Goldman AM's Reynolds: Private Credit Results Will Vary

Bloomberg

Watch Goldman AM's Reynolds: Private Credit Results Will Vary - Bloomberg on Dailymotion

Transcript

00:00Here we go. Here's kind of one of the first major blow-ups we're seeing in private credits

00:05rippling through markets and the effects are quite substantial. U.S. banks are being caught up in this,

00:11insurers are being caught up in this, Japanese banks have been caught up in this. It reaches out

00:15into lots of parts of the world. Is this, would you expect this to change the nature of private

00:22markets and this incredible run that we've seen as money has poured into this space? Is this

00:28something that you think changes the tone more broadly? Look, we remain very constructive

00:33about private markets in general and private credit in particular. By the way, we have been

00:38in this market for almost 30 years. So we have seen cycles on the up, on the down. So I don't

00:45think it changes the direction of travel and the interest for private markets, private credit in

00:51particular. Now I think if you step back, look, what are the two key pillars of private credit and

00:56performance in, in credit? It's discipline, right? Yeah. And it's, uh, underwriting and credit

01:03selection. Yeah. Um, and, and I think by the way, in general, on the private sides, you have

01:09differentiated access to information. So I, I don't think, um, there was, there's going to be less

01:14interest. I think though, what you're likely to see in the coming years is for the first time

01:20since the GFC is dispersion in performance across managers. Okay. And that's going to become because

01:28some haven't done their due diligence, basically. I think some managers may not have had the experience

01:33of prior cycles. Um, so managers, uh, may not have, you know, the origination edge that's, you know,

01:40others may have, uh, to effectively find those good assets. Um, so may not have, you know, the,

01:47the, the, the scan or maybe the teams to navigate challenges. There were 30% interest rates being

01:52offered here on, on vendor financing. Like that screams to me that somebody wasn't paying attention

01:57to risk. I, that that's what is going to make people worry. The obvious signals were ignored

02:04in this desperate rush to put to work serious quantities of money that are piling into this

02:09sector. Yeah. Look, I'm not going to be drawn into a specific deal, but it's, look, if, if I look at

02:13what we're doing in private credits and, and clearly for the last 28 years, we indexed our business

02:19towards defensive stories, defensive sectors, stable recession, resilience, you know, the, the alpha

02:26in our business is almost solely related to minimizing defaults and avoiding those losses. That's it.

02:34I want to turn maybe our focus into how private credit is going to play a role in data center

02:39funding in this AI frenzy. In some ways I want to ask you how, how big can some of these private

02:46credit deals get? Because the gap for funding, we, we get new numbers every week, it feels like,

02:51but there's a $1 trillion that needs to be raised in order to finance all of this pledged

02:57infrastructure spending. How do you expect private credit to play a role in that?

03:01That's true. And here we're probably moving towards more the private investment grades,

03:05right, which is a big trend. It's a trend that started several years ago, almost a decade ago.

03:10It's led in particular by insurance companies trying to pivot from public to private to get a

03:16bit of a premium compared to what they otherwise would get in, in a public portfolio. So we're seeing

03:21that we're very active in that space. Uh, we're working very well with our investment bankers,

03:26actually very active in that space. Um, look, this is likely to continue and not just data center

03:32financing, but also anything that has to do with, I would say powering the data center,

03:38energy transition. And so we're very active in that space as well. You're right. I mean,

03:41the numbers are, are, are large. And so we will require, um, sound underwriting sounds, um, structuring,

03:49uh, having the right collateral, uh, the right counterparts, contractual agreements as well,

03:55so that you have, um, attractive offtake agreements. And then I think,

03:59you know, a lot of the insurance companies or pension funds or even sovereign wealth funds

04:04today are really kind of pivoting towards kind of private investment grade or structured investment

04:09grades. Uh, and I think that's likely to continue for, uh, a few more years, decades, maybe.

04:14And when it comes to financing some of these specific deals, I guess, what can private credit

04:19offer some of these infrastructure, uh, companies that may be, you know, tapping the public markets

04:26can't, you know, we saw Oracle tap that, that large bond deal, I guess, you know, what's the

04:30pitch from private credit on why they should look into, into private financing?

