WE ARE SEEING A REGIONAL BANKING CRISIS, WE WILL SEE THE
OPPORTUNITIES?
>> THERE ARE A FAIR NUMBER OF PARALLELS IN G, ONE OF THE
INTERESTING THINGS THAT IS NOT A PARALLEL IS THAT THE GMC,
THERE ARE NO DIRECT LENDERS TO PROVIDE CAPITAL TO MIDSIZED
BUSINESSES.
WE ARE SEEING A TREMENDOUS OPPORTUNITY IN MIDDLE-MARKET
FOR HIGH-QUALITY COMPANIES WITH STRONG, STABLE BUSINESS MODELS,
MARKET LEADERS IN THE MARKETPLACE.
FOR US WE THINK WE ARE SEEING ONE OF THE BEST OPPORTUNITIES
IN PRIVATE CREDIT IN MANY YEARS. ROMAINE:
WE HAVE HAD THREE OF THE BIGGEST BANK FAILURES IN
HISTORY IN LESS THAN TWO MONTHS. A LOT OF CONCERN THAT THEY AND
THEIR PEERS HAVE STARTED TO PULL BACK.
HAVE YOU SEEN ANYTHING MATERIALIZE -- MATERIAL CHANGE
IN PEOPLE'S ACCESS TO THE MIDDLE-MARKET TO LENDING FROM
THE TRADITIONAL BANKING SECTOR?
>> IT COMES FROM TWO SIDES, I THINK THE SMALLER REGIONAL
BANKS THAT HISTORICALLY MAY HAVE PROVIDED SOME LENDING
CAPITAL ARE MORE CONSERVATIVE TODAY AND RIGHTLY SO.
I WANT TO SAY THAT IF A LARGER END OF COMPANIES WHO ONE OF
ACCESS TO THE BROADLY SYNDICATED LOAN MARKET, THAT
MARKET IS NOT THERE. IT IS LARGELY CLOSED.
WE ARE SEEING IS DIRECT LENDERS WHO ARE ACTUALLY TAKING SHARE
RELATIVE TO THE BROAD SYNDICATED MARKET AND PROVIDING
LARGER FINANCINGS TO LARGER COMPANIES THAT ARE MORE
SIGNIFICANT BUSINESSES AND I THINK THAT PRESENTS A
TREMENDOUS OPPORTUNITY IN AND OF ITSELF. ROMAINE:
WHAT ABOUT RISK?
YOU CANNOT DRAW A COMPARISON BUT THERE IS A RISK THAT THOSE
BANKS ARE RUNNING FROM, WHAT MAKES YOU THINK YOU CAN MAKE
THAT WORTH YOUR WHILE?
>> I WILL MAKE A COMPARISON FROM WHERE WE WERE A YEAR AGO
TO WHERE WE ARE TODAY.
IN MARKET, COMPANIES THAT HAD TYPICALLY 50 THROUGH 250
MILLION CASH FLOW. WE WERE DOING THOSE LOANS FOR
SIX OR 7%, THAT SAME LOAN TODAY IS NOW PRICED AT 12%.
WE ARE GETTING TWICE THE PRESS RETURN AND BETTER UNDERLYING
COVENANTS AND STRUCTURE FROM INCREMENTAL CAPITAL, A BETTER
LOAN TO VALUE, WE SEE THE OPPORTUNITY TODAY, IT IS AS
GOOD AS IT HAS EVER BEEN. ROMAINE:
ARE ALL OF THE DEALS FLOATING RATE?
>> YES. ROMAINE: THAT IS YOUR PRODUCTION MORE OR
LESS? WHERE COMING OUT OF AN ERA OF
NOTE COVENANT, HOW MUCH POWER -- OF NO COVENANT, HOW MUCH
POWER DO YOU HAVE TO MAKE DEMANDS IN THE PAST WOULD HAVE
BEEN NORMAL?
>> THE BALANCE OF POWER HAS SHIFTED TO THE LENDERS.
WE HAVE LEVERAGE TO GET TRADITIONAL FINANCIAL COVENANTS
IN ALL OF OUR DEALS. AND PUT US IN A POSITION WHERE
WE CAN PROTECT OURSELVES FROM THE POTENTIAL DOWNTURN.
IN THE OTHER PROTECTION IS THAT WE ARE FOCUSING ON COMPANIES
THAT HAVE PERFORMED THROUGH COVID AND PERFORMED THROUGH THE
CURRENT INTEREST RATE ENVIRONMENT.
WE CAN EVALUATE THAT AND MAKE LOANS TO BUSINESSES. ROMAINE:
TALK ABOUT THOSE COMPANIES OR SECTORS AND WHAT IS ATTRACTIVE,
WE ARE TALKING CYCLICAL SECTORS, GROWTH?
>> I WOULD SAY OUR PRINCIPAL FOCUS HAS BEEN AND CONTINUES TO
BE IN RECURRING REVENUE BUSINESSES.
