Private Credit Concerns: The podcast delves into the misconceptions and fears surrounding private credit, emphasizing that while concerns exist, they are often overblown and not indicative of systemic risk.
Blackstone's Performance: Blackstone's private credit and equity businesses have shown strong performance, with both sectors up nearly 13% over the past year, despite broader market fears.
Private Credit Transparency: The discussion highlights the importance of transparency in private credit, noting that increased availability of monthly reporting is improving investor insight.
Market Dynamics: The podcast explores the growth of private credit, driven by regulatory changes post-financial crisis and recent banking system freezes, positioning it as a vital component of the economy.
Investment Strategy: Emphasis is placed on the need for thorough due diligence in private credit investments, with a focus on management selection as a key driver of returns.
Liquidity and Risk: The illiquid nature of private credit is discussed as both a risk and a protective factor, with the inability to quickly liquidate potentially preventing panic selling during downturns.
Future Outlook: The podcast suggests that while private credit is expanding, the industry must be cautious of over-leveraging and maintain robust underwriting standards to mitigate potential risks.
```
Transcript
There we go. >> Give me a count to three. One, two, three. >> Three, two, one. >> Wait, can we have Ben say confident in his assertions? Over confident. A one, two. >> Very confident. >> Very confident assertions. >> All right, >> I just got back from Las Vegas. >> Oh, yeah. >> Yeah. >> For fun or for work? >> For work. All I do is work. Um, >> Las Vegas is my nightmare. >> It's You know what? >> I love it. I love all the depression and the tears and >> 36 hours, right? >> I had fun. I was there 18 hours >> and uh >> That's probably all right. >> I didn't I I did I was there on a Monday and a Tuesday or no a Tuesday and a Wednesday >> and it was still happen. >> Yeah. I mean the encore So the encore is always going >> Yeah. Yeah. I'd go for the sphere. I've never been to the sphere. >> The sphere is insane. It's one of the things that lives up to the hype. I saw you too. >> All right. >> I'm going back in May. >> Okay. >> For no doubt. I'm so I'm so excited. >> Mike and I are going like two weeks to Vegas. What are you? Are you going to see something at the sphere? >> We were going to go. It's Wizard of Oz, but >> just go. >> Just go >> to go see a movie. >> It's beyond It's so much more than a movie. It's fully immersive experience. >> I don't know. >> Just go. >> All right. You sound like a Chamber of Commerce person. >> No, because why wouldn't what I mean, unless you have other cool things to do. >> Blackjack. >> How How much Blackjack can you really play? >> We could bet Josh brought this back for me and Chris. >> Yeah. Check that out. That's a troy ounce of silver. You ever see this before? >> This This is the top. So, >> it crashed right as he bought it. >> So, can I tell you something? I walk I walk there's a guy >> there's a guy with coins, gold coins, silver coins on a display at the event that I'm at and I go >> better as a hard asset. Good alternative. >> So, I want to I want to buy I want to buy a few of those. How much are they? He goes, "Well, it's an ounce of silver." I'm like, "Okay, well, I don't know off hand what that means. I don't know how much an ounce of silver is." He's like, "No problem. I'll tell you how much it is. He looks on the Bloomberg app for the price of silver. He goes, "It's uh 4048." So I'm like, "Okay, two, please." He's like, "No problem. No problem." >> That's how he charged you. >> That'll be $96. Yeah. >> Huh. Go figure. >> Like right off the like what? Right off the quote screen. Cuz it's an ounce of silver. I thought that was >> He wasn't comfortable with the Google pricing. >> I think that was kind of cool. >> Wait, can I send one of you a chart that's I love? Yeah. Yeah. >> Um we don't need to use it. It's just kind of interesting and informative. What's your email? We want it. >> Uh, Michael Holtz. >> Are you crazy? >> I think people can figure it out. >> I get a lot of emails. >> Ridolts. >> Uh, >> you got hosed. It's already down to $42 an ounce. >> Bellagio has a new Carbone restaurant. That's Carbone Seafood. You have to take a boat to get to it. >> Are you joking? >> No, I'm not. >> Wait, where are we where are we staying in Vegas? >> We are staying at the casino. >> I don't know which hotel we're staying at. >> Okay. >> Bet and I going for a night. >> So, I'll tell you the I'll tell you what I've learned. I stay at the tower suites. >> Oh, we're at the MJM Grand. >> Okay. >> There are So, there are three of these. >> You stay where there's no casino, right? >> No, there is, but it's it's a separate building. It's connected. So, there's the Waldorf, which is just a tower. It's like a Manhattan high-rise. None of the [ __ ] in the lobby. Like, you don't hear ding ding ding ding ding. No, none of the the dregs of society. >> I need the [ __ ] I need I need the stale cigarette smoke in the air. I need it all. I love it. >> And then there's the from Batman. the encore the encore tower suite separate entrance you pull