00:00Bon Accord Capital partner Brad Pilcher and Brad I think it's worth noting for our audience that Bon Accord is
00:05GP stake.
00:06So you're investing in these actual managers themselves. So you have an excellent view of what's happening in the industry.
00:12As you're looking at these funds, are you having to be more discerning right now?
00:16Are there actual asset quality issues that you're having to navigate?
00:21Well, thank you very much for having me, Danny. I would say in our role it's important always to be
00:25discerning.
00:26But in a period of market volatility like we have right now, we're simply discovering who has been discerning and
00:30who has not.
00:34So what's the split look like, Brad? I mean, are most discerning? That's what I would hope.
00:40So I think when we look at private credit specifically, there are kind of two topics which are correlated but
00:45not the same.
00:46One is what is the fundamental asset quality of the assets that sit within the vehicles?
00:50And two is what's the level of investor belief in those vehicles?
00:53And I think given the headlines he just had as to redemptions in open-ended credit vehicles,
00:57what we're seeing is a loss of confidence in certain retail investors around the viability of these products.
01:02Now, to what extent that persists and to what extent it bleeds into open-ended equity vehicles is something that
01:07remains to be seen.
01:09If we look at the forecast growth in private markets, retail and wealth is forecast to be about 25%
01:14of overall growth.
01:16And so if there is fundamental confidence issues around these vehicles, that could be an issue, especially for the largest
01:21firms.
01:22Isn't it problematic that some of the biggest firms are allowing redemptions beyond the 5% level?
01:31Because as I learned about this product, I heard about that and it stuck in my mind that that's all
01:37they would redeem.
01:38Or that's all at least they had to redeem.
01:41And now if they redeem more, it puts pressure on others and it makes people think it's more liquid than
01:46semi-liquid is supposed to be.
01:49Well, I think it's a balancing act.
01:51At the end of the day, if they're able to support greater liquidity, I think that demonstrates more confidence in
01:54the underlying assets,
01:55which could decrease the level of investor uncertainty around the performance of these products.
02:01Brad, one of the criticisms that gets to the quality of the assets beyond just the perception
02:06is that these giants who have taken on retail capital because of the structure of the funds,
02:10they have to put that money to work right away, which means maybe underwriting standards have fell by the wayside.
02:16Is that a genuine concern?
02:18If so, are you being more in your discerningness of funds, looking for ones that maybe have less of a
02:24retail exposure?
02:25I think it is.
02:27And our focus specifically at our business is on the mid-market.
02:30And I think one of the major disparities that we've seen is given the velocity of capital deployment
02:34required as some of these very large firms have scaled substantially is that probably underwriting standards
02:39have decreased to a greater extent among the largest firms.
02:42And so as a general matter, mid-market firms are less reliant upon wealth and retail.
02:46They're less reliant upon open-ended vehicles.
02:48And as a consequence, we've seen less of deterioration of credit quality in those firms.
02:52Now, with that being said, as always, there are firms who underwrite with strength
02:57and there are firms who have underwritten with more expedience.
02:59I think one of the interesting things we're experiencing right now is private credit since
03:03the great financial crisis has grown by about six to seven times, from about $300 billion
03:07in AUM to about $2 trillion.
03:09And over that period of time, we haven't seen a substantial credit cycle.
03:13And so as Warren Buffett said, you never know who's swimming naked until the tide rolls out.
03:17I think what we will see as the credit cycle advances is we'll begin to see more of a dispersion
03:22of outcomes, more of a dispersion of returns, and we'll understand who is really focused on
03:26credit quality and underwriting and who is not.
03:27Brad, it's interesting to hear you talk about some of the issues being at the larger asset
03:31managers, because we've had a lot of people come on the show and argue the opposite, that
03:34it's the larger ones who survive.
03:36And it's mid-markets faced with businesses that don't get lesser interest rates now.
03:41Maybe they don't have teams that, once they're handed back the keys, can turn around a company.
03:45Why is it the large ones?
03:47You mentioned that pressure to deploy capital.
03:49But how big of an issue is it for them?
03:52What should we be looking out for when the proverbial tide comes in?
03:57Well, I think if I were to broaden the scope, right now in the market, we see what I would
04:00define as four vectors of uncertainty.
04:03One is AI-driven SaaS disruption.
04:05One is the viability of these open-end private markets vehicles.
04:08One is the impact of elevated energy prices.
04:10And finally, is one surrounding conflict-driven uncertainty.
04:13And what we see is we're not sure to what extent each of these will progress and to which
04:17extent to which each of these will deteriorate.
04:19But a lot of the tail risks, a lot of the scenarios really create and pose greater risk for some
04:24of the largest firms.
04:26You know, in terms of opening credit vehicles and exposure to the wealth and retail market,
04:30that's a story that's well told.
04:31In terms of conflict-driven uncertainty, one of the things that we're certainly monitoring
04:35is to the extent that the real disruptions in the Middle East as a result of the Iran
04:39conflict, that could cause some of these large sovereign pools of capital to focus
04:43more on domestic investment.
04:45You know, looking at the same analysis of where growth is forecast to come in the market,
04:48about 35% is forecast to be derived from sovereign wealth, which, you know, has a predominance
04:54within the Middle East.
04:55And so 25% of growth in private wealth, 35% of growth in sovereign wealth funds, both of
05:01those are the areas where the very large firms overwhelmingly predominate.
05:04So if we have 60% of growth in private markets adversely impacted, and specifically in the areas
05:10where the large firms are active, I think that creates a risk.
05:13And as we look at kind of the overall dynamics of how the markets have been performing in
05:17this period of uncertainty over the last six to eight weeks, I think there have been a lot
05:21of areas where we've probably seen a little bit of an overreaction, maybe even in terms
05:25of the pace of redemptions from these open-end credit vehicles.
05:28The one area where I'd say that's not the case is probably in the share price trading
05:32of the large list of alternative asset managers.
05:34This is the one that made the poor, the bank of the Rolling Stones, the one that made everykommenум
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