04:35Customized structure, uh, bespoke financing, uh, no need for, uh, a rating. Uh, you can really sit

04:42down with, uh, the management teams, uh, and, and provide a very kind of bespoke structure that

04:49otherwise the market would not be able to, uh, to provide because the market and, and the banks

04:54underwriting for the market are going to have to go for fairly standard financing. And so that's,

04:59that's the power of private credit. And that's why, you know, we remain, uh, very constructive

05:03about the outlook. There's a place for private credit. But do you think that, to Val's point,

05:08there's an awful lot of money getting required as we switch from cash flow financing to debt financing?

05:12There is this gold rush mentality that is there at the moment. And we started this conversation

05:17talking about due diligence. Is there just this, what, what vibe do you pick up from the market

05:23about the, this kind of headlong rush into financing data centers? When you listen to people

05:29in the technology sector, they say some of this stuff isn't going to work. Like a lot of this

05:32stuff isn't going to work. How good can the due diligence be at this point?

05:36Well, I go back to the basics, right? I mean, it's getting access to information. It's about

05:40not having the formal, a little bit of what you're describing here. Uh, it's about, uh, and it helps

05:46when you've actually been through cycles, right? Um, and I think that's, that's what's gonna make the

05:50difference. Uh, I go back also to the point I made earlier, which is you're going to start seeing

05:55this version in performance. We're already starting to see it. And I think investors,

05:59whether it's the insurance companies, pension phones, even wealth management or retail

06:03will have to certainly be more discerning about the managers that's, you know, they want to back.

06:08Uh, James, I guess one of the, uh, perhaps issues with private credit is that maybe that,

06:15that private credit and private markets in general have only really ballooned because

06:19essentially regulation to do public financing has gotten too onerous. Are you seeing anything

06:26out of the Trump administration that could really have, have a catalyst for your business when it

06:30comes to his deregulation push across the banking sector? No, I would say private credit has ballooned

06:35or, uh, increased because it offers a very unique, uh, proposition to the borrowers. That's,

06:42that's the reason. Um, you know, we, we were doing private credit back in the late nineties,

06:46right. Um, and the banks were still very active only on their balance sheets. Uh,

06:51it has a reason to exist. Uh, it, it provides, you know, the benefits that I mentioned earlier.

06:57Uh, and he provides those benefits, by the way, at times when even the market is shut down. Right.

07:01And so if you're now in the shoes of a management team and you can, you can know your lender,

07:06your lender is going to be here, uh, almost in any, in any market, uh, and his long-term and patient

07:12capital, I mean that these are the reasons why private credit exists. Um, and, and so whether

07:17it's in the U S in Europe or increasingly in Asia, by the way, we're seeing a lot of interest

07:23for the sector. If the fed cuts rates aggressively, which is a possibility next year,

07:27would that be a headwind? Look, we've, we've operated in markets where we've had zero interest

07:33rates, uh, and have delivered very strong returns, uh, during that decades. Uh, so is it a headwind?

07:39Yeah, it is a headwind to the extent that most of what we do is floating rates exposed. Yep. Um,

07:45but I would say we've been able in, in a decade where we had even negative rates in Europe,

07:50we've been able to deliver really attractive risk adjusted returns. Just, just to kind of wrap this

07:56all up. I just want to kind of get, like, we don't have to get to talk to kind of people who have got

08:02first hand experience as to what is happening. The message you're delivering as the market's got really

08:06big managers that are kind of tourists. Can we call them tourists have come into this space

08:12and they've not done the kind of the work that they need to. And as a result of which

08:16you need to be really careful on who your, who your manager is at the moment, because the dispersions

08:20are going to go up. Can I just focus on that last point for a moment? How much do you think dispersion

08:25is going to, I, at the moment the, the tide has gone up, everybody's gained. As the tide starts to maybe

08:32kind of, we, we, we get to the, to the top of the tide. How big is the dispersion going to get?

08:37How big is the difference between what you're doing and what another manager could be doing

08:40at this point? I think the dispersion is likely to be very significant. And, and what's likely to

08:45happen, by the way, is that, uh, a lot of these platforms are unlikely to raise, uh, the, the next

08:50funds, right? I mean, when they go to, uh, to LPs, to institutional LPs, it's going to be that more

08:55challenging to explain some of the mistakes made in, in previous portfolios and past portfolios.

Category

Transcript

Be the first to comment

Recommended