up to there's nobody there's security guard and a few few people working behind the desk you check in in two seconds you walk into your elevator you go right up and you're like in a you're almost like in an apartment building not >> I was in LA sort of I was in Nashville Opriand have you been there >> yes >> it's like Vegas >> opriand opland I've heard both >> grand old opri >> grand old opri >> yes in opera >> I didn't like it >> um You went to the wrong thing. You're supposed to go to the Ryman Auditorium. >> Ah, >> can we do 10 seconds on this? It's important, actually. >> The original >> The original Grand Old Aubrey. >> Okay. >> Was at this >> 1800's era church >> that became the Ryman Auditorium. That's where like Dolly Parton became famous. >> Yeah. >> That's like >> for country music, >> maybe for all of American music. That is like the That's like the Vatican. >> Okay. >> The Ryman Auditorium. >> I got to try it. the Grand Old Opry that they they tape they tape like a TV show. That's 20 that's 20 miles outside of Nashville. >> What was this for? >> For Chenali. >> It's you know that's the tourist trap you went to. >> I mean I went to Well, it was very corporate, right? It was like the Delta Lounge this and like you know another >> So if you really want to see like a country music show in the heart of Nashville in downtown Aubry, >> that's the Ryman Auditorium. Ah, I got to brush up on my Nashville. Beyond that, Nashville is the most amazing place. >> It really is. >> I'd move there if I could. >> Um, we have employees there. It's pretty sick because you have the you have uh Belmont, which is like one of the best music colleges in the country. Vanderbilt is right downtown. You have all of like Google and everybody is opened up. And then you've got the whole music component to it like Broadway with all the honky tonks and all. So, you've got good music taste, but like is Batnick like music just betting on the side? Like, what are you doing? >> Yeah, >> Batnick just wants a cool Nashville. There's live music everywhere I go. So cool. >> We used to saw like a band at a holiday in there and it was amazing. Everyone's carrying a guitar down the street. It's so cool. >> So, Shan, you're the perfect person to have here this week. We're going to be talking a lot about the cockroaches >> and I want to say this before we get into the show. So, I relatively early on, probably two years ago, was like, why the am I getting so many emails from private credit companies? What is happening? Like, I I've been on this corner for a long time now, right? It's been a minute. >> Mhm. And I also think that a lot of the conversation that is happening and I'm like how did I turn into like the the the voice the spokesperson for the private credit industry? It was never that's not like what I'm here to do. But I think a lot of the hyperbolic fears are just a way overblown. >> You know, it's like any other asset class. Why would you paint it with a broad brush? It doesn't make sense to me. If you're picking fund managers in public markets, you would look at those fund managers. You would look at their track record. You'd see how they've been doing over time. You would see importantly, which to me this drives me crazy, nobody asks what they're actually invested in. What are they underwriting? So those questions you've got to ask them. And if you look under the hood, you know, today was a great example. One of the biggest alternative managers had published their report. Blackstone, did you see the results? >> I did. Phenomenal. I'm a shareholder. So, Blackstone's private credit business alone was up 13 uh almost 13%. Private equity also 13% over the last 12 months. So, doing well despite all the cockroach fears. So, I had sent you that chart over there too. >> Went down 4% today. >> Gives a [ __ ] >> You know, actually all year long these managers have been reporting record assets and >> boy that laugh. >> All right. Uh that was Ben. All right, guys. They're doing the show before we start the show. >> Well, let's get started. I just wanted to get because I'm I want I want to give I want you to have the mic. It's enough of me. >> Three claps coming in. >> Wait, do you feel like you've spent the last week defending private equ uh private credit? >> Not def a little bit. I I don't I feel like I have been and I don't >> How did this happen? How did you become Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build a multi-asset portfolio of stocks, bonds, options, crypto, and more. >> You can also access industryleading yields like the 3.8% APY you can earn on your cash with no fees minimums. But what sets Public apart? AI isn't just a feature, it's woven into the entire experience. From portfolio insights to earnings call recaps, Public gives you smarter contacts at every touch point. Plus, earn an uncapped 1% match when you transfer your portfolio, including IRA transfers, rollovers, and even contributions. >> On your account in 5 minutes or less, paid for by public investing. Full disclosures in the podcast description. >> How did you become How did you become >> I was the first person to say it's it's [ __ ] And now I'm defending you. >> All right, ladies and gentlemen, welcome to the Joe Rogan Experience. My name is Downtown Josh Brown. Today is