Private Credit Faces Dispersion, Not Crisis: :Reynolds

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00:00The industry is relatively new. Very few players in the industry were there in the 90s when we

00:05started or during the financial crisis. A lot of these players came post-financial crisis and for

00:11the first decade, the environment has been relatively benign. Quantitative easing led to

00:15obviously maybe capital structure that are no longer fit for purpose. And so I do think that

00:20what you're going to see, rather than being systemic risk, is more around dispersion of

00:25performance. So is the reason, like the same reason we see in public credit markets, very,

00:33very tight spreads that just so much, so many dollars are chasing the same product?

00:39I'm not sure that's necessarily the case because all capital is not created equal. I mean, if you

00:43go back to private credit, you know, what are the success factors? You certainly need a very

00:48powerful origination engine, right? You want to see all the deals out there. You want to see them

00:53at inception when, you know, it's still an idea. And then you want to be very selective, right?

01:00So I don't think that's the case. I think there are still value to be had. You know,

01:03we're very constructive about private credit. You just need the best managers is what you're saying.

01:07No, you need to be selective, right? Is it though harder to be selective? And in my mind goes to

01:12something that Mark Nachman said recently, basically saying that with all of the assets coming in,

01:17especially as wealth gets more popular, you have ICs overruling deal teams because they're like,

01:22you have to deploy. This money needs to be put to work. Is that happening now?

01:26You never want to be forced to deploy, right? I mean, you want to create an investment culture.

01:32You want to create a culture of risk management where people, you know, can voice their opinion.

01:36And, you know, we celebrate when collectively we decline an opportunity, right? I mean,

01:41this is what we do. We only make about low single percentage at the end of the year

01:45of all the opportunities that we get to work on.

01:47I know you don't want to speak ill of your competitors, but you're confident about that.

01:50And some of the deals you see getting done, does that play in the back of your minds that

01:54maybe people are being forced and pressured to deploy and get deals done?

01:58Others, not you.

01:59Yeah, for the sake of quality.

01:59I think time will tell. That's the beauty of our industry is that eventually time will tell.

02:05Certainly, we continue to have the same discipline. We're not forced to deploy.

02:09You also want to have a very balanced funding source, right? I mean,

02:13if I think about our platform established almost 30 years ago, we have a lot of institutional capital.

02:18It's patient. It's long term. It's in closed-end vehicles or SMA formats.

02:24And they quite like when we decide, you know what, we're going to modulate and pace

02:27and slow down our investment activity.

02:30What you need as well is a very diversified platform.

02:33I would say global diversified platform. We started in Europe in 1996.

02:37We've been a major actor in private credit for almost 30 years.

02:40And sometimes we see better opportunities in a particular region or in a particular asset class.

02:47And that's, you know, having that ability to move around, I think it's actually very critical.

02:51So if you have, if you're better at selecting, if you're smarter, better managers,

02:55and you have a platform with more experience, you can better serve your clients.

02:59Can you also charge a premium for that and better serve your bank, your shareholders?

03:05I think, look, the premium and the fees that we're charging, eventually, you know,

03:11we've seen fee compression in the industry, right, in terms of how much, you know, we can negotiate also with our LPs.

03:17You know, institutional capital and kind of wealth management, slightly different vehicles as well,

03:22slightly different fees.

03:23But I would say what really matters, you know, we talk about returns,

03:27but you should look at returns post-default and post-losses.

03:31That's really what matters.

03:32I mean, the alpha in what we do is generated by the lack of losses.

03:36You talk about working with your LPs and the importance of that source of capital.

03:41But for many people, they have the sense that wealth is going to grow enough that it dwarfs that of the LPs.

03:47Is there a lot of discontent among those institutional investors,

03:51this idea that at some point maybe they become less important to GPs,

03:56that they become less important of a player?

03:57As far as we are concerned, and we just spent, and I spent the last three days,

04:03all day long with some of our largest investors, they're very happy here.

04:08And by the way, this was very timely given the narrative.

04:11Well, presumably they're happy at GSAM, but in general, is there a sense of discontent

04:16that industry-wide, that wealth is growing and threatens maybe their standing and their importance?

04:22I think that's why, you know, if you speak to them, I think they're going to be very discerning

04:26about the platforms and the managers that they want to be associated with and partnering with, right?

04:33There's going to be more of that going on from here onwards.

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