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00:00I want to first get to the investment. And Elliot, let's talk about this investment. What does this equity investment
00:05specifically do for you? It has to do with like operations, doesn't it?
00:08It does. The important thing for us is being able to go into more asset classes and really invest alongside
00:13of our partners. What we do, as you mentioned, Carol, is provide capital as well as access as well as
00:21several different things to the consumer lending market.
00:24What we're ultimately looking to do is to connect. A massive market, by the way. Huge market. $200 million in
00:29unsecured consumer last year.
00:30We're trying to connect, at the end of the day, big investment firms like a Fortress with really large consumer
00:37lending firms like a SoFi.
00:38Yeah, Bob, come on in on this investment. There's a lot of noise around credit markets, around private credit right
00:43now in particular.
00:45You have a very diverse portfolio at Atlas Merchant Capital. Why make this investment right now?
00:50You know, we have seen a real unbelievable development in the credit market since 2008, the great financial crisis.
00:59And I think so much of credit ended up on bank balance sheets prior to 2008, particularly outside the U
01:08.S.
01:08You know, the big banks in France, the big banks in the U.K., all the credit was on the
01:14bank balance sheets.
01:15And we have seen a real development. Some call it private credit. You know, it's edge focus. It's Fortress.
01:23There's so much diversification. And I think that's why we have had such a long period without a real blip
01:30in credit.
01:31It's become, you know, it's a real credit to the U.S. capital markets.
01:36I think in terms of consumer credit, and I saw this, you know, through the lens of Barclays.
01:41I saw it very much through BarclayCard, which dominated the credit card and consumer credit market in the U.K.,
01:49is, again, it's much more diverse.
01:50It can be spread a lot.
01:52And I think we have originators of consumer credit like SoFi in edge focus.
01:58We have capital that likes to invest in consumer credit like Fortress.
02:04And I think one of the things that we can do together is we can find more originators.
02:10We can find more investors.
02:13And, you know, when we look for an investment, you know, you want to have someone that has a unique
02:18position in their market.
02:20That's edge focus.
02:21You want to find someone that has strong leadership.
02:24That's Elliott and the team.
02:26You want to find a business that's profitable.
02:29But most importantly for us, you want to find a business that has both a willingness and ability to grow.
02:35And this can be a significant increase over the next three, four, five years with access to capital to grow
02:42this business.
02:42So it's unusual in financial services to look at investments where they can be multiples of where they are today.
02:50But what Elliott and the team have built can be multiples of this.
02:54It's a big market.
02:55You mentioned unique focus.
02:56That Elliott has and his team.
02:58What is that unique focus, Elliott?
03:00Because the consumer credit market, a lot of players, a lot of folks in there.
03:03What is it that you guys are doing differently?
03:05And I'm curious then, Bob, like what you think they're doing differently that's appealing.
03:09We do three things really well.
03:11We have access to a ton of data, our modeling approach, and then access to various other consumer lenders.
03:16From a data standpoint, hundreds of billions of data points in the U.S. consumer across lots of platforms.
03:22We know really well at all times what the consumer is looking like.
03:24Where's that data coming from?
03:25Two main sources from platforms themselves who issue loans as well as the credit bureaus.
03:30Lots of alternative data sources as well.
03:32From a modeling standpoint, we have PhD researchers where all they do every day is research how to model the
03:38consumer, see what the latest trends are, and then finally access.
03:41None of this matters unless you have really good access across lots of different platforms.
03:45They have one more thing.
03:48They have incredible discipline.
03:50This is someone who did, I assume, the due diligence.
03:52We did a lot of work on this.
03:53They have incredible discipline.
03:55And both the originators and the providers of capital love what they see here because of the discipline with their
04:01own capital, but also with their advice and counsel.
04:04So it's in underwriting, but also in advising.
04:07Does that mean only certain types of consumer credit that you're going to, like certain categories, certain types of, like
04:12tell us, is it top tier?