going to be one of the most epic episodes we have ever done. and I could not be more excited. We have in the house John Duncan, Nicole, Rob, the Compound crew. In addition, joining us today, you know him, you love him from several other shows on this network and anytime he joins us in person, it's a barrel of monkeys. Ladies and gentlemen, Ben Carlson. >> I don't have a bio written for you. >> Star of Broken Arrow and several other 90s action classes. Ben Ben is a collegiate football star. Um, well, you were >> I flamed out in high school. >> You flamed. All right. That was Oh, that was high school. >> That was high school. >> Uh, I played in college for a couple years, but it didn't happen. I was too busy partying. >> All right. More importantly, Ben is uh Ben is the head of institutional asset management here at Riddle's Wealth. He is the author of A Wealth of Common Sense. He is the co-host of Animal Spirits with Michael Batnik and uh just an all-around gem of a human being. Welcome back, uh, Ben. So happy you're here. And first time guest. She is, in my opinion, she was, in my opinion, one of the best reporters covering high finance. That's what I call it. I like the upper echelons of of finance. >> What happened to finance? >> No, no, no. Yeah, high finance. >> I mean, that's your beat. >> Finance. Uh, >> you changed him. >> I went with finance. You have interviewed before I even say your name, you have interviewed like every impressive person on Wall Street. You would agree with that? >> And even some non-impressive ones. >> Sure. Sure. Sure. That's true too. Uh Chanali Basic is the chief investment strategist for I Capital, responsible for developing market views and research. Prior to joining I Capital, Chanel anchored Bloomberg television show Open Interest while serving as the network's chief global finance correspondent. Welcome to the show. You happy to be here? >> I am so excited to be here. Longtime listener, longtime fan, first time guest, though. >> Thank you. All right. My first question. How dare you defend private credit? All right. So, this is going to be this is going to be a show that's fairly focused on private equity, private credit, clearing up some of the misconceptions that I have been spreading in the media. And no, what we want to do is get to the bottom of what somebody who is very connected within this world has to say. I know you've probably spent the last two or three weeks speaking to people at a very high level about this, both investors and fund managers and corporate executives. >> Yeah, we've been speaking to people about it, but we've also been doing a lot of research because we wanted to be so clear about what is and what isn't. Okay. And it's funny because private credit in particular, we were joking around Batnik and I just a second ago about how you were getting pitches for private credit funds for years now. Uh and most of my career at Bloomberg was very much around the private markets because that's where so much of the activity was moving. So similarly, you couldn't avoid it. So where are we now? It's grown so many. >> So let's start there. Like how much are we all about to lose? >> Well, we did this analysis. You shared it. I have one bone to pick, but I'll pick it later. Good. And so, because I know you like a little spiciness. Uh, and so if you look at the exposure across the business development corp universe, this is the private credit verse universe you'd really look at. Did you see how small the actual exposure was to two bankruptcies? >> Yeah. >> Try close zero. >> Well, >> not only small, but so dispersed that no one player is really affected at all other than Jeff. We looked at more than 165 BDC's and just over a dozen had any exposure at all and most of the exposure within those funds was 0.05%. >> Can we back up and tell the audience what what we're talking about when you say exposure to first brands for people that aren't paying very close attention? What what's like the synopsis of why all of a sudden everybody's worried about this? So there's two companies in a row first band andricolor that faced bankruptcy by the way I would actually argue for different reasons there was a third company that no one talks about the primolind company right but because it wasn't tied to private credit no one talked about it >> or because it didn't have a private credit >> not salacious enough >> exactly the private credit world draws a lot of questions and attention so when they went bankrupt we did see losses tied to banks and then a lot of questions around how exposed banks were to private credit firms terms because you saw those types of losses uh within these two what you know what Jamie Diamond is calling cockroaches what people have heard for the last couple of weeks what um you know people are calling the idiosyncratic risk tied to certain private credit but really this was a banking problem ultimately at the end of the day these were bank lines that at the end of the day >> I want to be clear also in one of these cases someone is alleging fraud >> yes >> which is not the same thing as quote unquote reckless lending it's its Fraud is just a part of unfortunately it's a risk that every financial institution faces. >> But even beyond that, there were a lot of questions about loans