00:00Let's talk about this disparity. We've had you on in the past, and you talk about this idea,
00:03particularly for the assets, for the lending that you guys do over at Churchill,
00:08that you're not seeing the same stress, you're not seeing the same defaults as maybe what we're
00:12seeing in the broader market. So kind of square the circle with sort of that 6% number that Fitch
00:17put out across those 1,300 issues. And what's under the hood at Churchill Asset Management?
00:23So it's a great question, a timely question. So I think I mentioned last month when we were here
00:27that the lead, which is coming out as a rebrand, we're actually going to be doing a webinar on
00:35defaults, and we're going to have the top four rating agencies in the middle of September each
00:39talking about what they're seeing, including Fitch. And so what you discover is everybody's
00:45methodology is different. So Fitch, as an example, includes other things other than actual default
00:50rates. So, for example, when they see a restructuring or they see pushing a maturity or they see
00:57a PIC loan, for example, they'll include that as if it's a default. And it's a reasonable assumption
01:03because the lenders are doing something to change the dynamics from the original deal,
01:08but it actually hasn't defaulted yet. So they'll explain this methodology and say, look,
01:14we think it's a risk and we see the risk is a little higher. And so hence the 6%
01:19that they have
01:20is a lot higher than some of the others. So we want them to come on and explain that.
01:23Now, what we're seeing in our portfolio. But that's not just semantics. So, I mean,
01:27I mean, that is a technical default if the terms change. That doesn't necessarily mean
01:30it's a washout. It's just something changed. And I guess they have an obligation to flag that as a
01:36default or whatever in the market. But then some of the other agencies don't look at it that way
01:40because they're actually saying, you know, is the company in default of its payment or are the
01:46lenders taking a look and saying, you know what, we're going to restructure this to allow the
01:50business to recover. And in some cases it helps them recover and then everybody gets their money
01:55paid back. But it's important to understand the differences. Like why is one saying 6% and one
02:01saying 2%? So that's important. And in our portfolio, you know, we're not seeing that because these are
02:07core middle market companies, as we talked about before. And we're seeing kind of the same level of
02:12risk that we've been seeing for the last 24, 36 months. Now, interest rates have come down in the last
02:18couple of years. So that's helpful. But look, interest rates are going to start to come up again.
02:22And so I think all investors are thinking now is what is in this portfolio such as if interest rates
02:27go up, there may be more risk. So when you say interest rates go up, is the expectations that
02:33they'll go up significantly or we're just going to, you know, bounce around? I mean, wherever the
02:36benchmark 10 years right now, we're just going to bounce around that level, you know, four and a half,
02:40five percent. If you think about the Fed now kind of saying that we're going to have at least
02:44one or two raises hikes between now and the end of the year. So if you if you're thinking about
02:49a nine
02:49percent unlevered yield on senior credit right now, you're you're talking kind of nine and a half to
02:5510 percent by the end of the year. All right. So investors are looking at that and saying, well, that's
02:58attractive. Now, it's not the 12 percent that we had in the golden age of private credit. But I think
03:04this is a
03:04little more sustainable. Talk to me about the difference between what we're seeing on the tech side of
03:10lending with particularly AI data center stuff and the non AI data center tech stuff. Is there a
03:18significant difference in how those things are being valued where the multiples are, et cetera?
03:22Well, right now it's interesting because the non tech is getting valued a lot higher because since the
03:28focus on AI and portfolios is so high, when private equity investors are looking at businesses right now,
03:34the old economy, ground level businesses that we kind of traffic in are getting almost as high
03:41purchase price multiples as some of the tech businesses. And I think tech is evolving. That's
03:46one of the beauties of it. It evolves all the time. And one of the things in senior credit, which
03:51is
03:51lower risk, is that we're not looking at high growth businesses. We're looking at steady growth
03:56businesses. And I think that difference that you mentioned between, you know, AI and regular way tech
04:01is something that's going to be evolving over time. And we're looking at it as with any other sector,
04:07we don't want to make sure that obsolescence risk is kind of our prime focus. Well, when we talk,
04:11so when obsolescent risk, I mean, the idea is, okay, halo, right? What are we talking like?
04:16Yes. Pest control, right? HVAC, you know, on and on here. Vet centers. Vet centers. Vet centers.
04:24Vet centers. Yes. If somebody has a dog, I could tell you, you guys get a lot of money out
04:28of me one way or the other,
04:29just made an appointment over the weekend. But is there a sense here? You don't worry about
04:34that's economic sort of not necessarily proof, but economic, economically resilient as well.
04:39Yeah. That's what we discovered over 20 years is that these businesses that are lower level,
04:45ground level, old economy, service related businesses tend to be more resilient. For example,
04:51they, they tend not to be impacted by tariffs. They, they're less impacted by some of the technology,
04:58AI, for example, pest control is not typically involved with that. And so,
05:03and there are 300,000, two to 300,000 companies, middle market companies in the United States.
05:09Two thirds of them are kind of in the service sector. And so private equity firms that only own
05:14about 5% of the total have so much white space right now to look at. And they're looking at
05:18these
05:19businesses and saying, over time, tariffs and AI and COVID and all these macros that have roiled the
05:26upper markets are not affecting these smaller companies. I do want to get your thoughts just
05:30about how the industry has changed and more from the perspective of the investor side. And, and maybe
05:35I'm making too much of this, but you had this newsletter product called Lead Left. Correct. You
05:40dropped the left. Yeah. Is there a reason for that? I mean, Lead Left has a very specific
05:44connotation in the world of finance. Yes. Is that sort of a nod to something or is that just you
05:49just
05:49decided? No. Well, that specific reference is something that you and I would probably know
05:55about, but others might not, particularly the generation that doesn't understand about what
06:00old tombstones were in the Wall Street Journal, for example. Right. And the lead left was the lead
06:05underwriter on the top left of the tombstone ad that signified they were running the deal. Yeah.
06:11You don't see that in the journal anymore. And so we just thought that the reference was confusing.
06:16There are some of, you know, my personal contacts that would get this and think it was a political
06:20reference, which it's not. It's an investment banking term. But as we broaden the scope of the
06:25lead, which I think is an even more simple and powerful title going out to now our Naveen clients
06:33and in the wealth channel, as well as institutional, it's what we're trying to do is to sort of broaden
06:37the understanding of the asset class because private credit right now has shown so much staying power.
06:42And the thing that's so attractive to institutional investors, as you know, over the last decade and a
06:48half, is equally attractive to the wealth investors, but they don't understand it as well because they
06:55don't have the experience that the institutional market has had. So with the lead coming out, what
06:59we're trying to do is to explain the asset class in a way that the average investor looks at it
07:05and
07:06say, OK, I understand. It's kind of like my house. I'm comfortable with the value of my house. I know
07:10it's not
07:10going to trade every day. Same with private credit. It's stable. It's going to provide me
07:15with income that is a higher yield than public credit. And it's going to allow me to not worry
07:22as much about these macro issues that we've been talking about because these businesses are a little
07:26more insulated, a little more resilient.
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