Let's talk more broadly about private credit.
There's an awful lot of talk about it right now.
It's grown really fast. At the same time, as you look at the
overall size of it, it's still relatively modest compared to a lot of
debt out there. Yeah.
I mean, I think when you think when we think about private credit, we think
there's a lot of growth areas. It really started in the low middle
market, non-investment grade market, and now it's expanded into upper middle
market. And at some point it's going and we're
at the beginning the continuing the sports talk when the first or second
inning on the non-corporate wane.
So think about asset backed finance for asset based finance for non-corporate.
So so let's talk about that. You started the middle market in some of
some riskier lending. It's grown beyond that.
Why is that? I mean, why is it that you can take that
away from banks or from syndicated loans?
Yeah, So I'll argue with the premise it's riskier.
I don't I don't think it's actually riskier when you look at the loss rates.
The loss rates are on par with the leveraged loan market historically, and
it's actually has better loss rates than the than the high yield market, about 50
basis points less on the high yield market and it offers better spread.
I think when we think about private credit and where private credit has come
from, this was the intended consequence of the regulation that came out of the
global financial crisis, which was to move
risk out of the banks where taxpayers had written protection
and move it into a safer place. And I would argue that private credit is
actually a safer place. We can talk about.
I'm happy to talk about that. Well, I do want to talk about that.
But before we do that, how big is it? I've seen numbers.
It's about $2 trillion thereabouts. And are you seeing the sorts of rates of
growth that we're seeing overall? I've heard it said that it's going to
grow like 15% a year for the next few years.
Yeah, look, I think so. I think private credit somewhere in
that, not on the non-investment grade corporate side between a 1.5 trillion
and $2 trillion. But there's always growth aspects of
private credit outside of non-investment grade corporate and including investment
grade, non-corporate. So think of it as consumer receivables.
Think of it as credit cards, mortgages, and then the then the non-investment
grade tranches. So those growth rates seem right to me.
But there's there's large areas that private credit continue to expand in.
So so what about the risk factor? You were saying it's a mistake to say
that this is riskier than others. So, look, I think this has been a little
bit the narrative from from banks who are trying to protect their their
syndicated business. But I think when you look at private
credit, private credit is unique compared to where banks banks have a
we're study we're actually we study business policies.
Living and private credit unlike banks have match funding.
And so banks, quite frankly, they lend long.
They they fund short with deposits and moments of crisis deposits come out of
the system. Private credits match fund is so the
asset class itself is more durable then than those same loans sitting in the
banks, mostly because of the funding model.
There can't be a run on your bank, so to speak.
There would be a run on our bank. Depositors can't come in and say, I want
my back now because it's locked up for some period of time.
Look at look what happened in Silicon Valley Bank.
Not to name names, but that was a lot of their assets were high quality
assets. A lot of them were actually government
guaranteed mortgages. We can all agree those did have risk on
the asset side, but they had a business model issue, which is a really funding
issue, which was their funding ran from private credit is not secret anymore.
I mean, you read the Bloomberg any given day, there's an expansion of private
credit. That must mean there's more competition
in your sphere. Does that actually push you to take
bigger risks because other people are willing to do things maybe you otherwise
wouldn't be? Well, we were investors first.
So when I think about our business or when we think about our business, we we
have a way of thinking about credit and risk reward.
We're going to continue to be investors first.
That's how markets work. And so what I would say is on the
competition side, there has been more competition.
The total addressable market has grown significantly.
Where? So at the same time, there's more
capital. The addressable market has grown too.
And so that feels I don't know if the competition issues feels as cute as one
would think. As you say, there's some criticism or
questioning from some of the big banks. Are you taking market share further?
We heard some color or UBS raised questions about it.
We've heard Jane Fraser raise some questions when it comes to the insurance
part of it, at least. Are you taking market share every day
from banks and is that what actually the regulators you think want?
Yeah. So I think again, I think this was the
intended consequence for for for the regulation, which was to diffuse the
risk where taxpayers had written. And people I think can remember I can
remember the $700 billion and TARP that had to recapitalize banks.
So I is there what I would say is I think there is a little bit of
protectionism as it relates to the bank model.
Again, we're students of business models.
And in the non-investment grade corporate side, banks are in the movie
business, not the storage business. And so they have a lot of fees in that
business. And users of capital, rather, go to the
end user and provider of capital, then have to go through an intermediary,
which has been the historical leveraged loan model.
There is I think you're correct me if I'm wrong, a certain lack of
transparency. We saw the IMF come out just recently
and say there's some risk there because we don't necessarily know the values of
some of the loans. They they don't get mark to market as
often in the market, the market may not be what you would have in an open public
market. Is there risk there?
Is IMF right, that there's a problem? Well, first of all, I think, again, I
would argue with the premise. Investment accounting has you mark to
market your loans. That bank accounting, on the other hand,
no offense to banks, is held to maturity accounting and don't mark their loans
and they have a less durable funding model.
And so I don't think you can look at the asset side without looking at the
liability side. And private credit has a much superior
business model given the durability of funding.
So again, I don't I don't see it. I'm a little bit we're talking our book
a little bit, you know, but when you look at the overall business model as a
much more durable and safe business model for investors, how much do you
partner with banks and what you do? Because that's actually something that
people have been concerned about. The IMF mentioned actually the exposure
of some of the regular banks, perhaps to private credit.
Yeah. So we partner with banks.
Banks are a big lender to this space. That is what regulators wanted.
They get better risk weighted assets treatment.
But they're only lending 40 to 50% LTV on the underlying loan we're making.
So there's a whole bunch of capital that sits behind them and subordination.
And so you can think about a world where if every loan that the industry
underwater defaulted, but there was a 50% recovery, banks wouldn't be harmed.
And so, again, I think what banks are doing is really smart and really prudent
and what regulators want them to do. There's talk about the regulators
wanting to regulate more of the private credit.
Some people have called for that. Is that coming down the pike and how
would it affect your business? Well, I think you always have to you
have to respect regulators. So we respect regulators.
We have active dialogues with them. I think most of the call on regulation
is coming from this protectionist view where the incumbents are losing market
share and losing fee streams that are valuable free streams.
Again, you have to go back to the risk. And when you think about private credit
and just think about the simple business model versus a private credit lender,
the bank has about 10% of their of their total assets in equity capital.
So risk bearing capital, private credit has somewhere between 20 and 50%.
So as much more capital to support the loans and as match funding.
And so it's a much more durable business model.
And at the end of the day, there needs to be credit creation for there to be
growth in developed economies. And private credit provides a valuable
source of credit creation to support the US economy.
We talk about the size of private credit between one and a half and 2 trillion,
you said. How much of that is committed and how
much that dry powder? Is there a lot of dry powder sitting on
the sidelines right now? Do you have trouble finding the project
you want to invest in? No, I mean, we're selective.
We're investors first. So we're finding opportunities where
we're slow at doing it. There's there's most definitely some dry
powder. But when you look at the dry powder
compared against the dry powder and private equity, for example, it's very,
very small. So ultimately, I think the demand for
capital will exceed the supply of capital on the private credit side.
You specialize. I'm not mistaken.
In private credit, that's what you do. A lot of the shops you're competing in
are multifaceted. They have different parts to their fund.
Are you tempted to move into other areas?
So when we look at the six feet to step back, we're $75 billion plus alternative
asset manager across private capital. So everything from preferred equity to
growth equity to sports investing to direct lending to ABF.
So we have a multi faceted platform where we think we could
take advantages over time for for our and for our investors.