that were not disclosed to investors among those firms, right? Fraud. But you know, was there diligence enough? Was there not enough diligence? This is a big question among the firms that were exposed to each of those companies. >> Don't you think that this is actually a positive for the industry though? Because there's people wouldn't have talked about this stuff a few years ago. Now, I think there's just going to be more transparency. I think in the end, that's a good thing. >> Yeah, I I I couldn't agree more because we were saying a little earlier, if you are invested in a public market manager, you are looking at their holdings. You're looking at what they're invested in. You are asking about track records. Why wouldn't you do the same thing for private credit? If you call up your manager, I did it throughout the last two weeks. I called a bunch of managers and I said, "What are you holding? What are you holding? And how sensitive is it to the broader economy?" >> You have the ability to do that. Everyone else doesn't. You know, the thing that's really interesting about private credit now because it's opening up to a broader market of individual investors, you are seeing more managers be more and more clear with as many adviserss that they could be really open the doors to the ability to >> I agree I agree with that. But but I but I also want to point out these things don't have QIPS. This is the fundamental difference. So when you own a public when you own a public bond fund >> Yeah. the manager is buying all sorts of bonds, all sorts of um loans in some cases, and for the most part, they tend to have a QIP, which means an end investor can look these things up, which is way more transparency than by definition you would get from private credit, from direct lending. There's no there's no way to know what anything's worth until the manager files and says, "Here's the mark. This is what we think it's worth." But don't you think it's interesting? You know, there was a story on Bloomberg today that's consistent with what we're seeing. As these products become much more available, these investments become more available, you're all of a sudden seeing, you know, what was impossible a few years ago possible now. Now we have monthly reporting from many funds, for example. And so that transparency, it has to increase as availability increases. But with that said, like let's talk about just private credit for a second. Shouldn't we just take a big step back here and say, why are we even talking about this? If you think about it, why did my why is it that I have spent so much time on private credit? It's because so much of my career was after the financial crisis. After the financial crisis, regulations really hamstrung the banks in certain areas. But then there's two other moments arguably that really accelerated this co when the banking system froze up in a lot of ways during COVID. It was actually private credit that moved a lot faster into many parts of the economy. You saw >> people still needed loans. >> Totally. And so that was one thing. And then when Silicon Valley Bank happened, right, you had seen that kind of regional banking crisis of 2023. And that was another big moment for private credit to really expand its wings in a massive way because again, you saw the banking system freeze up in certain ways, especially among smaller and middle medium-sized lenders. So, private credit firms started to backs stop many of those lenders and become what is now a more uh critical lifeblood to the American economy than it was a decade ago. So you're you're still relatively new to the space. I'm curious like what you've learned being on the inside now that we don't see from the outside. >> I actually the the chart that I sent you of returns, right? I think a lot of people are asking. >> Let's put that up. >> Yeah, you have it. John has it. >> Yeah, it's really really interesting chart here and what you're seeing is that you have doubledigit returns in many parts of the private markets. I thought this was the most clarifying >> management selection has been an important driver of return outcomes and alternatives. We're looking at we're looking at dispersion and I think I want to speak for you. What's your point? Cuz I think I think I know what it is. But you go. >> So a lot of people talk about volatility. I don't think volatility is the problem. I think dispersion is the problem. And if you're not in the better funds, if you're not doing the diligence that many people, as you were saying, Ben, are not doing by the way, then you're not getting what is possible from this industry. And a lot is possible. Remember, this is also an asset class that institutions were more privy to than individual investors. And we had a great I pulled this out for you, Josh Brown. You're asking how big of an opportunity the RAA channel is for al alternatives. If you are an RAA with assets above 500 million, you could have they they have had much much much more exposure to alts. Makes sense. You might have bigger clients in that book and more money then to put aside to alts. you used to have bigger minimum ticket sizes, but now you could invest $25,000 in an alternative fund with um with a fair degree of I hate this is a whole other topic. We should get into