04:14Like what are you going for?
04:15We look across the board.
04:17Generally speaking, we can provide the most value in near prime and subprime credit.
04:20Near prime and subprime.
04:21So on that, Elliot, SoFi and Happy Money are two existing deals that our Bloomberg News team has reported on.
04:30Would you think about expanding to, I don't know, other places like buy now, pay later firms, for example?
04:38Absolutely.
04:38I think it's part of the reason for the investment.
04:40We want to grow beyond unsecured, which we're really big in right now.
04:43We're getting much bigger in auto.
04:45We want to be in point of sale medical.
04:46We want to be in home improvement.
04:48There's a ton of areas for us to grow into.
04:51Are you talking right now to any specific buy now, pay later firms or any of those firms in the
04:55spaces that you just mentioned right now?
04:57Many of them, absolutely.
04:58So we should expect deals to be announced soon?
05:01Absolutely. Our LPs are asking for it as well.
05:03It's got really neat characteristics.
05:04Do you think that?
05:04They're actually going to have a pretty big announcement in about two weeks.
05:07I love this.
05:08All right, well, you guys got to come back.
05:10So mark the date.
05:11But that's appealing to you, that part of the market.
05:14You know, Carol, as I said, it's about a unique position, which they have.
05:19It's about strong leadership.
05:20It's about profitability.
05:21But most importantly, what we love is we're not just great investors.
05:25We're great operators.
05:27We love to roll up our sleeves, go out and visit clients, help them think about expansion.
05:32And when you look at a business that is this disciplined and this profitable and this focused with the market
05:39out there in consumer credit and beyond consumer credit, it's just this is exactly the kind of investment that gets
05:45us up in the morning.
05:46Well, so then what are you going to do, Bob, for Elliott and his team?
05:49You know, you say you guys like to roll up your sleeves.
05:52You're making this injection of capital.
05:54You're now a minority owner in the firm.
05:56That's just the beginning, right?
05:57Do you have an office there yet?
05:58First and foremost, when Carol and Tim call, I come here to Bloomberg.
06:01I like that.
06:02And maybe, I mean, they're out in Denver, so maybe you could go do some skiing this winter, too.
06:06It's out in the ether now.
06:08But, yeah, how involved?
06:10Like, it sounds like good old-fashioned.
06:11So, Fortress is a great partner.
06:13Yeah.
06:13There are other institutions that David Seamus and I and Brian Saunders have been very close to over the years
06:20in other investments or in our career.
06:23You know, David was with J.C. Flowers and my time at Barclays.
06:28We know a lot of people that would be interested in being capital providers.
06:32But until now, they have not heard about Edge Focus, and they have not heard about the business model.
06:37Who are the investors already involved with you?
06:40What other investors might be coming in?
06:42You just talk about the capital providers.
06:43Like, who are we talking about?
06:45All the really large private credit firms you've probably heard of.
06:48Like I said, we've talked about Fortress publicly quite a bit.
06:50Yeah.
06:50Several others as well.
06:52Okay.
06:52So, more.
06:53Yes.
06:53More.
06:53You know, I noticed in the press release that this is focused on hiring efforts, part of this injection of
06:59capital, partly focused on hiring efforts to build out a big part of your team.
07:04I'm curious about talent that your firm is targeting in a market that's really, really competitive.
07:10Incredibly competitive market.
07:11The biggest thing for us is hiring researchers, especially in the age of AI, making sure that we can find
07:16folks who really understand the data, can use AI tools effectively, efficiently.
07:21It's one of the most important things for us.
07:23Over two of those, our firm is technology-based.
07:25What goes further?
07:27You're already very technology-focused, AI-focused.
07:30I'm curious, like, what's the next step?
07:32Where do you go with all of this?
07:34New asset classes.
07:35We've done a lot in consumer and secured.
07:37We have a long way to go in subprime auto.
07:39We have a really long way to go in point of sale.
07:41And there's several other asset classes for us to get into.
