00:00Let's now turn to the bond market. Akhil Bansal, Carlisle Head of Asset-backed Finance,
00:04examines why bonds have become less reliable as a shock absorber in a new paper, writing,
00:09quote, public fixed income is currently structured, struggles to simultaneously deliver income,
00:14diversification, stability, and capital preservation. The data suggests that what
00:18has worked for most of the past 40 years may no longer do so. So pleased to say that Akhil
00:24joins us now. Akhil, thanks so much for stopping by. Thanks for having me. And I have to say,
00:28I love in this paper that you say, look, I know just for integrity's sake, I am the head of
00:33ABF
00:33at Carlisle, so I need to be intellectually honest. So I like that you start with that. So it is
00:37maybe
00:37an uphill battle to get everyone on board with what you're saying. But what has your research found
00:43about why traditional fixed income is no longer the ballast that it once was? Yeah. So when we've
00:49looked at the research and thought about fixed income, what we have found is that when you look
00:54at some of the things that investors are really looking for fixing them and the role of the
00:57planet's portfolio, that today suggests that there's been a change. And I think in this new
01:02inflationary environment, what you're seeing is first, that diversification benefit that fixed
01:06income is supposed to provide, that doesn't seem to be really playing out. For example, when you look
01:11at the correlation between public fixed income and equities, if you look at that 2010 to 2020 period,
01:17it was about 0.13. If you look at it from 2020 to today, it's closer to 0.63. That
01:25higher correlation,
01:26we think is a structural change. And I think it's really explained by the inflationary
01:31environment we're in. Inflation negatively punishes both equities and public fixed income.
01:36And so I think what we talk about in the paper is how private ABF is not looking to replace
01:41fixed
01:42income, but play that role of generating that yield, that diversification that historically public
01:47fixed income has played. And there's the chart of correlation there. You can see it has just spiked
01:51up it and is just at 0.63 on the measure that we're using at the moment. I do wonder,
01:57okay,
01:58so it's this inflationary environment, but how much of it is also the huge amount of issuance coming
02:03from tech players that we have seen at this moment. The peak was in 2021. We've already issued 88%
02:10of that amount so far. And we're only just halfway past the year when it comes to tech bonds. Is
02:15part of
02:15it that too, that this market is just being dominated by big tech players, much like the equity market is?
02:20Yeah, absolutely. I mean, when you look at someone's IG corporate bond portfolio, what you'll find it's
02:27concentrated in the three same sectors that you'll find your S&P 500 portfolio is in. And even that's
02:33misleading because when you look at technology bucket, what you'll find is companies like Alphabet
02:38and Meta are actually categorized in your communications or your consumer cyclical bucket. So when you
02:45actually think about them being quasi tech players in Atomon, you find that you're much more concentrated
02:50into this AI and tech boom. And even the transactions that are coming out of that,
02:56whether it's the data center financings, the chip financings, if you look at the ultimate form of
03:00credit support, they're coming back to a very small group of corporates. And so I think the
03:06diversification is visible, but some of it may not even be that visible unless you really open up the
03:12hood. So given these two trends, inflation, which is sticky, and the increasing issuance of tech
03:17players for this bond market, can traditional fixed income ever regain its portfolio position
03:23as something of a shock absorber? Or do you just think that that moment's gone, that we are in
03:27trends that are going to be difficult to break, and therefore this change is more permanent?
03:31Yeah, I think when we think about traditional fixed income, it still has a home in the portfolio.
03:35Like it's liquid. It still delivers a level of yield. But if you're an institutional investor
03:41and many pensions who are looking for an actuarial 7% to 8% nominal return, you're looking for that
03:47non-correlation. What we suggest is that looking into the private asset-backed finance markets where
03:52you have ultimate drivers that are not correlated to corporate earnings, that's where you can find that
03:58yield, where you can find that diversification, where you can find that stability.
04:02And I know just last week, for example, we learned of a Carlisle deal on farm loans, for example. So
04:07that would feel incredibly uncorrelated. You talk, though, that bonds still have a place considering
04:11they're liquid. How do you treat the illiquidness of asset-backed finance and asset-backed credit?
04:17What sort of premium should investors be needing in order to accept the liquidity profile of the
04:22asset class? Yeah, I think when you think about illiquidity premiums, it needs to be on the order of
04:27hundreds of basis points, we believe, in order to sufficiently compensate you for that illiquidity
04:34risk. I also think it's about the structures that you hold those investments in. And I think
04:39what we're very focused on, Carlisle, is being able to very clearly explain to our investors the type
04:44of liquidity they can expect and not expect when they come into these investments, because there
04:48is a trade-off there when you do come into these illiquid investments.
04:51By the way, again, I mentioned the Carlisle deals that you're doing. They are incredibly diverse in
04:56different asset classes. How much of this industry, though, is maybe making the similar pitch,
05:01but doing asset-backed finance that still is within this AI ecosystem?
05:05I think there is some of that going on, certainly. I think when you cut through some of the chip
05:10financings and some of the data center financings, ultimately what they're supported by are cash flows
05:15and leases, ultimately, to investment-grade counterparts, and many of those being the
05:20hyperscalers. And so there is an element that you may be secured by an asset, but ultimately what
05:26supports that asset is an obligation or a cash flow from an investment-grade corporate. I think when
05:32you look at Carlisle, some of the things we're doing is we don't look at AI monolithically.
05:37We think about diversification. So one of the areas we've been focused on is around energy and
05:42natural gas because we think natural gas is going to become the next currency of AI. When you think
05:47about all the CGT power plants that are being built to power these data centers, well, they're
05:52going to need natural gas. And that's one of our power allies is energy. So we have a venture with
05:56diversified energy where we've been going and acquiring mature cash-flowing, mostly natural gas
06:02wells, hedging them and securitizing them as a way to get that exposure and benefit from those
06:08tailwinds. I mean, one of the pitches, and yours sounds very different from we've been hearing from some of
06:12your other big publicly traded peers, is that they are less asset managers now than just an AI company.
06:17This is a pitch that Blackstone, for example, has been making, saying we're a really cheap way to be
06:21playing AI, sort of trying to hint that they should be trading maybe at tech multiples instead of asset
06:26management multiples. Do you think that this industry does have a concentration problem itself, not even
06:31the traditional bond market, but for private capital, do you think for many players that they are just
06:35getting concentrated too much on one specific theme of the AI ecosystem?
06:40I think that when we think about portfolio construction, and one of the things that sticks
06:45with me is something our head of credit says, which is diversification is the only free lunch.
06:50And when you think about diversification, you need to be able to peer through that when you look at a
06:54transaction structure and truly understand what is supporting my cash flows, what are the risks of
06:59those cash flows, and where is it coming from? And I think when we take that approach, what we find
07:03is there's
07:04many areas beyond AI that you can still earn very attractive returns. You can benefit from what's
07:10going on from a macro perspective without having a monolithic view of saying, I am singularly one thing.
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