:07And so, fundraising is difficult.
09:09The deals are not there.
09:10Deploying capital.
09:11So, that's all in the corporate direct lending space.
09:13Meanwhile, in asset-based finance, which is this diversified set of mortgages, consumer claims, equipment financing, et cetera, there, the fundraising is actually very robust.
09:24And we're seeing a very significant growth.
09:27At PIMCO, we've talked about growing our alternatives revenues from 23% of our revenues to 30% over the next several years.
09:36And we're seeing that happen this year, continued growth in fundraising around our alternatives business.
09:42What do you think can be improved on the deal-making front?
09:47Do you think there's a lot of optimism there, or are there still some gaps?
09:52Well, yes, there's a lot of optimism.
09:55And frankly, there's some sloppiness.
09:57And we've seen that in some of the headline defaults over the last few weeks, where there's real questions about,
10:04did the underwriters look at the collateral, test the collateral, bring in third-party auditors to really understand the quality of the collateral that was there,
10:15or whether the collateral actually exists.
10:17So, some of the big defaults like first brands or true color that have come out in the last few weeks, that's the question.
10:24And so, it suggests that people are more focused on deploying capital rather than making good credit investments,
10:32where ultimately you have the return of capital.
10:34So, that's really a focus for the entire industry right now.
10:38Has there been sloppy underwriting?
10:41What has been missed?
10:42What can be caught on a go-forward basis?
10:44It's something all of our teams at PIMCO have been historically looking at in real detail,
10:50but something where you have to remain vigilant because there are these ways that you can slip up.
10:59And ultimately, the ones who will win, the ones who will deliver the best performance,
11:04will have done the best underrating on the way in to get that return of capital on the way out.
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