00:00The concerns, the angst, what have you, how much of it is actually real at this point?
00:05Well, I mean, it's real because, you know, when you're investing in credit, there is some risk that you need
00:10to underwrite.
00:10And I think that people had lost sight that there could be effectively some work to be done in credit.
00:16So, you know, it's great to see this movement in the market.
00:22And I think it comes down to the fundamental of credit, which is, are you financing cash flow?
00:27Do you have an asset coverage?
00:28And all of a sudden people, you know, wake up to the fact that effectively over the past few years,
00:32some may have used credit as a proxy to equity.
00:36And when you're financing, you know, some ARR based company, you know, that's you.
00:43You must wake up at some point at some point, you know, to this to this credit cycle.
00:47So overall, you know, yes, there are some action taking place in the market.
00:51But for the better, you know, if I were to look out at this dispersion, because there always is this
00:55thing of maybe it's less transparent.
00:57So it's hard to find if I'm to look out and say, where have the mistakes been made?
01:01What would I look for?
01:02Well, I mean, the first of all, you know, in my view is when you started having an asset liability
01:07mismatch.
01:07And this huge development in the private market of this open ended fund, semi liquid fund, you know, push to
01:14retail, by the way, sometimes effectively when people realize that they want out, you know, you've got this mismatch.
01:21I mean, we're not trading QC based securities.
01:24You know, those are private assets.
01:26We saw that a couple of years ago, you know, on the real estate side, you know, and you remember
01:30the the headlines there.
01:31So now it's coming to to credit.
01:33So I think it's it's the right asset with the wrong structure.
01:36I think we will there is a silver lining there for sure, in my view, which is you can still
01:40use this type of structure, but by not promising, you know, some outperforming return, you know, not having so much
01:47leverage in the system and coming back to the basics of, you know, asset underwriting.
01:51Yeah, I mean, to me, Boaz Weinstein really captured it when he said the problem is they convinced investors that
01:58this was the greatest invention since the Internet, private credit, right, when it really was just lending money to small
02:03companies.
02:04So how do you see the wheels on the car?
02:10Are they coming off?
02:11Is it that bad or is this just the kind of blip that, you know, Mark Lipschultz says they've been
02:17through before?
02:18Yeah, well, you know, if I may, the people, you know, saying that, that they want to take the opportunity
02:21to park their garbage truck, you know, and try to fill in, you know, with everything they could.
02:27Which, by the way, Boaz Weinstein, of course, did buy some of what was sold off of Blue Album.
02:31And he wants to take I mean, he has really taken the gloves off that guy.
02:35I mean, listen, as you were saying, Danny, the secondary private credit, that is a new asset class, you know,
02:41in itself.
02:42I mean, you know what happened to the private equity secondaries that has grown over the past 20 years.
02:46I mean, now that the golden age of this new asset class, you know, for sure, because you're going to
02:50be providing liquidity to an illiquid asset class otherwise, but with the right, you know, with the right structure.
02:56I mean, you guys here at the BDCs, right?
02:58The BDC market is nothing else than effectively a private credit fund, which is supposed to address its liquidity on
03:04its own, you know, through the market.
03:06And effectively, right now, those BDCs are trading at a discount.
03:09You know, they're generating a double digit yield.
03:12And that's a great data point, you know, to reset the market.
03:14So, and of course, we should mention you just raised a very large secondary private credit fund, $1 billion.
03:21So, you know, you hear stories of Blue Owl is selling some of their BDC exposure, New Mountain Capital.
03:26What does it actually look out there?
03:28Is there a fire sale happening on right now?
03:31Actually, you know, the private market are not reacting as aggressively, maybe, at the public market, if looking at the
03:38stock, you know, at the stock price.
03:40The processes are still, you know, they're still orderly, you know, in an orderly, you know, manner for sure.
03:46The price discovery here, I mean, you have to do the work.
03:49And the numbers, you know, that some of the people externalize, you know, where they sold effectively their private credit
03:56asset is actually not that distressed.
04:00You know, people are expecting for some distressed, I think, certainly too early, because, yes, you may have their best
04:06assets, Mature.
04:07I mean, you're right that Blue Owl said, I think they got 99.7 percent.
04:11New Mountain got, what, 94 percent.
04:13So the numbers are getting lower.
04:15But are they selling their best assets to get those high numbers?
04:18Sell the best and keep the rest, right?
04:20So, but the, no, I mean, you know, our practice, if I talk about TKO, for the past five years,
04:25we've been active there.
