00:00This weird thing is going on at the moment. Private credit is so hot.
00:03You look at your equity brethren and there's this talk of zombie firms popping up more than ever.
00:08But private credit is so popular, you have hedge funds like .72 and Millennium launching strategies.
00:14What do those dynamics say to you that tortoise are now coming in?
00:17A lot of tourists, a lot of new entrants.
00:20Look, I think there's room for all of the players.
00:23Look, at the end of the day, private credit, in our view, is all about differentiated sourcing, origination.
00:30And ultimately, relationships, right?
00:31So I think you will have new entrants.
00:34I think there are certainly places to go with that capital.
00:37Whether those are the most optimal places to go with the capital and where they're lending, I think, is going to be an interesting question.
00:43But you've got established players that have relationships built over decades.
00:47And I think those firms are going to continue to enjoy the benefits of those relationships.
00:51But the new entrants that come in, I think, will probably focus more on opportunistic strategies, areas where they can drive somewhat higher returns, particularly if you look at hedge funds, right?
01:03That's their thing, right?
01:05They're looking for a niche or a way to drive incremental return.
01:09So I think those firms will focus more on opportunistic areas.
01:13And relationship lenders, folks like ourselves that rely on those historic differentiated sourcing and relationships, I think, have a place.
01:21Ken, just one point on that.
01:22We've seen this movie play out before.
01:25We had some of the Tiger Cubs get into private equity, for example.
01:27It didn't work out well.
01:29Yes.
01:29A lot of them took a lot of losses and were forced sellers into the market.
01:33Who's to say that that won't happen again if you have firms, again, whose history and credentials aren't necessarily in private credit?
01:39Yeah.
01:40Well, I think, look, part of where I think you'll see them go is in distressed areas, you know, where they can come in and provide capital and maybe a higher risk scenario.
01:48Look, the world we focus on is more traditional, right?
01:51We're looking for high-quality, mid-market businesses that are market leaders in their space, non-cyclical, where we can drive a very consistent long-term return.
02:02So you've got kind of the regular way private credit, and then you've got situational or opportunistic credit.
02:08I mean, the reality in private credit is you hear about it as a monolith, right?
02:18So there are lots of flavors of private credit.
02:21It's, you know, asset-based lending, you know, we saw with, you know, First Brands and Tricolor.
02:25So it's much more differentiated, and I think there are niches where those hedge funds will play,
02:30but it's not where we play.
02:33You play in the middle market.
02:35The firms that you invest in here in the U.S. are $10 to $100 million in EBITDA, right?
02:39Yes.
02:40And I'm wondering, there's two trends, big headline trends from the Trump administration.
02:45One is the tariffs, and I imagine that is much more difficult for middle market companies to deal with than mega cap companies.
02:52The other is deregulation, which must be a tailwind for middle market companies.
02:56So how do those two balance out?
02:58Yeah, sure.
02:58Well, the interesting thing about tariffs is that when you look at our businesses, the companies we finance,
03:04exclusively U.S. companies, primarily service businesses,
03:09that interestingly have very little influence on their business internationally, right?
03:14So very limited, you know, international customer base for these businesses, U.S. mid-market service companies,
03:21and actually very minimal manufacturing.
03:23So when you look at our concentration or tariff issue in our portfolio, less than 10% are really impacted at all by tariffs.
03:32So the tariff dynamic has actually turned out to be a pretty good thing for us.
03:36And, in fact, our investors see that and like the fact that there's limited tariff exposure.
03:41What about deregulation?
03:42Do you have to – do your companies have to spend less to deal with that kind of compliance?
03:47It's certainly a positive.
03:49Look, I think deregulation overall is a good thing.
03:52And certainly mid-market companies, you know, those that maybe don't have – or want to invest heavily in dealing with regulation,
03:58I think, you know, benefit from not having to do that.
04:02So I think deregulation is a net positive overall.
04:05That the tariff dynamic, I'd also say, you know, for us is something that, you know, has turned out to be even a positive from a fundraising perspective, right?