EMBEDDED SOFTWARE THAT IS PART OF A FUNDAMENTAL OPERATING
BUSINESS. IT IS RECURRING REVENUE IF YOU
WILL. WE ARE BIG INVESTORS IN
BUSINESS SERVICES, PROVIDING SUPPORT.
MARKET LEADERS IN THE AREA, LOGISTICS.
WITH COVID YOU HAVE SEEN SIGNIFICANT CHANGES IN HOW
PEOPLE WORK AND DO BUSINESS.
THWE ARE BIG INVESTORS IN HEALTH CARE, I WANT TO STAY
AWAY FROM MORE CYCLICAL WITNESSES, MORE VOLATILITY AND
RISK, WE ARE NOT INVESTORS IN RESTAURANTS, RETAIL, TRAVEL AND
LEISURE, REAL ESTATE. THINK ABOUT THE AREAS WE FOCUS
ON AND THE TYPES OF BUSINESSES WE ARE FINANCING, YOU ARE A
BUSINESS THAT IS CHALLENGED RIGHT NOW, YOU WILL NOT BE
DOING RAISING CAPITAL, IT IS NOT IN THE MONEY MARKET.
HIGHER QUALITY LARGER COMPANIES WITH BETTER STRUCTURE. ROMAINE:
WHAT ABOUT THE HYPE AROUND ARTIFICIAL INTELLIGENCE?
HAVE YOU LOOKED INTO GOING INTO THAT SPACE MAY BE INDIRECTLY
WITH THE TECH COMPANIES YOU HAVE BEEN WORKING WITH?
YOU ARE SMILING!
>> THERE IS A SONG THAT WAS RELEASED WITH ARTIFICIAL
INTELLIGENCE AND IT SOUNDS LIKE THE WEEKEND. ROMAINE: AND DRAKE!
>> IT HAS A ROLE TO PLAY.
I THINK IT HAS A ROLE, IN THE BASIC ASSESSMENT, AT THE END OF
THE DAY, OUR INVESTORS ARE RELY ON US TO MAKE THE FUNDAMENTAL
CREDIT DECISIONS. I THINK THERE IS A ROLE TO BE
ABLE TO DO SOME OF THE UNDERLYING WORK TO SUPPORT THE
DECISIONS WE MAKE. NOT TO MAKE THE DECISIONS.
I THINK WE NEED TO BE ABLE TO DO THAT. ROMAINE:
NO DRAKE SONGS COMING OUT? I GUESS IN THIS WORLD IT CAN BE
ANYTHING!
I DO WANT TO GET YOUR THOUGHTS ON THE SIZE OF THE INDUSTRY, WE
ARE TALKING ABOUT SOMETHING A FEW YEARS AGO WOULD HAVE A
COTTAGE INDUSTRY. A LOT OF PLAYERS HERE.
DO YOU ANTICIPATE CONSOLIDATION? >> 1.4 TRILLION DOLLAR MARK AND
TAKING SHARE IN SOME RESPECTS FROM THE BROADLY SYNDICATED
LOAN MARKET AND THE HIGH-YIELD BOND MARKET.
WE WILL SEE CONSOLIDATION. IT IS RELATIONSHIPS THAT DRIVE
SOURCING. IT IS NOT ONE-OFF, THOSE ARE
LONG-TERM RELATIONSHIPS BUILT UPON PROVIDING CAPITAL OVER AN
EXTENDED PERIOD, EQUALLY AS IMPORTANT IS SCALE.
THE LARGEST PLAYERS ARE INEVITABLY AND CLEARLY TAKING
SHARE RELATIVE TO SOME OF THE SMALL -- ROMAINE:
IT COMES WITH SCRUTINY AND TALK ABOUT THE DIRECT LENDING AND
SHADOW BANKING, THE IDEA THAT REGULATORS SHOULD BE MORE
INVOLVED IN WHAT YOU DO?
>> I DO NOT THINK SO. WE HAVE A FAIR AMOUNT OF
REGULATION TO DATE, REGULATED AS AN ASSET MANAGER, I WOULD
SAY ONE OF THE DIFFERENCES BETWEEN THE BANKS AND HOW THEY
OPERATE RELATIVE TO DIRECT LENDERS.
THINK ABOUT IT, WE MANAGED CAPITAL FOR OVER 700
INSTITUTIONAL INVESTORS. WE DIVERSIFY THAT RISK ACROSS
THOSE INVESTORS.
IT IS A MUCH LONGER TERM DURABLE BUSINESS MODEL.
IT PROVIDES EFFECTIVE INVESTMENT FOR ITS INSTITUTIONS
AND IT IS MUCH MORE DIVERSIFIED THAN A SINGLE BANK AND
CONCENTRATED WITH 400 MILLION IN A SINGLE ONE.
IT IS A GREAT MODEL.