00:00So this idea that they're more selective, does that mean that during the golden age of private credit, 2023 to
00:052024, lenders were not selective and they're all lending to the same types of companies, the same profiles of companies?
00:11Yeah, I would say 2023 actually was a great market to be deploying because during that gold, I call the
00:18golden age of private credit, it was really a market dislocation, right?
00:21The broadly syndicated loan market in that first half of that year was really on the sidelines and where you
00:27saw private credit get that S plus 600 spreads as well as leverage getting lower.
00:32And so that was a great market. But what's happened since then, starting at the end of 2023, I think
00:38through kind of 2025, was deal volume has been lower.
00:43LBOs have stagnated. It's really been a depressed environment over the last two to three years.
00:47And so I think there's been a lot of managers that had a pressure to deploy.
00:51And when you have pressure to deploy less volume of deal flow, that typically means you're going to be less
00:57selective or you're going to kind of loosen your underwriting.
01:00And I think that's been where private credit has been because this asset class has been growing.
01:05I think we're finally kind of in a stress test. We're mature now.
01:10And so I think this is where you're going to start seeing differentiation between managers.
01:15You start to see differentiation, but you still get the headlines of like ex-manager faces redemption requests.
01:21Christina, many people maybe thought we were past this point, but you still see it.
01:24Now you're seeing it in different types of vehicles and evergreen funds.
01:27Does this to you show that, you know, we're not working with a clean slate at the moment, that there's
01:32still some stress that needs to be worked out of the system?
01:34I think there is still some stress that needs to be worked out of the system.
01:37And you are seeing it on the retail side, because I think everyone saw what happened in Q1.
01:42And the next question was, what is Q2, Q3, Q4 going to look like?
01:46And I think, you know, when you're in a bull market and it's frothy conditions without really a dislocation that's
01:53been prolonged or deep enough, everyone's been rewarded, right, for investing in and not being selective.
02:01And so I think there is some stress to go through.
02:04So, for example, Sasspocalypse was a big headline a few months ago.
02:08I mean, it's quieter now, but these portfolios still have 20 to 30 percent.
02:13Am I saying that all of them are going to go bad?
02:15Absolutely not.
02:16But it's too early to tell who are the winners, who are the losers within software to really see the
02:23impact on portfolios.
02:24So the evergreen fund that, of course, is being gated, Danny, that you referenced as partners.
02:29And that's just one of the funds.
02:31It's a liquidity mismatch.
02:32Is there a valuation mismatch as well right now?
02:35Yeah, I would say from a valuation side, I know that's been another big headline is, you know, are these
02:40marks right?
02:42What is the cadence of the marks?
02:44How transparent are the marks?
02:45I will say that the marks can be subjective.
02:50But, you know, can there be bad apples?
02:52Yes.
02:53However, the majority of direct lenders are actually really incentivized to be transparent with their marks.
02:59And why is that?
03:00It's a trust currency with your investors, right?
03:04You're incentivized to be transparent because you want those investors to stay with you.
03:09Once you breach that trust, it's really hard to gain that back.
03:12And so I think from an industry perspective, people want to be transparent.
03:16And then the natural question is, well, then why are some marks different for the same bar or how can
03:22that happen?
03:23That can happen.
03:24And that usually happens when the situation is more stressed, right?
03:28And there's more subjectiveness because one manager can be saying, I love this management team.
03:33I think this is going to be a great outcome.
03:35Another manager may say, I don't love this management team.
03:38I don't think this is going to be a great outcome.
03:40So my mark is why.
03:41I do say that that's kind of what makes the market, though.
03:44There is always going to be a level of subjectivity.
03:46It feels like there's less of a market, though, specifically coming from the private equity side because they're still holding
03:51on to so many assets.
03:52We have a lot of creative liquidity solutions now that private credit, a lot of industries, Oaktree included, are offering.
04:00I just wonder what unglues the system?
04:02M&A is robust, but not when it comes to sponsors.
04:05How do we get to somewhere that looks like it did in the past with assets freely moving, being not
04:10just bought but sold to?
04:11Yeah, I think, one, when I think about the boom of LBOs and think about all the capital that came
04:17into play is really during a low interest rate environment.
04:19And so that is hard to replicate today.
04:22But I think what's going to spur LBOs is twofold.
04:25One is the dry powder that folks are sitting on.
04:28I think I've seen some stats around a trillion of dry powder in U.S. private equity funds.
04:33Most of these are in closed-end funds.
04:35You've got to spend it or you're going to lose it.
04:37And so I think there's a vintage issue coming up where people are looking to deploy.
04:41On the flip side, you know, if you have a 2021-2022 vintage fund, you are going to need to
04:46sell because your investors are banging on the table asking for distributions.
04:51And so if they don't sell and get those distributions, they can't raise their next fund.
04:55Now that it's been two to three years, I do think that we're kind of getting to a point of
05:00how much more can you elongate it?
05:02It's getting harder for them.
05:04So very quickly, as we wrap up our conversation here, do you think private market valuations have adjusted sufficiently to
05:10this newer world that we're living in?
05:12Higher rates, greater technological disruption from AI, from whatever else comes in the future?
05:17Yeah, I would say I think from the rate environment, yes.
05:21But from a software environment, it's still, again, too early to tell.
05:24All of these software companies, a lot of them are holding up in earnings, but it's a terminal value question.
05:29We're not going to really see it until they're out to either sell that asset or to refinance it.
05:33We're not going to really see it.
05:34We're not going to really see it.
05:34We're not going to really see it.
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