00:00Jeff Aronson the co-founder and managing principal at Centerbridge
00:03Partners joins us now to talk about how investors should be assessing the
00:07risk. Jeff thank you so much for joining us. And I know one of the
00:10points that that you've made before is that look this is a space that's
00:13grown tremendously and some of the safety and due diligence has maybe
00:19been put to the side for deployment. Can you just lay out just how bad some
00:23of that has gotten how weak some of the underwriting has looked. I think
00:27that's right. Private credit has seen tremendous growth. I mean whoever
00:31heard of the phrase private credit 10 years ago or 15 years ago it wasn't a
00:35thing. And now it's one point eight trillion dollars. So do I think that
00:40poses a systemic risk. No is one point eight trillion dollars a boatload of
00:45money. Yes. And I think what's happened over the past several years that the
00:50emphasis in private credit has been on growth grow grow grow. But things that
00:56credit investors should care about like quaint terms like safety or risk or
01:02getting your money back you don't hear that much about. And I think what you're
01:06seeing now is a recognition by investors that you know it's not going to grow to
01:12the moon and a golden age doesn't last forever. And like all credit products it's
01:18subject to a cycle. And it's not pristine it's still good. Private credit is still
01:24good. It's here to stay. But it doesn't mean that every single loan in every
01:29single portfolio is perfect. It's just it's just not the case. First of all I
01:33think you're 100 percent correct. I even I used to go to super return and I
01:38didn't really get private credit until the New York Times piece on Blue Owl. You
01:42know the origin story piece. But isn't this an asset where especially for retail
01:48investors where they're just going to their money's in there and that they stay put.
01:52They get the return collecting it over years. It's not like something they're
01:56going to be trading or they ever expected to trade. And those returns for the most
02:00part are still safe. Right. It depends upon the underlying quality of the
02:07portfolio. And it's going to vary according to manager. Some managers have been
02:11doing this a long time. They totally get it. They understand risk and other managers
02:17perhaps you know a little less experience. No one's really been in a cycle in a long
02:23time. The last credit cycle absent COVID was like a long time ago during the GFC.
02:29This asset class has largely not been tested through a cycle. So I think it's
02:34inevitable. Cycles have not been abolished. They're not going away. It's impossible to
02:39predict when they will come. We've seen a lot of late cycle behavior. Such as risk
02:48premiums have risen. People talk about pick loans. People talk in software about annual recurring
02:54revenue loans. People develop new metrics when traditional metrics no longer suffice.
03:00And you've seen some of that excess. It doesn't mean to your point that private credit is like oh
03:05my gosh it's going to be a disaster. I don't think that's going to be the case. Are there going
03:10to
03:10be issues? Absolutely. And whether it's appropriate for retail investors they really have to understand
03:17like all investors what you're investing in and deeply understand the risk. This whole notion of
03:23semi-liquid always it's like does it mean like kind of liquid sort of liquid or it's really not
03:29liquid when you want your liquidity which is exactly what's happening now. Again nothing wrong with
03:34that. But people have to understand that going in. Is this a shakeout. And I mean in terms of maybe
03:40we exit this period with less managers than we entered it or managers who look more like a zombie
03:46fund. Do you think that's kind of the track that we're on. I don't know if you're going to see
03:49a shakeout per
03:51se. I think that investors will start to differentiate between managers who understand who have long track
03:58records who think about these quaint concepts like risk and safety versus growth. I think a lot of
04:06these businesses where you've you know you guys have talked about all these redemption requests coming
04:10in. I think it's hard to grow from that. Imagine if you're an investor and you see your fund has
04:17been
04:17subject to 10 or 15 percent or even higher redemption. Are you likely going to put new money in.
04:25If it's your own money recognizing that they may take my money and pay out someone else.
04:31So it's going to take time though. It's really early. Is this really unfortunate timing for those
04:35types of funds because it's been said to Matt and I before that like this could be a really good
04:39vintage. It's not as competitive because of some of those dynamics and banks also aren't as present
04:44in the I agree. This is if you're an experienced investor. This is the exact moment to lean in
04:51when everyone else is running. Yes. You're supposed to if you have the capital and the courage of your
04:56convictions and the experience here's and you're supposed to go at higher rates also with increased
05:03underwriting standards. You know retails out the door and they'll sell to you at a discount if you have
05:08institutional money that's that knows these managers. I completely agree with that. But again most
05:14people we're going to read a headline and say I better run and the in the right instinct is
05:21what how is how are things fundamentally and if things are okay you're supposed to lean in.
05:25It's it's hard to do.
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