00:00I do want to talk about the state of the private credit market. There's been a lot of hand wringing
00:04over exactly what's going on behind the scenes. But from where you sit right now, are things
00:09improving right now or are we still sort of in this sort of downtrend of worry? I think we're
00:14still in the downtrend, but I want to be very careful that we keep this all in perspective.
00:21This is not a global financial crisis in the making. I think this is asset class specific
00:28and I think it has a lot to do with the end buyer of private credit over the course of
00:35the last 10
00:35years. I do not think this redemption pressure is coming from institutional investors, insurance
00:40companies, pension funds, endowments, foundations. It's coming from private wealth channels that
00:45probably sold product to an end user that does not understand liquidity provisions that are
00:53associated with those products. There are some people that would say when they see some of these
00:57BDCs enforce those 5% caps, that that is actually a good thing. And we should point out, this isn't
01:03so much gating. This is sort of the terms of what the original agreement was. But there was a lot
01:06of
01:06talk as to why limit, why not just let folks get their money? Is there an argument to be made
01:11for
01:11holding the line on that 5%? Well, I mean, it prevents the proverbial run on the bank, right? And
01:16so by
01:17capping redemptions, you can have an orderly exit of investors from a particular vehicle. Now, having said
01:23that, I think the strategy and the vehicles end up with a black eye. And I don't think investors will
01:30forgive for quite some time that it's going to take them months, maybe even years to get their capital
01:36back when they thought originally that this was a somewhat liquid asset class. Well, how does this
01:40impact those investors who maybe didn't necessarily understand what they were buying? How does that
01:45impact the industry going forward if people who were sold these products are kind of racing for the
01:51exits and sitting on losses? Well, I think you're still seeing an escalation and escalation in
01:56redemptions, right? So I think it's maybe $20 billion in the first quarter of 2026. I think
02:02it's $22 to $24 billion in the second quarter of 2026. I think you're going to continue to see
02:07people asking for their money back from private credit managers. Unfortunately, there's nothing they
02:14can do. Right. At the end of the day, if they need liquidity, they'll probably have to source
02:18it elsewhere. I think the fundamental problem here is that you have really a burgeoning secondary
02:26market. But the secondary market can only absorb. But so much of this product and the asset class
02:31has grown so fast since the global financial crisis. There's really no end buyer for as much product as
02:37they would need to sell to give back as much as 40 percent of the capital in these vehicles.
02:42A new reference of black eye. Is there any type of reputational damage for some of these funds?
02:47Absolutely. I think Romain was mentioning earlier Blue Owl as an organization. I think they've become
02:54the poster child. To some extent, Cliffwater has also become the poster child. I think Blackstone's so
03:00big that it's difficult to sort of put them in that category. But I do think that the asset class
03:07itself as well as the major players in the asset class will suffer. And look, this is their own doing.
03:14At the end of the day, they took in capital too fast and had questionable opportunities in which to
03:20allocate that capital to, which has now led to performance issues within the portfolios, which has
03:26led to people wanting to exit the asset class. When you raise capital that fast, you lose your valuation
03:32discipline. You lose your investment discipline. You worry more about putting the money to work
03:36than you do where it's actually going to work. And I think that's what's happening
03:40with the larger managers in the private credit space. Having said that, you have smaller managers
03:45that are continuing to be more thoughtful and prudent about how much capital they take in.
03:50And they're sticking to those areas of the market where it's a much safer investment opportunity long term.
03:57I do want to broaden this out a little bit. And I am curious as to just what allocation looks
04:02like overall across the board, across various asset classes right now. We're coming off the
04:06first half of the year where at least equities in the U.S., more or less set record after record,
04:12if you will, a bit of a pullback over the last few weeks. Even in the fixed income space,
04:16you did public fixed income space, you made out pretty well. Credit spreads are tight and you're
04:20getting pretty decent yields in the government debt market right now. So how do people sort of balance
04:25things out for the rest of the year? Look, I think the major question that people are dealing
04:29with from an asset allocation perspective is what to do about their equity portfolios, right?
04:35And you started really in the beginning of May to see a divergence. You started to see performance
04:41leadership from smaller cap stocks. And so when you think about from May to now, you've got roughly
04:47a 16 or 17 percent gap between what I'll call sort of the mag seven and the Russell 2000. And
04:56so that
04:58that reallocation that's occurring. And to some extent, we're seeing a real unwind and semiconductors
05:04right now as they're starting to accelerate that reallocation is probably the biggest decision that
05:10investors are making right now is the reallocation among the equity components of their portfolios.
05:15When you look at just the AI landscape overall, do you still see value in some of these publicly
05:20traded names? You know, I'm sticking to the strategy that we started with, you know, almost
05:27two years ago. And so the names we like two years ago are the names we like today. If you
05:33look at a
05:33company like Micron, Micron, I think over the course of the last seven or eight years has had 10 days
05:40where
05:40the stock has traded off as much as 10 percent. And then you look out three months, it's up 15
05:45to 25
05:46percent. And so I think that investors just have to understand that there's good volatility and there's
05:53bad volatility. The volatility that we're experiencing today is leading to higher highs.
05:58Right. It's when it leads to lower lows that perhaps it's time to think about,
06:02you know, a rotation out. But is there any concern about the rotation or broadening in the fact that
06:08a corning is up 273 percent in the last 12 months? Caterpillar is up 142 percent. Like these are
06:14companies that are getting the AI bid because there's so much demand for real assets. Sure.
06:19But they're getting a valuation expectation that this is something that's going to continue for
06:22five more years now. Look, I think that the AI revolution is probably one of the biggest
06:27technological revolutions we will experience in our lifetime. And so I don't think that this is
06:32a story that ends abruptly look in the process of getting to a set of winners. There will be a
06:41lot
06:41of roadkill and a lot of capital will go up in smoke in venture capital as well as in the
06:47public markets.
06:47But I think we still have another five to 10 years of runway in this particular trade. You just have
06:55to
06:55be prepared to stomach the volatility. And at a certain point, it doesn't become about the
07:01hyperscalers or about semiconductors. It becomes about picking the winners within those categories.
07:08And then that becomes sort of the second phase of this particular trade in our perspective.
Comments