00:00Are we still talking about private credit and anxiety?
00:03There's a lot less anxiety.
00:04I'll tell you, the guy that was talking about cockroaches 60 days ago is now opening up a private credit
00:11business.
00:12He's trying to raise a few billion dollars for private credit this week.
00:15Yeah, all right. I assume you're referring to Jamie Dimon there, who has maybe had to walk back a few
00:20things.
00:21But it gets to this idea, though, too, is maybe were we focused on the wrong things, Ted,
00:25when everybody, including the media for that matter, was so focused on those cockroaches?
00:29Yeah, you know, it's interesting. Yeah. Private credit has been around for 20 years.
00:33We started our firm 25 years ago. It's an institutional asset class.
00:38For the last 15 years, it's been an institutional asset class.
00:42About five, six years ago, it became open to high net worth investors and warehouses.
00:49Pushed that product out the door in a big way.
00:51If you look at most of the big Wall Street asset managers, they're all deep in private credit.
00:56And when the product was sold, it was sold as a guaranteed return product.
01:01We've generated great returns for institutional investors.
01:03But that's a buy and hold strategy. It's not a liquid strategy.
01:07So when individual investors want to get out, they're like fish.
01:11They swim in schools. They all come in at the same time.
01:15They all want to go out at the same time.
01:16But was that a failure then in terms of communication?
01:18Because, I mean, you know, speaking of other big banking CEOs, we heard from, well, John Waldron, the president of
01:23Goldman, who kind of addressed this a couple of weeks ago.
01:26The idea of just how the liquidity sort of narrative wasn't necessarily explained in a way that he thought was
01:33appropriate.
01:33It's not a failure in the structure because the structure was the right structure.
01:37Five percent max liquidity threshold every quarter.
01:41That's to protect the investors in the fund.
01:44What happened was it probably wasn't either explained or understood as well with the individual investors that couldn't get their
01:52money out.
01:53For a long time, people put money in.
01:55People took money out.
01:56Everything worked great.
01:57But nobody read the fine print and said it's a five percent limit.
02:01So it's not a bug.
02:02That's a protective feature to protect the investors that are in the fund in case of mass redemptions.
02:08Well, to quote another big fish from Goldman Sachs, we also heard from David Solomon on their earnings call basically
02:14saying that there's going to continue to be noise when it comes to the retail space in private credit.
02:19But, you know, I do think it's an interesting point that these products were functioning as sold.
02:24Maybe there was a misunderstanding when it comes to the end investor and how they were sold there.
02:29But do you think that this sort of dampens the enthusiasm from that cohort of investors, sort of the mass
02:36affluent and the individual investors?
02:38That's a good question.
02:38I don't think so.
02:39Private credit has been sold as a substitute for fixed income for the last five years.
02:44Fixed income is a liquid product.
02:46It pays you four or five percent, maybe six percent on a good day.
02:50That's what institutional investors have come to appreciate over the years and high net worth investors got into it.
02:56Private credit has been paying eight or nine percent.
02:59So what's happened is a lot of the fixed income investors and the high net worth shifted into private credit
03:05and they're not used to the fact they can't get out every quarter or every month like they couldn't fixed
03:09income.
03:10And it's interesting.
03:11I mean, you think about what sort of started that daisy chain of redemption requests that we saw over the
03:18past couple of weeks and months.
03:19A lot of that came back to software concerns about software exposure when it comes to a lot of these
03:26private credit securities.
03:27And I'm taking a look at your notes and you say that the A.I. risk is real, but it's
03:31being misdiagnosed.
03:33Explain to us what you mean by that.
03:34Yeah.
03:35A.I. risk is a real risk.
03:36I can tell you right now that I don't know what's going to happen in three years from now.
03:41A.I. and software makes up probably 30 percent of M&A today.
03:45So there's a lot of M&A loans that are being done for private equity firms, good quality, big private
03:51equity firms doing software deals.
03:53Software that's enterprise software that's embedded in operating systems, high switching costs, both operational, financial, high renewal rates are going
04:03to stay.
04:05Software, though, that is more commoditized where it can be developed easily and there's low switching costs.
04:13That's all at risk.
04:14And that's you're going to see those companies get hurt.
04:18And you've seen it in the market.
04:19Markets down 20, 30 percent on software.
04:22Everyone's trying to limit their exposure.
04:24The big misconception, it's not a credit risk.
04:27This is an equity risk.
04:28Yeah.
04:29People are missing the fact that private equity owns this risk.
04:32We're 20 percent loan to value in our portfolio.
04:36It's private equity.
04:37It's got that 80 percent exposure.
04:39Well, I do want to talk a little bit more about your portfolio, particularly in light of the funding round
04:43that you closed earlier this year.
04:44Something like, you know, 2.8 billion from the LPs.
04:47And I think with leverage and other things, you get that up to six billion dollars.
04:50Does that fit within your traditional strategy of sort of focusing in on the lower middle market?
04:55Or are you looking to maybe expand your strategy over at Monroe?
04:58Exactly.
04:59Yeah.
04:59We're the largest player in the U.S. today in the lower middle market.
05:03We manage about 26 billion in assets.
05:06We've got 520 companies in our portfolio that are Main Street companies.
05:10We do 100 deals a year, 100 buyout transactions that we back private equity firms.
05:16And we put probably about 10 billion in the ground each year.
05:20So I'm in ground zero.
05:22I've got a bird's eye view of what's happening in the industry, which industries are growing, which are shrinking, where
05:28margins are expanding, where margins are contracting, what's happening with reimbursement rates and health care.
05:33I mean, today we love health care.
05:35Interesting.
05:36We love distribution.
05:37We love halo industries, heavy assets, low obsolescence.
05:41Right.
05:41We love software, but we love software in a box.
05:44Oh, okay.
05:45We love software in a box.
05:4795% renewal rates, heavily embedded in operating systems, very high switching costs.
05:53Those are good software companies.
05:55AI is going to make those companies better.
05:57We've seen our margins in software companies increase over the last year because of AI.
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