00:00That has gone through quite at least the narrative disruption so far this year.
00:04And I wonder if we're heading towards another one because we are on the precipice of potentially a rate hike.
00:10Markets are certainly pricing it in. Credit markets live through 2023 and the rate hiking cycle.
00:15Then what happens if we enter another one? What happens to this credit market?
00:19Despite the geopolitical and macroeconomic volatility, the private credit asset class is actually holding up very well.
00:26So, for example, within our portfolio, the vast majority of our companies are actually growing.
00:31Leverage levels are coming down and default rates remain very low.
00:35Now, defaults have ticked up a bit across the industry, but they're still within cycle averages.
00:40So this just, again, reinforces the importance of credit selection and disciplined underwriting.
00:45I was looking. There was this one study from Houlihan Loki.
00:48It was basically pointing out very small lenders, saying the default rates among them have ticked up beyond what has
00:54been the norm over the past couple years.
00:56I wonder if there are pockets of concern.
00:58If on a surface level, yes, everything looks calm, but are there certain areas within this market that you would
01:02be worried about?
01:03Look, the whole market has talked about software.
01:05I think we've seen the resilience of the portfolios, and many of these issues are idiosyncratic.
01:12So, again, I just point back to the importance of disciplined underwriting and not straying from the frameworks that we
01:17have.
01:17Do you think, then, considering a lot of investors did live through some of the issues around software, that a
01:23lot of this industry strayed from that core?
01:25It's possible because there was a significant amount of capital that was deployed into the industry.
01:31Inevitably, there will be some winners and losers.
01:33But at the same time, as long as the managers stuck to their detailed frameworks, I think it'll be just
01:37fine.
01:38Well, just on that, because recently there have been various credits that have been essentially marked down to zero.
01:43We saw it with BlackRock's TCP.
01:44Blue Owl had an issue recently.
01:46What does that say, not asking you to comment on your competitors directly, but what does that say in this
01:50environment where you have had this rapid repricing for some of these portfolio companies?
01:55Defaults in portfolios is nothing new.
01:57Everyone's taking risk with respect to investing in the asset class.
02:00But at the same time, if you look over cycle, defaults, I don't think, will be anything past the normal.
02:06So, as long as, again, even in this environment, as we're looking to invest into different credits, as long as
02:12we stick to our knitting, I think the industry will be fine.
02:14And there has been a lot of demand.
02:16But I wonder about that demand side.
02:18Recently, there was a conversation from the founder of Andromeda Capital.
02:21And I should just say, for posterity's sake, he is a short seller and is currently short private credit.
02:26So, take with that what you will.
02:27But he basically made this argument that as rates move higher, there's more competition.
02:32That all of a sudden, people would look, investors would look at this treasury market above 5% and say,
02:38OK, that's a safer issue than maybe private credit.
02:40And the demand starts to wane. Is that a concern as rates move higher?
02:43It's not a concern.
02:45On the way in, rates going higher is actually favorable because private credit is largely a floating rate asset class.
02:52At the same time, you have to look at the portfolio and make sure that the companies can still support
02:55the debt loads that they have.
02:57And if you look at recent vintages in private credit, I think borrowers have been much more disciplined in terms
03:02of the amount of leverage that they're taking.
03:03So, it's not really a concern.
03:04So, as you're looking to put money at work, you have a lot of firepower behind you at the moment.
03:09Carlisle raised $13 billion in credit in Q2, bringing year-to-date fundraising at $21 billion.
03:14Where are the opportunities right now?
03:17It's clearly a very interesting time to be investing in private credit.
03:21At Carlisle, we think there are three opportunities that are very interesting.
03:24Opportunity to credit, asset-backed finance, and actually traditional direct lending.
03:28Within opportunities to credit with the market volatility and the coming maturity wall,
03:33it's creating opportunities for us to deploy hybrid capital and very attractive economics in asset-backed finance.
03:39It provides diversification away from traditional corporate credit while also providing exposure to the real economy through consumer, financial, and
03:47hard assets.
03:48And within traditional direct lending, there's been more of a balance in the capital supply-demand dynamic,
03:54which is leading to wider spreads, tighter terms.
03:57And remember, there's still a significant amount of M&A that needs to come that is going to be financed
04:02by private credit.
04:03Well, tighter terms, that's interesting.
04:04After some of the blow-ups of the first brands of the world, has this industry had kind of a
04:08come-to-Jesus moment, if you will?
04:10I don't think that the industry really strayed because, again, with first brands, we all know that there wasn't really
04:15a private credit investment.
04:17If you look at the documentation within private credit, I think that the managers have done a good job of
04:23making sure that the protections that we need have stayed in the best interest of investors.
04:28So we are in this moment where the conversation about a maturity wall feels like we keep having it and
04:34it keeps building up.
04:35Moody's thinks that total refinancing needs are going to be roughly around $5 trillion over the next four years for
04:39the U.S. and for EMEA.
04:42Is there a risk with that refinancing wall and that maturity wall, and are there opportunities within that even?
04:48Clearly opportunities.
04:50I think the industry has been looking at the maturity wall for quite some time.
04:53It's very well understood.
04:54We know the credits that are coming that need to refinance the maturities within the next one to two years.
04:59That activity is already starting to happen in a very orderly fashion.
05:03There may be some defaults as a result of it, but it's not going to be a surprise.
05:06And it's actually creating opportunities for us to deploy across private credit within opportunities to credit, for example, at very
05:13attractive economics.
05:14Can you just explain that dynamic, how this maturity wall creates those opportunities?
05:17Sure.
05:18So, for example, if there is a maturity coming up in 2027, you have to get ahead of it.
05:23So this year, you're going to address it and you're going to look to extend out the maturities or to
05:28refinance the capital structure.
05:29Now, to the extent that you are within certain leverage limits, that will be done in a very smooth manner.
05:37But at the same time, if you need additional capital, that's where hybrid capital comes in, in the form of
05:41equity, to help you get the leverage down so you can affect a maturity extension.
05:45So this market is constantly changing.
05:47And within that, you've had a big change yourself, Alex, three decades at Goldman Sachs.
05:50Now you've been in the Carlisle job for eight months, if I'm not mistaken.
05:54What have been your priorities as you've come in to lead this part of the firm?
05:58It's been fantastic to be at Carlisle.
06:00Our job is to continue to make sure that we are providing the products and the access points for investors
06:06into the platform,
06:07while also providing a complete set of solutions for our borrowers, all while maintaining diversification across the platform.
06:15But also the big opportunity is to continue to make sure that we're unlocking the synergies of being part of
06:20a global-scaled asset manager like Carlisle.
06:22There's been a lot of consolidation within the industry itself.
06:25How does competition look more broadly?
06:27Carlisle is certainly not small, to be very clear.
06:30But just as the industry consolidates, how does that change the investment opportunity and environment that you're operating in?
06:36Clearly a competitive environment, but it's not a winner-take-all environment.
06:39We're going to continue to differentiate ourselves just based upon our global-scaled platform
06:43and taking advantage of the fact that we have other big parts of our platform that can originate and help
06:48us in underwriting
06:49and making sure that we're underwriting with rigor.
06:52So it's not a winner-take-all environment.
06:54And in fact, the environment is very constructive right now.
06:58Within the perpetual vehicles, redemption requests have been coming down.
07:02In fact, within our own non-traded BDC, redemption requests have been at or below 5% for the last
07:07couple of quarters,
07:08all while we're experiencing inflows.
07:10And away from that, within our institutional vehicles, demand has been quite strong.
Comments