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00:00I mean, it has been this huge revival. How much of it, though, is just down to fundamentals are
00:04really good. People like these deals and things get funded very easily versus just a lot of cash
00:09that's being put to work in the sheer demand that helps keep spreads tight. I think we're in a
00:14position of everything seems to be working. Number one, there is a lot of liquidity in the markets.
00:19Number two, outlook on the economy looks very positive for 2026. We've revised our own GDP,
00:25U.S. growth estimates to two and a half percent. Credit spreads have come into a place that are
00:30very attractive. I think boardrooms have a little bit more confidence. And there's just a tremendous
00:36amount of pent up demand for product. And then you also have the sponsor dynamic, which is
00:41extraordinary. M&A, as you know, is up meaningfully year over year, but sponsor M&A is up almost 45%.
00:47And the mega deals have returned. Mega deals, we define that $10 billion or more, are up almost
00:53a hundred percent. So if you think about that dynamic, what that means is if those transactions
00:58are working, the credit markets have got to be able to support them. And we haven't even talked
01:02about what's going on with AI, infrastructure, energy transition. Investors are very, very interested
01:10in financing that. If you take a look at the percent of the market that is supporting AI and infra
01:16right now, it's about one or 2%. It should be closer to 5%. And go back, look at other big
01:22technology moves around TMT and the internet, even energy back in the day, that percent was almost
01:3015, 20% of the markets. So we have a long way to go for investors to get appropriately indexed to
01:36these underlying trends.
01:38So, but this is, is this a new M&A cycle or is this kind of a one-off AI thing with some media
01:45deals thrown in or?
01:46So here's my view. You know, M&A was pretty quiet for the last couple of years and 25 started off
01:53with a big surge and then it got a little quiet based on what happened in April. And people were
01:59focused on a part of the market that's down. The sub $500 million M&A market has been down this year,
02:04about 9%. So it's come back, but we're only at five-year averages. So we're getting back to
02:11hopefully a very strong M&A environment. So there's the fundamentals of the M&A market coming
02:15back. I think it's, it's definitely spurred on by companies looking at AI, not just the data centers,
02:22not just energy, but every corporation in America, including Goldman Sachs, we've just launched what
02:27we call 1GS 3.0. And that is our version of looking at AI transforming our business, not just for
02:34our shareholders and efficiencies, but how does it change the client experience? So you combine a
02:39strong M&A market, sponsors that have a tremendous amount of capital, an AI backdrop, investors that
02:46want to invest, and I think you're going to have a very strong 26.
02:49Is there an element though, that you need to hedge or at least find a little safety in being overly
02:54exposed to AI? And that kind of asks us with the knowledge of last week, our reporting suggests
02:58that Morgan Stanley was going to be selling some of their exposure via SRTs. Is that something that
03:03needs to be happening in this environment? Just given, yes, M&A more broadly is doing really
03:07well, but there is a bit of outsized exposure of AI, at least starting to build.
03:11So if you go back to sort of fundamental credit, credit, you always want to be hedging when you
03:16have tall trees. And so anytime you've got exposures to individual companies or industries,
03:22of course, it's prudent to hedge. Everyone does it. And the ones that do it the best are the ones that
03:27can handle the volatility. So I don't think the fact that one institution may be hedging a specific
03:33exposure is an indication of a problem. It's just prudent risk management.
03:37What do you think about rate expectations? And I've been kind of harping on this today, but as the Fed
03:44has cut the last 75 basis points, the 10-year yield is still at 4.1%, 4.2%. And indications are that
03:52inflation is going to continue to head higher and the 10-year yield could be pulled higher by global
03:58rates next year too. Does it matter? Look, our personal view on the 10 years, it's going to be
04:03around four and a quarter now for the foreseeable future, which is a very comfortable place for that
04:07treasury to sit. And those of us that grew up in the business in the 80s, it was a very comfortable
04:13level for the 10-year. I do think we're going to have a couple more rate cuts. I think everyone's
04:17expecting even the market at 97% odds of it happening on Wednesday, two more for our perspective
04:24in 26. So I think the front end is going to come down, settle in the three to three and a quarter
04:29percent. And the 10-year, our expectation is it's going to hover around four and a quarter,
04:33which is a very healthy place for cost of capital, deals getting done.