04:26Our average price was 85 cents a dollar because, effectively, you need, there is a new liquidity premium that you
04:33need to crystallize for your investors.
04:36And so I don't think that those good assets are going.
04:39I think the nature of the buyer, and if you look at the nature of the buyers who provided liquidity
04:42in these circumstances, are people who might have different type of capital, you know, in terms of expected return, in
04:49terms of flexibility, in terms of liquidity.
04:52So I think it's just a normal process that is starting, yeah.
04:54Well, the buyer also, in some cases, is the insurance companies that they own.
04:58Well, how do you, how do you, is that a problem?
05:01No, I mean, you know, I cannot comment.
05:02I'm not, I'm not involved in this, in this transaction.
05:05Well, what about, okay, so part of Jamie Dimon, and of course, I caveated it by saying he, like, loves
05:10to be, like, there's a problem in private credit.
05:12But he talked about this time that maybe the 2008 moment gets caused by software exposure.
05:18It feels to be, like, the original sin in the, in the public market's minds of what's happening with private
05:23credit.
05:23What is your software exposure like?
05:25How are you thinking about this as an asset class?
05:28Is there concern?
05:29Is it all going to be okay?
05:30Yeah.
05:30Well, I mean, we, we went public, you know, with that last week when we reported our earnings.
05:33You know, our software exposure is 7%, which is way inside, you know, the 20% of the market, if
05:39not higher, you know, once you retreat the industry services, you know, or others.
05:43So, I don't know if private credit is the best invention, you know, since the internet, Matt, but probably AI
05:49is, right?
05:50And so, that's where people wake up, you know, to this big theme around, you know, but not everything will
05:54go to zero.
05:56Otherwise, we'll have a serious, you know, issue on the market.
05:58And that's our take, for sure, yeah.
05:59All right, so, it is a fascinating time to be buying up these assets, and you're saying it's a new
06:05asset class, but it's really just your bargain hunting, right, with the secondaries fund I'm talking about.
06:11It's kind of like what Howard Marks does, or?
06:14No, I think it's different because, you know, instead of going to one single asset, you know, if you're referring
06:19to Octree, you know, great investors, what we're doing here, we're providing liquidity to LPs in their commitment, you know,
06:26into other GPs.
06:27Very similar to secondary private, you know, private equity.
06:29The big difference in credit is that you've got maturity, a coupon, and a nominal.
06:34So, you know exactly, you know, what you're, you know, walking away from, unlike private equity.
06:38When you look at the development of the secondary P market over the past 20 years, which is now a
06:42proper, you know, asset class, and many, I mean, look at what, you know, callers sold themselves, you know, a
06:47couple of weeks ago, you know, to EQT.
06:50I mean, like, it's a proper, you know, asset class.
06:52Secondary private credit is in the early days because we're just coming out, you know, of this very solid primary
06:58cycle over the past 10, 15 years.
07:00What's happening right now in the market is a great, you know, wake-up call for some, and this asset
07:05class is going to get organized.
07:06And so we've been acting there, you know, for the past five years.
07:10It's not bargaining.
07:11It's effectively providing liquidity to some people looking at rebalancing their portfolio, changing regulation somewhere.
07:18Exactly.
07:19Well, I think of secondaries in private equity, and I don't know this market nearly as well as Danny or
07:24you.
07:26I think of it sort of as passing the hot potato, right?
07:28We can't find any other exit, so let's create another fund that is the exit.
07:31In this case, though, you're buying hopefully not distressed assets, but buying assets from a maybe distressed buyer.
07:38Well, actually, you'd be surprised.
07:40A distressed seller.
07:40I mean, that's not the case.
07:41I mean, today the people who are selling are public pension funds, insurance companies, sometimes, you know, family offices with
07:47a change of your leadership.
07:48And it's a rebalancing of portfolio.
07:50I mean, remember that, to your point about, you know, these big primary market tailwinds, you know, to private credit.
07:58Now people are rebalancing their portfolio.
08:00That happened, and that started, by the way, when the interest rates started raising, you know, five years ago, you
08:05know, when we came out of the zero interest rates, you know, policy.
08:07That's when the asset class effectively started developing.
08:09And we took advantage, you know, of this opportunity.
08:12Others have since then.
08:14You know, people who thought originally it was just a cyclical COVID-like people were freaking out, end of the
08:20world.
08:20And now it has become, you know, really structural.
08:22And I think we're only in the early days.
08:24There are many people who now, you know, are tackling, you know, this opportunity.
08:30But you need to externalize, you know, some track record there.
08:32That's where the good managers will make a difference.
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