07:44Bob, provide some context here, given your history in banking and, you know, how what Elliott's firm is doing, in
07:51your view, is different from the way that a big bank can profile a consumer.
07:57I think it's a number of things.
07:59But I think, first and foremost, you know, the traditional banks prior to 2008 just had a very, very different
08:06approach to managing what was in their portfolio.
08:10You'd see the quarterly earnings, and you'd see a little bit of provision here and provision there, but it was
08:16not really asset or loan-specific.
08:20Even in BarclayCard, which was really consumer credit, an unsecured consumer credit, it didn't have the depth of this.
08:26So it's the incredible discipline and the incredible technology that they've brought to understanding credits so that the separation from
08:37kind of near prime to prime and subprime and things like that, the number of gradations on that continuum are
08:44incredible.
08:45And that's what they've done.
08:46So they're much, much better at managing access to credit and the return that comes from credit.
08:53And I think we've seen it broadly in the market.
08:55Like, since 2008, we haven't had a blip in credit.
08:58We've never had a cycle quite like this.
09:00And I don't think it's about to stop because there are so many more participants, so much more technology, artificial
09:07intelligence that's being applied to analyzing the risks associated with every single piece of credit.
09:13Are you saying this time is different?
09:16I am saying this cycle is very different.
09:17This cycle is different, okay.
09:18Because of technology, because of AI, because of firms like EdgeFocus, yeah.
09:23Okay.
09:24Meaning that...
09:25By the way, it doesn't mean there won't be mistakes.
09:27Right.
09:27For people that don't use that technology, for people that don't use EdgeFocus, you know, there will still be mistakes,
09:33but I don't think they'll be systemic.
09:35They're not going to be across the piece.
09:37They're not going to be a crisis for the industry.
09:39They may be a crisis for an individual fund.
09:44So, in other words, not just that the risk is spread, but if somebody who doesn't have the great oversight
09:49or risk...
09:50There will still be mistakes made, Carol.
09:52Yeah.
09:52Absolutely.
09:53And I think what will separate EdgeFocus is more and more people are going to want to have access to
10:00people like Elliot and his team so they can move into that echelon without trying to build it themselves.
10:06So, let me ask you, there are always cycles, and I'm just curious how exposed EdgeFocus is specifically to consumer
10:12credit, and how will you guys be protected if ultimately we see financial conditions tighten?
10:17We are...
10:18Things go through cycles, and then we start to see end-user delinquencies increase significantly.
10:24I mean, these things happen.
10:25Absolutely.
10:26We're very long consumer credit.
10:27There's no question about it.
10:28At the end of the day, we need to be...
10:30But what do you do to mitigate risk?
10:31It's all about having that loan-level selection where we can use all the data we have at the individual
10:36borrower level to ultimately buy better portfolios of assets for investors.
10:42So, you're saying the data, the algorithms, the AI...
10:44It's the data that...
10:45And we also have to monitor it really well, too.
10:46We've built out tons of proprietary internal platforms where we can watch this stuff in a real-time basis and
10:51understand exactly how the consumer is evolving.
10:53And so far, in terms of issues that have gotten you into trouble, like what percentage?
10:59I mean, look, there's no investment that's ever perfect, right?
11:02No.
11:02No, no, no.
11:03Fair.
11:03I mean, if you go back to 2022, 2023, for example, inflation was really challenging on the consumer, there's no
11:08doubt.
11:08But you learn a lot from that.
11:09You add into your algorithms, you add into your models, and ultimately you create a much more sustainable, defensible platform.
11:15Well, Carol brings up a good point, and what I heard from you just now speaks to what it sounds
11:20like you have this...
11:21What you think is a very solid, real-time view of how consumers are doing.
11:26We try to figure that out each and every day on this program by looking at the data that we
11:30get from the Fed, data that we get from different bureaus, alternative data as well.
11:35How is the consumer doing?
