00:00But I first want to, base off of Claire's story, ask what it means for a market when spreads are
00:04really tight to get this upswell of M&A supply coming in. Yeah, it's welcomed. We are living in
00:11an environment where spreads are tight. And the big driver of that is the supply and demand imbalance.
00:16We haven't had a lot of net new issuance in the market the last few years. And as most of
00:22the
00:22capital is reinvested back into the market, that interest is compounds, particularly as rates are
00:28higher. So we are in the supply and demand imbalance where we're welcome of new capital coming in for
00:35sure. How much would it take for the imbalance to turn into which where there's so much supply that it
00:42widens spread significantly? Look, I mean, I think that it takes a lot. And like 100 billion from M&A.
00:48Each market's a little different. Right. And it depends which market that goes into, whether it be the
00:54syndicated loan market, the high yield bond market, the private credit market, whether it's investment
00:58grade, asset based finance or corporate. So it depends is the quick answer. But you mentioned sort
01:06of price to perfection. I do think that the market is at a 50,000 foot level price to perfection.
01:13A big
01:13part of it is there's infinite demand or close to infinite demand for high quality assets. But there's a
01:19lot of dispersion in the market. And what people aren't really talking about is there's been
01:23dispersion in the market for years now. If you look at the syndicated loan market for the last three
01:28years, defaults have been elevated around close to 4 percent, 3.8 percent when you throw in LMEs and
01:34other restructurings. That's an elevated above level. Now, the high yield bond market has been low
01:41default levels, but that's the highest quality high yield bond market we've ever seen. It's 57 percent
01:48double B and it's the shortest duration market we've seen. So it's comparing that to historical levels may
01:53not be the right comparison. So how difficult is it then to make a mistake if there's still a lot
01:58of demand in credit markets overall, the quality of which has been healthy? Yeah, and it is it is
02:03difficult. You're getting penalized for making mistakes in the public markets. There's definitely
02:08the haves and have nots. And a big part of that is if you look at look at a lot
02:13of the capital that's
02:14been raised in the credit markets, it's rules based capital. What does that mean? It's restrictions on
02:20the ratings you can buy, the weighted average spread in a CLO. It's only senior secured. And so what ends
02:27up
02:28happening is a lot of flexibility is taken out of the market or it has to be liquid asset. And
02:33so as a result,
02:34there's definitely a reaction of sell first, ask questions later when things miss, which creates an
02:41opportunity. And I think that's where if you can be flexible, if you can be nimble, if you can have
02:48multi-asset
02:48approach, that's where you're going to win. And I think avoiding mistakes is also going to be a big
02:54part of 26 alpha. To that point, do you think that there are a lot of opportunistic loan traders,
02:59buyers who are now looking at some of the selling and software names and are jumping in? For sure.
03:04For sure. I think there's a lot of overselling in some of these high quality software names. You know,
03:10it reminds me a lot of the high yield market in 2015 when 20 percent of that market was energy
03:16and the whole market sold off. You have 20 percent of the private credit or direct lending market
03:21in software. You have 13, 14 percent of the syndicated loan market in software. So I do think
03:28that there is some overselling as a result and it's not going to be equal and there's going to be
03:35a lot
03:36of dispersion by specific credit. You know, with all the competition for loans, and Claire was talking
03:41about it, not just from the broadly syndicate market, but from private credit, too. In that
03:46competition, there had been a lot of criticism early on in, you know, in the deal peak of 21 and
03:5222
03:52that a lot of Cove Light deals were getting done, that the quality of some of these loans weren't as
03:56good. Is that at risk of repeating as banks come back in in full force and then are competing
04:01with their private credit counterparts? Yeah, I don't view the public-private as competition.
04:07They are going to coexist together. And right now with what we've seen in the direct lending market
04:14is the size of the business has just gone up. So the Cove Light doesn't necessarily stress us out
04:21at KKR that much because the average EBITDA has grown dramatically to what we're lending against. I'd
04:27much rather lend against a 250 million EBITDA business than a 25 million EBITDA. So if you are going
04:32to look for like possible spots of cracks of concerns as you laid out in your report, where might you
04:36look?
04:36So I think, look, you're always going to focus on where the supply and demand imbalance is out of
04:42whack. And there you're seeing a lot of capital formation in the public markets and in addition
04:48to the direct lending market. However, I'm not saying walk away from that. If you run that very
04:56diversified, keep it high quality, you're still earning, you know, nine to 10 percent cash on cash
05:02on levered on a lot of these markets. So that's attractive to us to just go up in quality, go
05:07diversification, then focus real opportunity on where the supply and demand is the other way. So
05:12that could be regions like Asia that could be asked parts of asset based finance, or that could be in
05:18sort of this capital solutions or structured equity, right, where we're seeing a ton of opportunity,
05:24no spread compression.
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