00:00I love people who've been in the industry for a while, seen some different things.
00:03The private credit industry, it seems like nonstop that we've been talking about for several years right now,
00:09it's grown, it's massive.
00:12I'm just curious how, in terms of the evolution from when it first started, when you were first involved,
00:17is this for better or for worse?
00:19My God, it's changed so much.
00:20We took the company public at Fifth Street in 2008.
00:24Since then, everything's changed.
00:26Back then, we were 0.7 times lever.
00:28Today, you're 1.2 times levered.
00:31Almost double.
00:33Yeah.
00:33A lot more leverage.
00:35EBITDA.
00:35Everybody says they're at EBITDA five times leverage.
00:38Today, it's really, I think, seven.
00:40You saw that in an S&P report that basically said, look, you have a lot of ad backs.
00:44So many things.
00:45We can't do it all today, but so many things have changed to add leverage,
00:50to maybe change the quality of the assets.
00:53Then it became very frothy.
00:54We all know it was a bubble.
00:55Lots of assets came in.
00:57Interval Funds opened a new client base.
00:59Now, the bubble's bursting, which is kind of normal for the industry.
01:04Well, that's a big statement because I think people would say we see cracks.
01:09What do you mean it's bursting?
01:10Because it's like, are you saying that there's a lot more to come in terms of redemptions?
01:15Tell me, go deeper in that.
01:18Go deeper into it?
01:18Yeah.
01:18Well, you know, it always happens, the industry cycles.
01:22Back then when we started a company called American Capital, Allied Capital, and GE Capital were the three leaders.
01:29Today, none of them exist, right?
01:31Ten years later, they don't exist.
01:33Right.
01:34GE Capital was lauded.
01:36Amazing.
01:37That's right.
01:38In a big way.
01:38Yeah.
01:38Exactly.
01:38And so that bubble, that created a bubble, and that bubble burst.
01:42And that bubble burst because liquidity came out of the system in 2008, which gave birth to my little company
01:48that we started.
01:49And we got to come in at that vintage.
01:50So today, it's a similar thing happening.
01:53The industry will be here.
01:54Look, it's a good industry.
01:55It's an institutional industry.
01:57So I'm not saying the industry goes away.
01:59It's just, and it has a good purpose.
02:01It's just, it's not going to be quite this big.
02:04What's the cause of the bubble bursting this time?
02:07Well, it's usually liquidity draining from a system.
02:09So that's what you're seeing here in the redemptions.
02:11You're seeing liquidity drain.
02:12Sometimes you see a recession.
02:14Sometimes you see, you know, investors wanting their capital or hoarding capital.
02:18Sometimes in 2008, you see 2020, right?
02:21You see dislocation.
02:21But the investor appetite for capital, what's prompting that right now?
02:25Is it concerns about AI and software, for example, and a lot of the software exposure that these funds have?
02:31Like, what is it that's prompting investors to say, actually, we want our money back?
02:35So I think a smart person on Bloomberg, I mean, it was blank fine.
02:39I was watching the clip, and he goes, you know, what happens in history doesn't repeat itself, but it rhymes.
02:44Right.
02:45It's rhyming, right?
02:46So you never know what bursts a bubble.
02:49But it usually is liquidity drain.
02:51I mean, it can be the AI causing more dislocation, and it could be the pick securities.
02:57I mean, I think the people became very complacent.
02:59You have things called pick toggles.
03:01I know that's difficult.
03:02Or think payment in kind.
03:04So in other words, they really don't collect cash.
03:06They collect more debt.
03:08And so all of these different tools, lack of covenants.
03:12People say they have a covenant.
03:13Covenants, like, think about it brakes on a car.
03:15So you're running a car at 65 miles an hour.
03:17And lately, they've been doing it with no brakes.
03:20So that's kind of scary.
03:21And so all of these different changes in the market, since you and I spoke last, maybe 8, 10 years
03:26ago.
03:27A long time ago.
03:27I know.
03:28Yeah.
03:28It's made a difference.
03:29Well, you know, I think it's a conversation we've had a lot, Tim and I have, certainly around this table.