liquidity, right? And so >> that's the that's I think that's the biggest that's why we're never going to have a plane crash in private markets because it'll be like let's say this really was it would be a death by a thousand cuts because the investors can't panic, right? You could you can you can't get out of it quickly. How would you panic as a private credit investor? You would have to buy CDS against the basket of the loans that you you're on the hook. >> So, because of the illquid nature of the funds like that that would make it worse if there was a credit problem and everyone said, "All right, get me out now." You can't do that. You literally can't because of the way the funds are structured. >> So, John, >> we actually but so just like a little bit of nuance there. >> We saw a small version. Some would say if the people that said this is a canary in the coal mine ended up being wrong, but we saw an episode where Black Rockck has a semi-liquid uh >> Black Stone, >> excuse me, Blackstone Bed >> semi-liquid and Blackstone had to gate redemptions because the alternative is allow people to have their money back and sell things at a depressed valuation. >> Wait, hang on. And that's not good for anyone if the portfolio is forced to liquidate things at prices that they don't want to. So they gated redemptions. Eventually the redemption requests cooled off and BE is still trading and it's okay. >> But that if you go back to that time, it's such an interesting moment, right? Because it actually worked the way it was supposed to work. A gate is only a gate if you're not legal. Like they they had limits. All of these funds, to Ben's point, have limits on how it's not full liquidity. It's and it's also not a gate. And so to talk about these funds as though they're liquid is a big mistake. >> Starwood gated, right? Wasn't it Starwood that said there's no more money coming back? >> We could people could fact check. I don't want to like spit. All right. So be So John chart 10. So we're fast forwarding for a little bit here. This was going to be my ultimate take. I have been of the mind that the episode that we just experienced withricolor and first brand it's not nothing there is something happening is it systemic I don't think so I think that it ultimately blows over in a very similar way that be blew over and guess what the stress in the real estate market particularly the office space which they don't have a ton of exposure to at least not anymore this was so much more significant and potentially systemic. Think about the stress in the real estate sector, the actual stress. And here we are a couple years later and it's fine. >> Yeah, Nick, you know, I'm just going to call you on Tuesday nights now and just be like, let's talk about this. >> I mean, I I think that's I think Michael's point, the asset the assets in this the assets in this fund have been between 50 and 60 billion for the last two years straight. And that that disruption that everyone said this is going to be the death nail for these semi-liquid real estate vehicles turned out not to be true. And to Michael's point like the the uh the hysteria cooled off. So >> but if there are real losses though the clients are going to have to eat them. >> Sure. >> That's the thing. That's the that's the difference. >> So that goes back to the dispersion chart too. It's not that you people don't lose money in this asset class but they lose they also make a lot of money. Those are going to be the stories someday is like look at how terrible this fund did. The people were overpromised or there was too much leverage or whatever it was. Those are going to be the stories. >> Okay. So, >> but my comment at the time was what you think you can't lose money in a publicly traded REIT? Like what are we talking here? >> So, BE the returns have not been great over the past couple of years. Yeah, real estate's been challenged. We know. But is it a catastrophe for investors? No. Is it great? No, it's not great. It's basically flat for the last few years. But let's get back to Shanali's chart that she showed on in terms of dispersion. Okay, I think this is really important. When you are investing in things with highly idiosyncratic manager access risk like venture, like growth equity, the dispersion of returns are a mile wide. And if you're not in the top whatever >> Yeah. >> decile cile, >> you might as well >> the better the better managers versus the run-of-the-mill managers or the bad managers. >> Direct lending is the opposite. We aren't we? The industry is making loans and guess what? most of the loans get paid back. So this is an interesting I tal I like I said in the last week I've talked to a lot of managers about this and it's not like you know if you're Stan Ducken Miller right Stan Ducken Miller is known for big concentrated bets right that is the secret to his success but those are like 40% returns right venture capital's like that too but different different type of asset direct lending super diversified there are hundreds and hundreds of loans that are being underwritten such that if one loan were to go add it's a typical >> what is the typical position size for one of these funds I know it's there's a lot of different funds but I mean what is it 1% two like how how big are the position