04:16I think when tariffs came in, there were a lot of questions about, oh, my gosh, you know, what's this really going to do to portfolios?
04:22And as things have played out over the last several months, investors can see that it really hasn't had a significant impact on our portfolio.
04:29So that spurred more fundraising, which is great.
04:32But I'd also – and I'd also say that when you think about our dynamics going forward, being away from tariffs versus the broadly syndicated market,
04:42where you have larger companies that have much more international exposure, makes us more attractive on a relative basis as well.
04:48Ken, one of the things that makes you unique is that you're staying in middle markets,
04:52because it feels like every private credit company wants to get into big infrastructure AI,
04:57that they're all touting how great it is to be with these blue chip IG companies.
05:01Yes.
05:01Is this also – you may be seeing risk in there of participating in that market?
05:06Yeah, no, it's a great question.
05:07And actually, I spoke with Romain about this at a conference a few months ago.
05:12We actually – there was a panel talking about exactly that,
05:14the re-industrialization or the industrialization due to the data centers and how that's playing out.
05:22We did some research when I met with him in advance, because I always know what a great job he does in all of his research.
05:28He does.
05:29And what we found is that we have about $6 billion invested in our portfolio,
05:34not in the data centers themselves, but in companies that are – mid-market companies that are supporting data centers.
05:41So I think that, you know, there's a misconception that it's just building these data centers that's driving the activity.
05:47The reality is there are thousands of companies in the mid-market that are participating in that.
05:54We finance, for example, HVAC build-out businesses, right?
05:58Well, they're supporting data centers.
06:00Food service businesses that are actually supporting the workers that are working in the data centers.
06:05So I think it's a broad-based benefit to the economy.
06:08I mean, I think while data centers are part of it, and obviously those are the largest dollars,
06:12we're not financing data centers, but we are financing the companies that are, you know, participating in that opportunity.
06:18You mentioned fundraising is fantastic.
06:21What do you expect in terms of growth?
06:24I know you have tens of billions of dollars under management.
06:27You have 200 employees.
06:28What kind of growth do you expect?
06:29Well, we just finished our annual investor meeting this week.
06:34I think we had something like, you know, $15 trillion of investors participating in the meeting.
06:40So I got lots of feedback on what we anticipate.
06:43And look, I think certainly our investors are looking for a more conservative profile.
06:49You know, there's always the risk of, you know, recessionary dynamics from tariffs.
06:54And we haven't seen that at this point in our portfolio.
06:56But I think they're looking for us to stick to our knitting.
06:58I think, you know, five, six years ago, investors, I don't think, fully appreciated all these differentials within private credit.
07:06Today, they like the middle market, and they want us to stay there, right?
07:10So, you know, they don't want to see us, you know, venturing off into some of these other areas.
07:15And we have absolutely no intention of doing that.
07:17But I think sticking to our knitting is important right now.
07:19There's been a real big conversation that the reason you've seen a lot of the giants of this space go into other areas is because there's been real fee compression.
07:26And that in order to succeed, you need to asset gather when fees aren't as robust as they once were.
07:32Yes.
07:32Is that a troubling trend if we are moving into the commoditization of private capital?
07:37I think where you're seeing more of that is in the BSL market, right?
07:41In the large cap companies that now have a syndicated option and a private credit option, right?
07:49So the private credit lenders that are moving into that space are actually competing with the syndicated loan market.
07:55So you've seen compression in spreads in the large cap market.
07:59Today, core middle market, what we do in traditional private credit, has about a 2 to 250 basis point advantage over the syndicated market.
08:07And I think a big reason for that is that compression of spreads we're seeing in the BSL world.
08:11So we like our space better, I would say, overall.
08:14But you're right, the largest private credit managers that are going into that space are competing with the syndicated loan market.
08:22Therefore, there's a lot more competitive dynamics that they're running into versus the core direct lending market where, frankly, delivering $300, $400, $500 million solutions, there are a fairly limited number of firms that can do that.
08:35So we like our space a lot.
08:36But you're right, as you get into the larger deals, it's a much, much more competitive dynamic.
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