00:00You've got operating control of at least 18 businesses out there employing roughly $100,000.
00:0322. 22, not the short-changing.
00:05But that gives you a much different perspective.
00:08I mean, it's one thing to just sort of put your money in and hope for that return.
00:11It's another thing to actually be an operator itself here.
00:14What is the health right now that you're seeing in the credit space?
00:18Lots of pressure.
00:20You know, the way, and I remember we talked about this last year at this conference,
00:24last 24, 2024, 2025, pressure is being amped up, high interest rates.
00:33People can't make them.
00:35Default cycle picks up.
00:37Over the last four months, last five months, you have an oil shock reverberating through.
00:44Unclear just how deep.
00:46And at the same point in time, software has accounted for 20% of high-yield portfolios.
00:53It's software that parts of it, parts of software, existential to it.
00:59Is the software concern, to the extent that we've seen it play out in the media, is that appropriate?
01:05Because it seems like you'll hear it from some companies saying, look, you know,
01:09we're probably a lot sickier than even with AI out there than we would be without it.
01:13I know there are some other software companies that just have awful business models,
01:17but they were probably going to go away anyway.
01:19The software concern is really appropriate.
01:21And look, and by the way, there's nothing systematic about it.
01:25Okay.
01:25It's like, you know, the telecom bust in 2001, 25% of telecom companies defaulted.
01:34Oil and gas crash, 2014, 35% defaulted.
01:38So if there are 15%, 20% defaults in software, it's concern, yes, systematic, no.
01:47Systemic's a whole different thing.
01:48So the concerns in software warranted at this point in your view.
01:53I wonder if you see any opportunity in software, because whether those concerns are warranted or not,
01:59you have to imagine maybe there's some babies that have been thrown out with the bathwater.
02:03Too early.
02:04Too early.
02:05So, and I'll just give you our perspective.
02:09For the last two years, there have been busted software companies.
02:13We have looked at them.
02:15You know, we've had a team of people looking at them, studying them.
02:18We've hired technology and consultants and advisors to help us.
02:23And what we find is when software goes, it goes bad.
02:27And it's not just a gentle decline, it goes off a cliff.
02:31The business model gets outdated.
02:34So when we look at this software cycle, we're in the software default cycle.
02:40We think it's going to take nine months, 12 months to figure out which ones are really popping.
02:48So, and I think to our point of view, yeah, there's product out there, but we're just being very careful.
02:54Yeah, I was wondering, I mean, what kind of stance do you take in that sort of environment?
02:58Should we see defaults really pick up when it comes to the software side?
03:02I mean, is that an environment where you can be offensive or maybe one where you'd want to be a
03:06little bit more on the defensive?
03:07You know, there's one thing you said, if I could perhaps correct.
03:12Please.
03:12Yeah, please humor me.
03:14Default rates in 2024 and 2025 are 6% a year.
03:20Those are Moody's default rates.
03:23Two years, back-to-back 6%.
03:25Those are big numbers.
03:28In COVID, it was 9% for three months, and then it was gone.
03:33So we come into this cycle today already with lots of headwinds, lots of pressure.
03:40So everything which the oil shock does, software reverberating does, it just compounds it.
03:48Yeah.
03:49I think it's caution.
03:51Caution's merit.
03:52And by the way, the opportunities, please, in a good year, we'll invest $6, $7 billion a year.
03:58We've got about $22 billion.
04:00Well, let's talk about those.
04:01We've invested a billion and a half in the last six weeks.
04:05In the last six weeks.
04:06Don't annualize it.
04:07Okay.
04:08Don't annualize it, right?
04:09I've already done it, yeah.
04:10But it gives you a sense as to what's starting to come on earth.
04:15Well, then I am curious.
04:16I mean, you recently, what was that, your special situations, your fifth fund on the special situation side.
04:21That has a pretty broad mandate.
04:22It does.
04:23So give me a sense here as to, in this world we're in right now, where you go after opportunities.
04:30I mean, is there a focus to it or what?
04:32Oh, absolutely.
04:33Yeah, okay.
04:34Right?
04:34So software, obviously, is not a focus.
04:36Okay, yeah.
04:37What we find is the contagion caused by everything I said.
04:42So if you look at anything associated with home building or building products, it's in the tank.
04:49Chemical businesses, once in a 20-year down cycle.
04:53Consumer brands in trouble.
04:56Okay.
04:56Europe.
04:57Europe is about...
04:58You put a lot of money into it.
04:59We have.
04:59Yeah.
05:0030% of the overall high-yield market struggling.
05:04Struggling economically.
05:06West Germany probably going into a recession.
05:09Real estate as an asset class.
05:12Slow-moving tsunami over the last two, three, four years.
05:17It's picking up speed as we kind of go.
05:20Right?
05:21So when we...
05:21This is not...
05:23Romain, it's not pockets of opportunity.
05:25It is like large chunks of industry and businesses are in trouble.
05:31But you rattle off quite a few areas.
05:32But the idea you see that as opportunity seems to suggest you think the cycle that we're in is a
05:38cycle.
05:38That this is a down cycle and that these will rebound.
05:41Yes.
05:42Okay.
05:43When we invest there, Romain, we look at it even a little...
05:47We add a little something.
05:48Okay.
05:49Sure, we think they'll rebound.
05:50But we think a lot of these businesses, which get troubled, there's a lot of upside operationally by going in
05:59and fixing them.
06:00So when we are buying, we're not just buying for the rebound.
06:04Yeah.
06:04We are saying this is an under-managed business.
06:07Let's fix it.
06:08It's got a lot of upside.
06:09The rebound is just extra, if and when it comes.
06:14I do want to just talk a little bit about potential ripple effects here.
06:18Because I'm taking a look at an interview you gave to some of our colleagues on the print side.
06:22I want to bring it back to software.
06:24You talked about how this software pane is going to taint everything across credit.
06:28And with that in mind, I mean, we just got through a first quarter where the redemption quests from some
06:33of these BDCs were really interesting to look at.
06:37And I wonder, you know, should this continue, would you expect to see more quarters of these types of levels
06:42of requests to pull money?
06:44I think our sense, when you see this happen with these open-ended funds, it's not one and done.
06:53When people put in redemption requests and they can't be fully redeemed, it creates even more redemptions as you go.
07:01So, I think our sense would be 12 months, 18 months for this cycle to work through.
07:08So, it's not over.
07:09So, it's not over.
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