sizes in these funds >> well let's put it this way when first brands the losses that we saw like I said it was 05% that was lost for most of these funds >> so who has taken who has taken the losses >> so it's a half of 1% >> that those are just the BC >> okay >> so you'll take in a bankruptcy you're taking basically a total loss >> less than half zero 5% and the problem with that is that the collateral the leans were no good because there was fraud. >> Yes, >> double count double counting assets. >> Even then how small that was relative to the overall portfolio. That's kind of the point. But with that said, I actually was pulling up an email because I asked our diligence team how they go about picking funds as well. And they said uh there are two rules. There are two rules when it comes to underwriting. Protect capital and don't forget no definitely not that. Have you ever heard protect your capital and don't forget rule number one. How do you ever finish a thought? >> That's a B that's a Buffett that's a Buffett quote. >> Yeah. >> Rule number one, don't lose money. Let me give you another number two. Don't forget rule number one. >> Who's who is the one that said don't ever hire an optimistic credit manager. >> Right. >> I like that one. >> So, so my take is there is >> if you look at just rolling returns, not rolling returns, rolling like inflows, >> the institution has pulled back dramatically because they're good. They're full, right? And distributions on the private equity side have just not materialized. So they're not really allocating as much there on private credit >> or equity. >> And the the flows have been replaced by wealth managers. We we know the story. It's very it's very transparent. But it's not as if the inflows have triple xed. So even though I guess my skepticism would say there's so much money coming in that there can't possibly be this many good loans to make and therefore the underwriting standards have probably come down. There's probably some sloppy behavior which we're seeing and it's not going to be in my estimation a systemic holy [ __ ] I can't believe we were so blind to the risk. it'll probably be lower returns. Now, the counterpoint is well, but it's sold for plus six and that's just kind of what it is. And so, if rates come down, returns will come down, but let's say that there's a tick up in defaults. Returns will come down, too. So, fine. So, it's not 9 to 11%, it's 7 to 9%. >> And again, it depends on the manager because the one we were talking about this morning is still double digits, right? But with that said, yes, you're right. Um, there is an element here. I call them tourists. There are a lot of people who have entered the space that don't know what they're doing. That's for sure. Right. And why do I believe? >> Stop sub tweeting, Michael. >> Is that Oh my god, you used to be my favorite. >> I have a fund. I have a private credit fund. Uh taking investors now. >> Well, you know, the thing about the tourists here is that we haven't seen a real market cycle here since 2008. Not not to a severe degree. And so a lot of people who are entering the industry have not experienced that pain. And you know, a lot of people when they look at their managers say, okay, well, what kind of pain have you experienced? And have you navigated it? to the point you were making Ben on uh it's not just the ability to withstand pain in the market the bigger managers because of scale there is a benefit right if you have management teams and big teams that can work with the portfolio companies you're also at greater um you know greater protection of even making it to a workout and if you make it to a workout by the way a lot of these people have been through distress cycles before they know how to work those >> for the listener the workout is all right we can't actually make these payments as currently structured. What else can we do so that the underlying company survives? And then the lender has all the incentive in the world. And a lot of times these are bilateral things. It's not a syndicated loan >> where you know it it just gets adjudicated in court and there's nothing you could do about it. These are like phone calls between people who trust each other. >> When were we in Charlotte with uh with with Cam Harvey? >> 23. >> Okay. So in 23 I was talking to Cam and this is back when I was like why am I getting several emails a dozen a week from private credit managers and I spoke to Cam and I said does this worry you at all and he's I don't that he's not kn he's not known as a pessimist but he's a risk guy right and he was like no and I said really tell me more and he said well because these loans were otherwise syndicated by a by banks and there was a million different investors and knife fights galore and lawsuits like I'd much rather this go I didn't say blackstone per se but I'd much rather the the risk in the hand of a single operator that can negotiate with these companies and work it out. And so there's like been a lot of talk about this payment in kind stuff. Oh, it's all just payment in kind. They're just adding to the end of the loan. They're extended because they can't pay. And if you look at the data, that's actually just not happening. And if it were, I would be sharing it and people would be