00:00This has been I mean we've been wringing our hands you know terribly concerned that the sky is falling for
00:08months now ever since Jamie
00:09Diamond's cockroach comment. How do you see the issue. Well look I mean why did anyone think there was a
00:16moat around private credit that
00:17makes it any different than other non-investment grade debt products like the broadly syndicated market or the higher bond
00:22market. Things have
00:23ups and downs. And you know we're in a phase now where private credit which was the darling of the
00:29media and the investment
00:29community for half a dozen years is hitting hitting some bumps in the road. It's not a surprise. And like
00:38I mean I'm old enough to
00:39remember when Drexel went under and everyone said this is the end of the high yield bond market. And of
00:44course you know people
00:45filled that gap and went on to higher heights of AUM and returns and survived pretty well during the 2008.
00:53Maybe it's not an era of like private credit falling apart but it feels like maybe we're just just right
00:58for some
00:58disappointment that returns won't be as robust. And isn't that to some degree kind of the worst time to be
01:06pushing it to
01:07retail investors if we are heading later in the cycle and this is when you're like thrusting this product.
01:12Well it sort of depends doesn't it. I mean when things are unpopular is when it's probably the best time
01:17to actually go in. So it's
01:19unclear. Now look whether or not it's a good idea for retail investors. And again we don't talk about what
01:24retail
01:24investors we're talking about. The people who are in these funds are not the 401k for the plumber and the
01:29electrician.
01:30These are generally speaking very high net worth individuals that are in these funds. It's not the way we think
01:35about a retail
01:36product. There have been stories. And I was talking with Elisa Maul from the Dell family office for example who
01:41said some
01:41RIA came to her retired parents and was like private credit would be great for you. And her reaction was
01:47mom dad no you need
01:48liquidity. This doesn't make sense to you. I would agree that that wouldn't make sense for them. But doesn't that
01:52open some
01:53regulatory risk also. If I'm 32 years old I'm not going to need that money for 30 years. Right. Shouldn't
01:58I get the benefit of the
02:00return. This is the argument. Shouldn't I get I'm not an investment advisor. Shouldn't I get the benefit of the
02:05returns on
02:06alternatives that are available to others. Of course. Look if I'm a teacher or a cop. Right. I get those
02:11benefits because T.I.A.
02:13Cref or Cowper's invest in it as well. And they're by the way lining up to get involved right now
02:19because they see a good
02:20vintage coming after retail got burned in the last couple of bad vintage. Right. As Howard Marks and I made
02:26a good point the other
02:27day that anything that's new tends to get over invested over promoted. OK. And then there's the disappointment phase.
02:34And then there's a normalization phase. It's nothing new about private credit. I mean you had G.G.E. C
02:39.C.
02:39Capital. You had Aries. You had Gallup. You had all you run forever making these loans. The difference was there
02:46was a
02:46pullback by the regulated banks in part because the leverage lending guidance and other factors and a void was filled
02:53just at the
02:54time when you had low interest rates driving middle market private equity. And it's it's it's a great product for
02:59those guys.
03:00No need to go out and do a syndication. No need to get a rating. It's a lot easier. You
03:05don't have the reporting of
03:06liability of a high yield bond. So it makes a lot of sense as a product. Was it over capitalized.
03:13I think if you look at
03:14things today which is not the end of the game just today you might say yes. Were they chasing deals
03:19and perhaps price them at lower yields.
03:22And in hindsight looks like the right answer. There's probably a bit of that. That's to that point when it
03:28was you know
03:29golden age frenzy. What have you. There were stories coming out left and right of all these Cove light deals.
03:34So much
03:34competition that things were overlooked. Cove light is more more prevalent in the syndicated market. The private credit.
03:40But I. But my question to you is just have things changed since then. Has there been any pullback in
03:46willingness to lend.
03:47How standards become more strict. Are they more expensive now. Has there been a change just as there's been.
03:53We just saw that says look we're aiming for a smaller fund. That means demands not there. It's all about
03:58supply and demand.
04:00At the end of the day the more capital you have that are chasing these deals the better terms of
04:05bars are going to get.
04:05When the when that reverses. It's the opposite. First of all. You have to come on Danny's deal.
04:12You have to come on. Every Wednesday she does an hour special on M&A. And you. Well she is
04:17the brains of the operation being a University of Virginia graduate. Yes.
