00:00Let's get more on the current investment landscape with Arjun Raghavan, CEO of Partners Capital, a global investment office that
00:06manages $75 billion in assets for families and nonprofits globally.
00:11Arjun, I'd have to imagine that you see such a big and interesting cross-section of how investors are behaving
00:18and what they want.
00:19What exactly does your client base look like? Who are the types of people you're managing money for?
00:24Yeah, well, thank you. Well, firstly, great to be here. Thank you for having me.
00:27So we manage about $75 billion of assets for a global client base.
00:32About half of that consists of endowments and foundations, and these are what I'd describe as mid-sized endowments and
00:39foundations.
00:40And the other half are sort of private individuals and large family offices for whom we look after capital.
00:47And the model we adopt is a long-term investment model.
00:51So it's a highly disciplined, long-term compounding, multi-asset class approach to investing.
00:57Now, of course, 25 years ago, that was quite simple because you just had to put money in different asset
01:03classes, and then that's all you needed to do.
01:05But what's actually happened, as we all know, is alternatives in particular, which is quite a differentiated niche asset class
01:1325 years ago, has exploded.
01:15Right? And so we like to say alternatives will become mainstream.
01:19And so in that environment, it's much harder to actually build truly resilient multi-asset class portfolios that can wade
01:27through different macroeconomic environments.
01:29Because the fact of risk and the exposures that you're actually getting in sort of asset classes, which are labeled
01:35differently, but actually not be very different.
01:37So in effect, asset class labels might actually hide the risk that you're getting from different asset classes.
01:44By the way, that's an argument Cliff Aspen has made with us before, that you're saying, oh, you think you
01:47have private credit.
01:48Actually, maybe the correlation is quite similar to credit itself.
01:52But in that market, because I know that this is an asset class that wealth and probably a lot of
01:56your clients historically had been underexposed to, and that exposure has ramped up.
02:01How many of them are calling you saying, Arjun, should we really have the exposure we have at this moment,
02:06given some of the high-profile bankruptcies and write-downs we've seen?
02:09Yeah. No, absolutely. That's a huge question.
02:12In fact, it's one of the top three questions that come up, right?
02:14The first question is around private equity, which we can talk about.
02:17The second is around private credit, which we can address.
02:20And the third one is around geopolitics, right?
02:22On private credit specifically, we've invested in private credit for about 15 years, and we've gradually ramped exposure up in
02:31the private credit space.
02:32But we've been very tactical in terms of where we want to get exposure, because there are certain points in
02:38time when you can simply do classic corporate direct lending, and that's sufficient.
02:43But there are other times where that becomes quite dangerous.
02:46So over time, as capital has flown into the asset class, we've become very specific and differentiated in terms of
02:52how we get those exposures.
02:53So we don't – we think there are some pockets of distress coming in private credit, particularly in sort of
02:59the large-cap names.
03:01We don't have exposure to those.
03:03We're in the nichier parts of the market, we're in sort of the mid-market, and we also have quite
03:10a lot of asset-backed lending, which is quite different to what the classic big BDCs have, where I think
03:16there are pockets of distress.
03:17What are the characteristics that you want in a private credit investment that truly differentiate it from highly leveraged loans
03:25or really high-yield debt, broadly syndicated loans?
03:31Well, the first thing you need is a portfolio which is truly diversified, right?
03:36So we're not looking for concentration in this space.
03:39You don't want 25% software?
03:41Absolutely not.
03:42And, in fact, we're very underweight software because, you know, back to this idea of factor risk, the biggest factor
03:49risk today is in AI, right?
03:52So if you just look at the broad indices, you've got AI sitting in IG credit, you've got, obviously, AI
03:57because you're lending to data centers in private credit, you've got AI embedded within the software exposures in private equity,
04:04you've got AI in the public equity stock, so you've got AI everywhere.
04:08And so we've made a very conscious decision to be very specific about where we need that AI exposure, and
04:14it's not in private credit, right?
04:17So you need to be very diversified away from private credit.
04:20Don't fall into the trap of doing exactly what everybody else is doing in that space.
04:24Asset-backed lending, special situations where you're going to...
04:27Do you find that?
04:27Do you find private and credit investments that are away from software and away from data center lending and away
04:33from AI?
04:34About 90% of what we do, or 95% is away from those spaces.
04:38You have to look under the bonnet, right?
04:40So if you just fall into the trap of just doing what the index holds, I think it's quite dangerous.
04:45But there are plenty of opportunities where, particularly in this environment, where you're going to see a lot of distress
04:49in the space, where capital solutions, where you can be quite creative about stepping in, you know, look for good
04:55covenants, look for low LTVs.
04:58Arjun, we have less than a minute here, but I do just want to ask, because you're trying to stay
05:02away from the pockets of distress.
05:03What is it about this moment that you are seeing more distress?
05:06Where's that coming from?
05:08It's coming from a broad sell-off, which is based on risk appetite, right?
05:13So you've got to pull back on risk appetite.
05:15You're going to see people panicking.
05:16You're going to see the distress sales because people are trying to withdraw capital from the space.
05:20So if you actually don't understand, if you're sitting at the asset class level, at the label level, and you've
05:26got broad exposure, we think you're going to see some distress selling in that space, which is a great opportunity,
05:31arguably, to step in and buy, which is what we'll be looking to do.
05:34We're looking to do.
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