03:34And just this idea that the industry grew so much.
03:37There were assets chasing deals to be made.
03:40There was just the hope of, you know, the returns of the past that would continue.
03:45And when you have so much money chasing maybe a certain amount of deals, you're going to tend to put
03:51that money into deals that maybe aren't so wonderful.
03:54And that deal that might look great in a zero interest rate environment or really low, okay, but doesn't look
04:01the same way today.
04:02And that's what we're starting to see.
04:04And will interest rates bail them out?
04:06Like I saw you.
04:07Probably not.
04:08Now we think probably not, right?
04:10Now it's forecasted to even go the other way.
04:12So they were hoping, people were hoping, stay alive until 25.
04:16I want to throw something on.
04:18And this is from one of our producers, Talia, who shared this story with me.
04:22And we wanted to bring it up with you.
04:23Sure.
04:24Goldman Sachs and J.P. Morgan are offering hedge fund clients ways to bet against the private credit market.
04:30They have assembled baskets of listed companies with exposure to this space, including European financial institutions and alternative managers,
04:37or alternative managers, private credit market, of course, facing pressure.
04:41We've heard that story before, right?
04:43Betting against something.
04:44Sure.
04:44Do you think that's a telling sign or just or not necessarily?
04:49I think taking a blanket approach is not the right approach.
04:52Yeah.
04:52I hate painting the same brush with everybody.
04:55There are good performers in private credit.
04:58When the fire burns, the forest burns, the new trees can grow.
05:01Hopefully, we get to invest now in the new lower middle market's empty.
05:04Right.
05:04So we get to invest in a very exciting part where they haven't had good returns for the last seven
05:09years.
05:09So you pick up things at a really low price?
05:11Is that what you're saying?
05:12Or no?
05:12We're coming into deals and getting another 400 basis points, which pays for that risk-adjusted return, which wasn't there
05:19a year ago.
05:20Right.
05:20So now is a good time to invest.
05:22So there will be winners.
05:24But I think that that same fire, right, will burn some trees, and there will be some trees that remain.
05:30And there's some really good players in the market.
05:31So what about your portfolio and your private credit portfolio right now?
05:35What are you seeing in there?
05:37Well, the good news is I'm just building it in the last four months.
05:41So it's a good time to build it?
05:43Your private credit exposure you're just building in the last four months?
05:45I sold our Fifth Street to Oak Tree in 2017.
05:49I personally owned about $100 million of Oak Tree stock.
05:52I've sold all that a couple of years ago.
05:54It did very well, actually, a couple of years ago.
05:56That stock has gone down a lot.
05:58And today, I haven't invested at all in private credit.
06:01I just started again.
06:03And we always invest our money at TCG alongside our investors.
06:06So I'm the largest investor in every fund.
06:08I own 25% to 30% of the fund.
06:10So we put our money where our mouth is.
06:11And now, I think, it's a really exciting time to invest in the lower middle market.
06:15Where specifically?
06:16I mean, you can invest across assets.
06:18You can do asset-backed stuff.
06:19You can even do some technology.
06:21One of the companies we invested in goes into a company that uses Walmart and Target and trades with them.
06:28They're one of the suppliers.
06:30And they always mismatch invoices.
06:32So they go and they say, I'll save you 25%.
06:34And if they do, they get 25% or 30% of the money they save them.
06:39And that's a great business model.
06:40And I think AI, going back to your other conversation about AI, is helping them.
06:45Because the smaller companies, the lower middle market, can often be helped by AI to compete with even bigger ones.
06:50Len, real quickly, just got about 40 seconds.
06:52What about in the software space that's been beaten up?
06:54Is that not something you want to touch?
06:56Is it just not in that lower middle market area?
06:58I'm just curious.
06:59I'm not a software expert.
07:0130% of our stuff was technology.
07:03So I believe, even though I'm not a software expert, that about 50% have trouble and 50% may
07:09do very well.
07:10I'm just not smart enough to be in the right 50%.
07:12So we're not going to play.
07:13You want to know what you're investing in.
07:14Try to understand it.
07:15Yeah.
07:16You have to be an expert to invest in software here.
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