04:20Right. Spoken from a true who. That is. A hundred percent. That is. I won't. I won't debate that. I
04:25want to ask you about any AI concerns because we had a scoop overnight that the chairman of the Fed
04:32and the Treasury Secretary called an emergency.
04:35I saw that. Yeah. Actually secret. Yeah. Meeting with the top. Which was immediately leaked to everybody. Of course. Secret.
04:40Well it was last Tuesday. That's not immediate in this news cycle.
04:44And they warned about the risks of AI. These are the very same risks that we've been worried worried about
04:49for the software companies that private credit is overwhelmingly invested in.
04:53Like some private funds have 30 percent software whereas you have. OK. And then you have some that have zero.
04:58If you look at a two a trillion dollar market it is slightly larger in private credit than in the
05:05syndicated market.
05:06We're not talking orders of magnitude of a multiple. So it is. There is slightly more concentration. Now there's now
05:14a panic on software because of AI. OK.
05:18And clearly there are going to be some commoditized products that will be not not renew their subscriptions. You can
05:25do it in house. But the mission critical aspects of the enterprise software.
05:29That's not going away. So the question is. And nobody knows the answer to this. How fast is the ice
05:35cube going to melt. And does it melt enough so that lenders are impaired.
05:40And the leverage on those companies is not you know at least at the time the loan was made not
05:46overwhelming. So how. OK. When when something's trading in the equity markets at 50
05:52times EBITDA but I lend at five times. OK. I'm not concerned that the multiples in the equity market have
06:00contracted dramatically. I just want to make sure you're at five times
06:03plus. But I wonder if to some degree some of it becomes a self-fulfilling prophecy. And there was this
06:09reporting that this one of the Tama Bravo software
06:12companies that Blackstone its other lenders were basically going to call time on it that they weren't going to extend
06:18anything. And is there some degree where even if the company
06:21is strong there's just enough concerns around software that capital markets freeze up for these companies and just make life
06:26hard. Some do. And then you have someone else who comes
06:29in and says I can get 300 basis points more yield by making this loan. So if you have a.
06:34And this is the end of the day is what it comes
06:36down to. How does the economy perform. How do how do the companies perform. And I'm not seeing a rise
06:43in defaults among the software
06:44credits at the moment. I don't have a crystal ball. I don't think anybody does. It is something you have
06:49to watch because AI is going to be
06:51massively disruptive throughout the economy. Right. And I want to get your take on that. Yeah. Unrelated to private credit
06:57as a lawyer who's been
06:59in practice for a long time. Is AI something that you and your colleagues use to replace the work that
07:07first and second
07:08year associates would normally have done. Like how fast. I don't want to get too in the weeds. But a
07:13lot of things first and
07:14second year associates do are not going to go away. Due diligence closing. So you know. But is there a
07:20category of work that lawyers do that's going to be replaced by AI. The answer to that is yes. And
07:27it's starting right now. We've just
07:29hired a team that's up and running fast. It is something that you have to get ahead of the curve
07:33of if you're going to succeed. And and and I think there are some
07:38people who it's just too big. They don't want to deal with it. Those firms that deal with it head
07:43on and hire the best people. We've got
07:46Stanford engineers working on this. It is going to be OK. Is there going to be a reduction in hours
07:52that lawyers are working. Yes. May the pricing
07:56model have to change. Perhaps all of this is to come. But you have to be on the cutting edge
08:01of this or you're going to have a
08:02problem. I also want to ask about you mentioned Drexel Burnham Lambert. Yeah. Barbarians at the gate has to be
08:08one of the greatest books on the
08:11financial industry. You have written I don't know four or five books now very successfully as an author. OK. I'll
08:15take five. OK. Is this private credit blow up
08:19going to be worth it or is it such a flash in the pan that you won't even that nobody
08:24will even bother. Well
08:25nobody knows at the moment. Right. OK. And there's always a name associated with a crisis.
08:30Aaron Ross Sorkin and Brian Burroughs. You know we don't know Sorkin on Bloomer TV. That's our competitor. Well Howard
08:38Marks put him in the left. Who is going to be the private credit storyteller. We don't know that yet.
08:46And has anyone
08:47raised their hand. Right. How big a crisis is it if no one's saying I mean you people think about
08:51all
08:52day how you're going to attach your name to great historic stories. Yes. We haven't seen that yet.
08:56And you guys are pretty smart. So maybe it's not going to be this historic sort of blow up. I
09:01don't know.
09:01I don't have a crystal ball.
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