Erik Hirsch: Inside Talk of Private Credit Bubble

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00:00I think it's interesting. There's a lot of talk about sort of a private credit bubble that's sort

00:04of hanging out there. And yet when we actually start to see the problems and see actually who's

00:08been doing some questionable lending, it's not the big private credit firms. It's much more of

00:13the banks. So I don't find it all that surprising right now that what we're starting to see is the

00:18banks reassessing their lending practices and reassessing what kinds of positions they want

00:23to be maintaining on their own portfolio. Well, we've seen lately some pretty high profile

00:28problems, right? With Saks, with First Brands. There's a lot of debt that you may not have

00:34expected, you know, 50 percent, 60 percent, 70 percent drops from. But it's been happening.

00:42Are we seeing cracks in credit? I don't think we're seeing cracks in credit. I think what we're seeing

00:48is some questionable lending practices by some folks that don't frankly have the same resources

00:53and skill sets to play in the game. So First Brands is a great example. You look at who the

00:58big players were, the big lenders in that. They were not the big private credit firms. You did

01:03not see the Aries, Apollos, KKRs, Blackstones. They were not playing in that company. It was in fact

01:10much more bank oriented and hedge fund oriented. So for us, this is simply a question of be careful

01:16who your partners are. There are a tremendous number of people providing capital into the market.

01:21There's no shortage of capital. And I think investors just need to focus on who they want to back,

01:26who they want to partner with, because I don't see a sort of substantial problem with the sector

01:31or the industry. What I see is variation, not surprisingly, across the actual individual

01:37players. So what do you think is happening in these individual situations? And how wide will

01:46the ripples spread of something like a First Brands? So I don't see a big ripple. I think what we see

01:52today is equity to borrowing ratios look relatively conservative. Overall leverage levels are looking

01:58fine. We're not seeing a high level of default in the market. And so I think these are much more

02:03episodic, which is, again, not surprising. Happens all the time that you've got a bad borrower or a bad

02:10lender or a bad combination. But that to me does not translate into some systematic or systemic risk

02:17across the entire sector. All right. So we have big bank earnings coming up over the next few days.

02:25You don't think we're going to hear anything about, you know, tricolor or sacks from these

02:30banks. It's not going to be big enough to affect their earnings. I don't see that, no. And I think

02:35if you sort of counterbalance that with what's been actually pretty positive, you've had a pretty robust

02:39IPO market for the last few months. The banks are doing well in the wealth sectors as that industry

02:45continues to grow and thrive. Overall equity market performance has been good. So, no,

02:50I wouldn't think that what we're seeing here is going to warrant any sort of hit to earnings.

02:55And M&A has been, I mean, a trillion dollars of deals in the quarter. It does feel like there's a lot

03:00of, you know, Friday notwithstanding energy back in these markets, animal spirits back in these markets.

03:06IPOs are happening again, as you mentioned. What's your outlook?

03:09Well, I think we're going to continue to see more of this. So, again, absent some huge trade war with

03:15China, which is certainly a possibility. But I think what you see is the public market is looking

03:22for more product. There's real pent up demand there. The private markets have a lot of high

03:26quality companies that are looking for liquidity and looking for an exit. And so I think that pipeline

03:31could stay strong for a while.

03:32What do you think the future of investing for retail looks like? Because, as you mentioned,

03:39there's not a lot left to access in public markets. In private, you know, everyone's reaching

03:44for that special sauce. So are we going to be able to retail investors, for example,

03:51invest more directly in private markets?

03:53Absolutely, Matt. And so you're already seeing it. The number of products that are now available

03:57to the retail customer has never been bigger and continues to grow. And I think right now,

04:02it's not so much even the retail investor looking for return. I think what they're looking for,

04:07and frankly, smartly, they're looking for diversification. So if you take the average

04:11enterprise value for the public companies around the world, it's literally $100 billion.

04:18You look at the average enterprise value for what sort of the private markets are focusing on,

04:23$2 billion. So part of this is simply accessing part of the economy that's a big driver of the economy,

04:30which is small and medium-sized businesses. Those are not publicly traded. Those exist only

04:35in the private markets. And so if you're looking for a well-balanced, diversified portfolio that's

04:41getting access to all of the economic drivers, you're going to need to have exposure to the

04:45private markets. And that is just the reality.

04:49So will retail investors need more transparency,

04:53a better look into these private companies, or will they simply need to have a strong fiduciary

04:58representative? I think it's going to be both. I think what you're seeing is transparency is on

05:03the rise, as it should be. And so the SEC and other regulatory entities are very focused on making

05:09sure that the retail investor is protected. And at the same time, we need to see education levels of

05:14what private markets are and what they are not. As you know, there's a lot of myths around the private

05:20markets. And so getting people's educations higher, having access, having transparency, all of that is here,

05:26all of that is continuing to evolve and grow. I think it's all a good thing. I think it's natural.

05:32I think it's an expected part of a maturing asset class. And if you're bringing in this new big

05:37segment of an investor, I think it's to be expected.

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