- 5 months ago
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00:00RDN manages $200 billion in assets, including $137 billion in private equity, $49 billion in real assets, and $14 billion
00:08in credit with relatively limited exposure.
00:10What are you wowing at?
00:11It's just a nice breakdown.
00:13Thank you. No, I looked this up before you came on because I was just thinking, Mark, we came through
00:17this period where everybody tried to go all in on private credit, certain firms.
00:22That's their main shtick.
00:23But you guys have kind of held loyal to private equity being the bulk of your exposure, and you don't
00:29have any retail funds and private credit either.
00:31Are you feeling happy about that mix of assets at the moment?
00:35Yeah, I think first, I think diversification clearly matters.
00:38That's what we're seeing in today's market.
00:40I also think that there's nothing wrong with growing slowly.
00:43We've had a private credit business for over 25 years, which means we're one of the few groups who've lived
00:49through an economic cycle.
00:5060% of all the private credit funds that exist today were created post-great financial crisis.
00:57So have they lived through?
00:58Do they know how to react when a portfolio company goes the wrong way or not?
01:02So I think that's very important.
01:03Can I just ask quickly about that?
01:04Because if we are in this world where there are more bankruptcies, how many funds out there do you think
01:09are able to take back the keys and do a restructuring and work with a company?
01:13Are we about to see some real angst if we are heading for a credit cycle?
01:17It's clearly a core competency.
01:18I do think that there are some groups who will be equipped to do it and some others who are
01:23not.
01:23I think, for example, there are some overexposures to software like you mentioned before.
01:28And that's tricky because where is that market going?
01:31So even if you were to take back a software company that breaches a covenant, where does that company go
01:37and what's the risk that it's facing from AI disruption?
01:39So that's a competency you need to have.
01:42In our portfolio, for example, if you look over 25 years in private credit, we have a 0.02%
01:48loss ratio.
01:50The actual default ratio is a touch higher.
01:52And you'd say, well, how is your default ratio higher than the recovery ratio?
01:56It's because when we take the keys on a couple of companies that didn't work, we actually created value over
02:00time.
02:01So you need to have that competency.
02:03I remember when they took the keys to Anthropic after the – I mean, obviously unrelated.
02:07But after the FTX crash and now, obviously, people who are out money are swimming in profit.
02:15Listen, this morning I saw this Deutsche Bank story.
02:18They are also breaking out their exposure to private credit.
02:21And they're saying, like, we have $30 billion.
02:24We're not exposed to significant risks.
02:26And we're looking at your exposure.
02:28And I thought, wow, it's like 2008 again.
02:30We're all worried about figuring out whose exposure is what.
02:33And then I saw Jeff Gundlach tweeting the same thing.
02:37Like, we're seeing people say, we can't sell these assets to give you money back.
02:43It's like 2008 again.
02:44Steve Major on Bloomberg Surveillance this morning said, oh, it's like 2008 again with regards to private credit.
02:48In fact, I mean, we've heard it from Jamie Dimon.
02:51We've heard it from Lloyd Blankfein.
02:52We've heard it from Mohamed El-Aryan.
02:54Do you see it that way as well?
02:55Do you see those echoes?
02:56Yes and no.
02:57So I think first, if private credit and credit has a cycle, okay?
03:01So there will be an end of the cycle.
03:03Where things get messy and complicated and defaults will pick up.
03:06Right now, if you look through the figures, we don't see it.
03:09And if I compare to 2008, I'll give you a statistic.
03:12You know, we're an existing investor in 1,600 private equity funds around the world.
03:16So we have lots and lots of data.
03:17Our portfolio today, the net debt to EBITDA, 4.25 times.
03:22If I went back to the same statistic in 2000, call it September of 2007, so before everything got really
03:29complicated,
03:30that was like above six times.
03:31The biggest buyout ever done pre-great financial crisis, 11 times leverage, and also a sliver of equity above that.
03:39So the market's completely changed.
03:41There's not as much risk in the system.
03:43And so things are in better shape.
03:44The banks are in better shape.
03:46They have better balance sheets.
03:47So I think everything's more equipped for a cycle.
03:49We don't see it in the figures today.
03:51Default rates are kind of bumping along usual rates.
03:55Software is a question.