04:37Normal.
04:38Normal. I think it's normal. But I'm older than you are, a lot older than the two of you.
04:43Nonsense. Okay, look, when it comes to this market, though, again, spreads are really tight.
04:47Deals are getting done very easily. If you do look in little pockets, you can see some concerns.
04:51And it plays out a lot through public markets, be it Oracle, CDS spreads starting to widen.
04:57They're going to have earnings on Wednesday. CoreWeave announces $2 billion of convertible
05:01loans, and their stock sells off. Do you also see some of that risk starting to creep into market
05:06of these big AI companies that maybe don't have the revenue to back up some of the debt load that
05:11they're starting to take on?
05:13So here's what I would say. I think in any major technology transition where capital is flowing into
05:18an opportunity, you're going to have periods of volatility. And there's going to be many winners,
05:23and there'll be a few probably that are not going to survive. But that's very normal. I think there's
05:29real credit dispersion as well still in the markets. And while almost everything's working, you can find
05:35examples of things that aren't working. And so investors are being careful to look at companies
05:40that are going through significant issues. And so just like an AI, there'll be many, many winners,
05:46and I'm sure there'll be a couple of losers. But there's nothing that we see on that theme
05:50that we're overly concerned about, you know, just based on what we see investors looking for,
05:56the fundamentals, the huge growth that this investment should yield for not only the U.S.,
06:04but the world.
06:06I've lived in Berlin for a long time, and the most exciting event of the whole year is super return.
06:11Like they have so much money, right? They throw, they know how to throw parties. Is private markets
06:19like private capital and private equity and private credit taking up more and more of the slack? Or is
06:25that going to start to turn around? Are banks going to start fighting back?
06:27I'm really glad you brought this up, Matt, because I love to talk about this.
06:30I think what's happened in the private markets is as important as exciting as what's going on in
06:35some of these innovative technologies. Because what's happening is, driven by the U.S.,
06:39we're innovating, we're creating deeper pools of capital. The private credit market right now
06:44is $1.7 trillion, and that is the below investment grade. We think the non-investment grade,
06:50I mean, sorry, the investment grade private credit market is also in the low $1 trillions.
06:54Those two markets are growing at probably 20% per year. Add to it what we call the liquid public
07:01markets, public bonds, IG, you know, $8, $9 trillion, leverage loans, high yield, $5 trillion.
07:09Those are very liquid pools of capital that are all there to support. And what's great
07:14about private credit and public at Goldman Sachs, we love both of them. We're a top player in both
07:20markets. And so we're very bullish on both of them. There'll be use cases for one or the other.
07:25We'll flip back and forth. Companies will sometimes go private, sometimes we'll go public.
07:29But they're going to find the best source of capital. And sometimes we'll be private,
07:33sometimes we'll be public.
07:33People love to frame it, though, as competition, that the two are going head to head.
07:37It's competitive, but that's America.
07:38But could there not be circumstances where there's riskier lending standards or more
07:42lax lending standards in order to win that over?
07:44Sure. Absolutely. The way we approach it, fundamental credit analysis, you have good
07:48credit processes, you monitor your credits, you don't do every deal. It's the same fundamentals
07:54that have existed for decades. But the fact that these two markets exist and they, quote,
07:59compete, it drives down cost of capital for investors. It provides solutions for clients.
08:04We have a client that's in the behind the meter, or I like to reframe that as off the grid energy
08:10sources that needed five billion of capital. It was private equity backed. It was private credit
08:15backed. It came to us. We looked at a structured off balance sheet IG solution. We looked at a high
08:21yield solution. We looked at an asset based lending solution. They chose two of the three and raised
08:26an incredible amount of capital, a hundred basis points inside of what we might have thought we
08:30could have raised based on demand. That's a great use case for why both markets will compete,
08:36but not in a negative way. It's just going to add more opportunity for our clients.
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