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00:06Well, following that wonderful conversation, you get another one, one of my favorite people,
00:11one of the best investors I can imagine, Dawn Fitzpatrick. She is CEO and CIO of Soros Fund
00:17Management, formerly 25 years at UBS. Very curious, before we start, we were planning to talk about
00:24all sorts of things that had nothing to do with oil, yet here we are. I wanted to start with
00:29that.
00:30How much the past three days have upended things or been revealing in terms of how markets have
00:36responded to this latest shock? Yeah. So, I mean, you can see the price action today where markets
00:43are definitely under stress. And when you think about coming into kind of this week, at a high
00:50level, markets looked kind of benign. If you look at index returns, they were flat to up. But below
00:57the surface, we were seeing a pretty violent rotation. You know, part of what you just heard
01:02Mark talk about. So markets definitely felt a little fragile. And then we come into yesterday
01:08and I was surprised that the market rallied back to flat. But I think the realization that
01:15investors are coming to now is this is not going to be a couple day event. This is going
01:21to be really, really hard. And I just think market participants are dealing with an enormous
01:26amount of uncertainty. You have obviously the AI disruption. You have, you know, geopolitical
01:33risks. And I just think that, you know, under the surface, there's a lot of fatigue from all
01:41of that. We're going to get into the under the surface in terms of AI disruptions and things
01:46of that nature. But I want to start with what has been priced in so far and what hasn't in
01:51terms of
01:52how resilient the U.S. and frankly, the global economy are to some sort of call it stagflationary
01:58shock, a big increase in energy prices. Yeah, well, you see, by the way, around the globe,
02:04you're starting to see rate cuts priced out of the market. So Friday, you know, through December,
02:11there was roughly in the U.S. about 60 basis points. That's that's down now to about 40 basis
02:17points. And you obviously have seen kind of the 10 year U.S. Treasuries move 15 basis points higher.
02:24And from an economic perspective, you know, you're basically seeing a fairly dramatic tightening of
02:32capital conditions. And I and I think that really is kind of worrisome on on a lot of different levels.
02:38Does it make sense to you, though, that actually that would be the response
02:42for monetary policymakers to raise rates or not to cut rates in the face of higher oil prices?
02:49Yeah, so I think you've heard the U.S. Federal Reserve talk talk about this a little. They like
02:54to look through temporary increases in in in oil. And again, when you look at at the impact of oil
03:02on
03:02the U.S. consumer, it's it's only about five percent of their their spend. But but I do think
03:09there's knock on impact. So I still think actually I would bet the Fed cuts two times and I I
03:17think they
03:18will look through this as long as it's contained to under, say, you know, three months. But but we'll see.
03:26I actually think they should also look through in part some of the A.I. boom, because the weather rates
03:33are 50 basis points higher, 50 basis points lower. It's not going to impact the amount of CapEx that's
03:39going on there. And then under the surface, as I mentioned, financial conditions are tightening.
03:46I think the lower end consumer is is struggling a bit while overall consumer feels OK. And I think
03:52it's a hard dynamic to deal with. What's fascinating is normally when people think, oh,
03:56they're going to be rate cuts, that's yay for risk assets, risk on the scenario you're pointing is
04:02cutting rates for the wrong reason, which is actual weakness, true stress that you're seeing get into
04:07the market, whether it's a low income consumer or whether it's these pockets of financial stress.
04:12Is that correct? Do you think that the rate cuts won't help add to risk appetite or could potentially
04:18be indicative of something more of a problem? So a couple of things on that. First of all,
04:25at a at a high level, I actually think the U.S. economy and the global economy is going to
04:30the
04:31recent headlines notwithstanding is going to grow higher than expectations. I do think inflation is
04:39moderating. And again, I think rates where there are modestly restrictive. So so, you know,
04:47I don't think it's necessarily like a rate cut into into a disaster. I just I think the Fed has
04:55room
04:55to lower rates. And in the context of everything going on, I think it would be smart of them to
04:59do.
05:00So you don't think inflation is the skunk at the party? Pardon? You don't think that inflation is
05:04the skunk at the party, as Jamie Dimon would say? Yeah, I think it's going to continue to trend lower.
05:10And I think things like A.I., while right now I don't think it's having any effect on inflation,
05:16I think ultimately it will. Meanwhile, the market has been tumultuous under the surface
05:22for a while. And we've talked about you heard Mark talk extensively about the software concerns
05:27and how much that's really impacting private credit in particular. Where are we in that washout? Do you
05:33have a sense of how far along in terms of recognizing who the winners and losers are going to be
05:37in the
05:37software shakeout? Yeah, and I think Mark spoke to it. When it comes to private credit, we saw the
05:45Blackstone headlines overnight. I think that's going to take a while to work its way through the system.