03:56Because if, you know, if we're five to seven turns of EBITDA lower in valuation,
04:01because the market's saying they're worth less given what's happening with all of AI,
04:06does that mean there's going to be a credit impairment that's going to come?
04:08Does that mean that their earnings are going to evaporate or slow down?
04:11I'll give you one statistic, which I think is very fascinating.
04:14We look through our software exposure.
04:16You know, we're exposed on the 200 billion of assets that we own.
04:19We're 16% exposed to software, which is, you know, sizable, but it's not 80%.
04:24And when we look through that today, we see about 3% of the 16% that could or might
04:33be
04:33impaired in the short term with what's happening.
04:36But when we look at the beneficiaries of AI, the margin expansion, 1,000 basis points,
04:42and the EBITDA growth, 50% since ChatGPT was launched.
04:47So there's going to be some winners and losers.
04:49There's going to be a shakeout.
04:50That could be for the assets.
04:51That could be for the managers.
04:53I think it's important to be diversified.
04:54So if there is a shakeout to come and it's concentrated on software and you have players
04:59in the industry whose entire funds are surrounded about software, or after COVID, they loaded
05:04up on a lot of very expensive software exposure, what does the shakeout look like?
05:10Is it really confined?
05:11Because I feel like it's a market right now that is really worried, that this could have
05:14an impact on the private credit universe as a whole if that shakeout comes.
05:19I do think that the news flow today and the perspectives on private credit is worse than
05:26the reality.
05:27But maybe the reality will catch up to that news flow.
05:29Are there canaries in the coal mine, so to speak?
05:31But when we look at it ourselves, I think what's going to happen is you're going to have
05:35some groups who are going to manage through it just fine.
05:38And I think some other groups will be in some real trouble.
05:40It's hard to say right now because I think a lot of this is going to change very quickly.
05:44What does real trouble look like, though?
05:45That's what I always struggle with because it's not like they're publicly traded stocks
05:49and you see them crash because they don't necessarily just blow up.
05:53You have to manage the assets that they have.
05:54So what does it look like if a fund is in real trouble with their software exposure?
05:58Yeah, I think if you go back to the financial crisis example we were giving, there was a lot
06:03of some very large assets that were in covenant default.
06:06And if you look at what happened to some of those, many of them recovered and were able to
06:11return a profit eventually, it made for a bad return, it made for a bad vintage, but they're
06:16able to get there.
06:16And it comes back to the point I made before that if you have a private credit fund, you
06:21can really judge that fund at the end of the day.
06:23You cannot say two-thirds of the way through on the seventh inning, this fund has been great
06:28because if you get left with one asset that has not performed well and that goes under,
06:33that can pollute the return for the whole fund.
06:36We've lived through an economic cycle.
06:38We have three or four funds that are fully realized, so we know the importance of that.
06:43But there are some groups who are quite new that we'll have to experience it firsthand.
06:47By the way, this is something we've been talking about a lot of the last couple of days.
06:51It seems like, certainly retail, but it seems like the zeitgeist is, oh, this is a bank run
06:58and we should be able to get our money back, when in actuality, that's not the way these funds
07:03were designed. That's not the way these investments were intended, right?
07:07Do we need to see some discipline at the top?
07:10Do we need to see, like Morgan Stanley, a big bank saying, look, we said 5% a quarter.
07:16It's going to remain 5% a quarter.
07:18Now just chill out, because if the investor mentality starts to understand it the way we do
07:24with 401ks or IRAs, then there wouldn't be this big push for liquidity.
07:29Yeah, I think you have to be careful with making too many exceptions.
07:31And some groups who have stepped in to, you know, redeem more than what the maximum was
07:36for that quarter, that might be great now.
07:38But is that sustainable over two, three, four, or five quarters?
07:42I'm not sure.
07:42I think, but to your point, what's key in this market is really explaining to the underlying investor,
07:48you know, what is the liquidity?
07:49What is the risk that they're taking?
07:51And I think, you know, sometimes it gets buried into a risk document or the last 20 pages of
07:56an offering document.
07:58But that to me is very important.
07:59You have to really educate the retail investor to know what risk they're taking and what a
08:04reasonable liquidity is.
08:05You know, this term semi-liquid fund, that's maybe not a great term for this product.
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