11:36Yeah, we have a lot of really cool insight into how the consumer is doing.
11:40What I can tell you is that applications continue to increase across all the platforms we have.
11:44Applications are up year over year on the end of 20%.
11:46Is that a good thing?
11:46You know, we're actually seeing delinquencies stay very, very consistent.
11:50But consumers need more credit.
11:52They are, and we're actually seeing an increase overall in debt-to-income ratios across consumers.
11:57So although the consumer looks to be needing some more credit, and that's being shown in the applications, delinquencies are
12:02being pretty constant right now.
12:04Why is that?
12:04Bob, like when you look at that cycle or those data points...
12:08Which part of it?
12:10Where you said that debt-to-income is rising, and yet delinquencies are low.
12:16How do we explain that?
12:18You know, I think it's more discipline in the system, and more providers of capital.
12:24So I think the same thing I talked about since 2008 on the investor side or the bank side in
12:30terms of their portfolios,
12:31I think consumers are much more mature, much more sophisticated.
12:34So it's not surprising that you would see less of an increase in delinquencies than you would in the amount
12:44of outstanding credit.
12:45That would be unsurprising.
12:46So, Bob, this is a minority investment in edge focus right now.
12:50Are you going to ask when it's going to be a majority?
12:52Yeah, that's exactly what I was going to ask.
12:54Sorry.
12:54Is this the beginning of something?
12:55Perfection is never.
12:57Is this the beginning of something, or is this...
12:59This is absolutely the beginning of something.
13:01Is there going to be more money coming from you, or do you think this is enough for them to
13:04go out, do their thing, and then there's an exit at the end?
13:07I think the beauty of being Atlas Merchant Capital is a couple of things.
13:11One is our investors are very, very patient.
13:13If we go to them in three or four or five years and say, this isn't going to be a
13:18normal cycle, we want to stay in this longer.
13:20We have a number of large sovereigns.
13:22The biggest issue they face every day is reinvestment, not exit.
13:27So, we have that option in terms of the relationship we have with our investors.
13:33But I think most importantly, if there was need for more capital, because the business is growing and valuations are
13:40going up, that's a good presentation for us.
13:43It doesn't mean we would go to majority.
13:45That would be unusual, and that might be in a distress situation, which would be the furthest thing from our
13:53mind in this situation.
13:54But if we have opportunities down the line to add additional investment and higher valuations, because the business is growing,
14:01both in terms of products and in terms of customers and clients, that's fantastic.
14:06So, we'd be remiss.
14:07We've only got about a minute or so left here, Bob.
14:10You have seen, you know, iconic for anybody who's watched Wall Street and financial markets.
14:15You've seen a lot of different cycles, good, bad, different.
14:19What do you make of this market cycle, which is there's angst, and yet we hit records?
14:24And how do you make sense?
14:25Well, I think two things, Carol, and I think on one side, and I see this, I've been very, very
14:31fortunate to be the chair of the advisory board for the U.S. Export-Import Bank with John Jovanovic and
14:38the team.
14:38And they, for the first time in decades, are profitable.
14:43They are really driving performance with middle market companies across the U.S.
14:47And what shocks me is how profitable they are.
14:51What shocks me is how excited they are at the tailwinds coming from this administration in terms of less regulation,
14:59more pro-business.
15:01And so, the CEOs of middle market companies across the states are pretty excited.
15:07I think in terms of the cycle with AI that people are talking about, and I suspect that's the other
15:13piece that we're asking.
15:14Yeah, it is.
15:15I think there'll be a correction.
15:17There'll always be a correction.
15:19Every technical innovation we've had from railroads, from electricity, from the Internet will have a massive correction at some point.
15:28It doesn't feel like it's going to be tomorrow, but you know, with any technical revolution like this, there's going
15:34to be corrections.
15:35It's not going to be one.
15:37It doesn't feel like it's around the corner, but I can assure you there'll be a correction.
15:41I just can't assure you when it's going to be.
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