05:53I think we're going to continue to see elevated redemptions. I think some of these structures
05:59are going to come under pressure. So in publicly traded BDCs, they're trading right now on average
06:07at about 23% discount. The private BDCs and the interval funds have to return capital at NAV.
06:15And the rotation is going to be redeem those private BDCs and interval funds and transition to the public
06:24BDCs. You'll get a higher yield even if the NAV discount doesn't close. So I think you're going to
06:30see that. And I think ultimately what happens there is it's going to put pressure for there to actually
06:36be secondary sales in private credit. And the other thing with private credit is, you know, not all funds
06:44are created equal. Some funds have disproportionate amount of exposure to the software sector. And again,
06:52I think within the software sector, this is a structural re-rating that is deserved. So I think
07:01really doing your homework on what kind of exposures the underlying has is going to be really important.
07:09I also think investors, big endowments, high net worth are over allocated to private assets.
07:18Their private equity isn't cash flowing. And now they're going to have a similar issue
07:23in private credit. So it's, I think it's going to be a painful 18 to 24 months.
07:28Let's get to private equity in just a second and how it's not cash flowing and what that means in
07:33terms of just investor appetite for the asset class. How much pain is there going to be? I mean,
07:40where is it going to be expressed in the software shakeout? You were talking about BDCs and the shares.
07:44People have pointed to retail funds and you said Blackstone, the idea of lifting redemptions to,
07:49I believe, seven and a half percent of the fund, saying, look, we can meet these
07:53redemptions. I mean, what's the model for how you view this proceeding?
07:59Yeah. So first of all, I think what Blackstone did was broadly smart. I think when you look at
08:07these alternative asset managers, I think the returning capital in a way that they promise to
08:13investors is going to be long-term, short-term, it will hurt their fees. Long-term, I think it will
08:21massively aid their businesses. And I think there's going to be a differentiation between
08:27alternative asset managers who do that well and ones who don't. So I think that's going to be
08:35really, really important, keeping your promises to end investors. And I don't think memories are going
08:40to be short for managers who don't do that. By the way, if you're a BDC trading at a 23
08:47% discount,
08:47you should be selling loans and buying back shares. And the only reason you wouldn't be doing that
08:52is to maximize your fees, which is really hard to justify. So I think it's going to be really
08:59interesting to see how much people stick to kind of fiduciary responsibilities. And I do think it's going
09:06to be a culling of the alternative asset managers. As an institutional investor, do you want to stay
09:10away from private asset managers or private credit funds in particular that try to cater to retail
09:16funds? No. So to be clear, we're kind of dipping our toe and buying some of these public BDCs, the
09:23ones
09:23where we like the underlying loan portfolios. So it's kind of the opposite. We like to provide liquidity
09:32liquidity when liquidity premiums are blowing out. And I would argue that that this is going
09:38to be one of those moments in time. Same thing on the secondary sales. There's going to be great
09:43opportunities there. And we are we're definitely going to be a buyer. We are in a good liquidity
09:48position and kind of looking forward to a little bit of, you know, of carnage in private markets.
09:56So I hear this all the time when things start selling off or dislocating. People say,
10:00oh, I can't wait for the dislocation. I'm looking forward to buy. And then when things start getting
10:04pretty heady, people start saying this time might be different. There's going to be contagion. And I
10:08don't know who's going to be potentially exposed. What are the nodes of contagion where you could see
10:12this become a bit more systemic and cause concern that goes beyond just the knowable risk?
10:17So there's 300 billion dollars of back leverage on private credit funds through banks. And generally
10:28that leverage, while loan to value is modest, it is mostly mark to market. And those loans generally
10:38have not had a lot of mark to market volatility. And I think there's going to be regulatory pressure
10:45to start remarking those loans. And once they do that, those private credit funds are going to have
10:52to come up with cash to meet those margin calls. In most cases, they have some excess cash, but I
10:57think those cash reserves are going to run low quickly. So if you start seeing pain and or
11:07scrutiny on the banks on that lending side, I think that could be a harbinger of worse things to come.
11:13To what extent does it have a risk for the financial sector more broadly?
11:18So, you know, software employment as a percent of the U.S. economy is less than 1%.
11:27I think where it plays into the broader economy is where I started. It's general financial conditions.
11:34And the cost of borrowing is going to go higher. I do think the offset to that
11:40is bank regulation is easing. So banks have more ability to loan into this. And I think
11:47Treasury Secretary Bessett made this comment the other day. I don't think Washington really minds that
11:53shift from private credit lending incrementally to the banks. So I think that's a partial outlet valve.
12:04One aspect of this is the pain. What about the gain? I mean, how are you seeing potential opportunities?
12:10Not only as we see the shakeout in BDC shares, for example, but in the AI transition where it's not
12:14just going to be losers,
12:15but also will be winners?
12:17Yeah. I mean, so even in the public software sector, you know, there are some names that we think
12:24ultimately will be winners. The other thing on AI is you see companies who are using operating leverage to
12:33spend a lot of money on technology right now. And by the way, JP Morgan initially got criticized for this.
12:41I think ultimately what you're going to see is, you know, JP, the Goldman's of the world,
12:47the Walmart's of the world are creating a moat relative to their competitors. They're going to
12:53press an advantage that will become very, very apparent in a year or two. And I think
13:00AI is going to play to the people who are bigger and can make those investments structurally.
13:06How do you want to get exposed to that? Right. I mean, this is sort of a question the audience
13:12just asked, which is just because you talk a little bit about your asset allocation. But in terms of
13:16public, in terms of private, in terms of illiquid, in terms of macro, I mean, how are you sort of
13:21arranging this?
13:23So relative to other endowments, we leaned incrementally out of private equity back in like
13:3021-22 to give and replace that beta with public markets. Again, we might use this moment in time
13:39if things get sloppy enough to change that mix. I think in public markets, you're seeing a lot of
13:46dispersion. You know, the rotation we talked about from kind of old world real economy that's done
13:55really well this year and away from asset light. Under the surface, there are great ways to pick
14:02winners and losers at the company level and you're getting paid for that. So we think being in public
14:08markets, having kind of an alpha oriented portfolio is really important. I think diversification at kind
14:17of the asset level also, even though treasuries are going the wrong way now, I do ultimately think
14:23that that treasuries, you know, will be a safe haven and having, you know, a reasonable allocation
14:30to government bonds is important. On the credit side, we've leaned out of a lot of credit recently,
14:37but it's really just to create dry powder for the opportunities that we think is coming.
14:42You use the word diversification and a lot of people have used that to mean a lot of different
14:45things over the past couple of years, in particular, whether it's not diversifying in asset classes,
14:50but diversifying in regions. And people are saying they've been going away from the US and going into
14:55more underpriced markets. I'm just wondering if you think that trade's done and we're seeing sort
15:00of the shakeout of it right now when it's tested by the potential for an oil shock.
15:05I don't think it's done. I think what happened is asset allocators kind of got lazy over time
15:11and coming into last year ended up way over allocated to the US dollar and US assets.
15:18And they're just trying to write those allocations. I think the initial move
15:24was pretty aggressive because they realized how offsides they were. I think you're going to see a
15:28continue continuation of that. But I think it's going to be more more moderated and modest in terms
15:33of the impact. But again, I invariably think people got overexposed to the dollar and are just trying
15:41to get back on sides. But I don't think it's necessarily repudiation of the US.
15:47Well, and I want to finish up on something that you kept saying, which is that private equity just
15:51isn't cash flowing. I love that concept. But it's not giving people the capital to reinvest and
15:57redeploy in the same kind of way and to reallocate to private equity. Where is PE in just sort of
16:04its
16:05cycle, given the fact that we haven't seen exits, we haven't seen IPOs, we haven't seen the kind of
16:10monetization of a lot of these investments? Yeah, so I think there was a lot of hope coming into 2026
16:17that it would be the year when when when PE starts to cash flow in a really meaningful way.
16:23What you're seeing is the IPO market is open, but it's only open for really high quality companies.
16:30We had 14 billion dollars in secondary and primary sales last night, but they were utilities and
16:35insurance companies. So and and the other interesting thing about private equity is
16:42historically, when private equity monetize an asset, you get like a 20% bump. Last quarter,
16:49modernizations were flat to down on the and I think that's a little bit giving up, you know,
16:55giving up the ghost. On the plus side, 2026, you are going to see some mega IPOs. Unfortunately,
17:03these aren't necessarily companies held by private equity. But you know, rumor is you'll see OpenAI,
17:10Anthropic, SpaceX, all go public. By the way, to put that in context, any one of them alone
17:16would be the largest IPO ever. In aggregate, if you get 10% float, it's about a quarter trillion
17:25dollar of IPO proceeds, which is more than the US had since in aggregate since 2022.
17:33I think that's good in a lot of ways in that it will clean up those cap cap structures, it
17:38gives them
17:39access to capital markets in terms of heavy, heavy spend. But that money is going to have to come from
17:45somewhere. And that's why you see a really hard fought to get included in the indexes,
17:54which again, will create natural buyers for those companies. But there's another side to that, it will
18:00mean people have to sell the other names currently in the index. And if you look at historical data,
18:07when you get a really big pop in IPOs, generally, six months forward, the market re rates on a multiple
18:15basis lower. So we could expect that possibly going forward. Unfortunately, we're out of time. I could
18:20talk to you all day. That's Dawn Fitzpatrick of Soros Fund Management. Thank you so much. That was wonderful.
18:24That was awesome.
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