talking about it. But it's not. John, can you throw up chart two? >> So this is from Hulahan Loki and we next chart, please. I'm sorry. Chart three like we're talking we're just talking stories without like fundamentals and data and look at the top chart payment in kind >> as slow down define for for did >> but what does that what does that mean what does that mean for somebody >> because you weren't listening so payment in kind is payment is missed and it is added to the end of the loan it extend it makes the principal payment >> in lie of making a payment today we'll just give you more money we'll lend you even more money and you'll owe us So that is like the buzzword that people keep talking about. >> That's what the Financial Times looks at and says this is going to this will end badly. >> Okay, but look at the data please. So payment in kind as a percent of total interest income, it's steady. And if you look at non-acrruel investments, which are which are uh uh uh borrowers that miss a payment, there's nothing there. You know, and I've got to say, I've tried to look at this in so many ways and stress test all these ideas because, you know, not only has this remained steady when you look at the markets, are you more worried at this juncture honestly about public credit or private credit? >> Private credit. >> Why credit spreads are in honestly? >> Don't the yields have to come down though there if there's that many lenders out? Josh said Josh said, "Well, it's it's the sofur plus whatever." Don't they have to come down if there's that much competition for the loans? >> That's what I'm worried about. >> Okay. Let me let me address this too. There's two things going on. The traditional way private credit used to be defined was direct lending. This was, you know, levered loans by and large. That's estimated to be a $ 1.7 trillion industry. Broadly syndicated loans are actually less than that. >> What's the difference between those two? I thought they're like kind of the same thing. >> Bilateral versus a syndicate where there's a million lenders and and everyone has a tiny slice. >> Levered loans and bank loans aren't the same thing. >> So broadly syndicated loans, levered loans are in the same bucket, but direct lending versus BSL. Okay. I got it. That's what I'm talking about. Direct lending is now a bigger by many estimates industry than broadly syndicated loans. So, it's kind of how much bigger can it really get when they're kind of the same type of borrower? We'll see. The high yield market is, you know, different estimates, but just a little bigger, 2.6 trillion. So, where now has private credit been going next? Why is it growing so much? It's not all direct lending. >> Data centers. >> There's a lot of data centers which are absolutely >> great more exposure to AI. I know >> that's what everyone's missing in their portfolio is more AI exposure. >> There's so many funky things, right? Assetbacked lending, music royalties, um there's consumer finance which is more weighted to the credit cycle. And so, uh I think the industry is evolving in different ways. You're just seeing it's just lending. It's just lending. >> Direct lending is Aries raises a fund. they raise $10 billion. >> Mid midsized companies >> that are not going to issue bonds in the public market go to Aries and say we have a contract to supply X number of gigawatts of electricity to this AI um to this AI data center. Here's the contract. Meta is paying. We know it's money good. Basically, it's almost like factoring. But but let's go to the data center thing for a second. >> So wait, so Aries makes that loan. >> Yes. >> In their fund. >> Yes, >> I'm comfortable with that because it's Aries on the hook for it. >> I thought you hated private markets into it. >> No, no, no. I want to I want to point this out. I think it's important. A lot of people are making the comparison, myself included, to the mortgage bond the the mortgage bond era. >> Interesting. >> The difference between this and that. This actually seems safer to me because in the mortgage bond era, nobody knew who owned what. It was syndicated to death and trunched >> and it was backed by the strawberry farmer who had eight houses. >> This is backed by Meta. >> So that's So >> it's not the same. I'm so I'm saying something very constructive here, which is that I feel pretty confident the guys running Blue Owl and Aries and Apollo, they're not complete insane maniacs that are just randomly spitting money at at lending opportunities >> and and hoping for their back. >> Yes. And they all have seen a credit cycle, right? Um >> these guys were all these guys all came out of >> like Drexel. >> Yeah, they've seen it all. So I I'm comfortable with that aspect of it. This is what I This is what I've been saying. They're not the only players in the market. >> Yeah, >> that's one. >> Now you have a second tier. >> Yeah, cuz those big firms, they can short up and they're not the ones pitching Michael. >> But wait, okay, so this is a very important point. So all of this [ __ ] in my inbox, these these these funds are nonsense, right? Even if it's like a third tier asset manager that we know, no chance, buddy. Sorry, not going to happen. But the Blackstone Aries, KKR, Carlos of the world, there is only like six of them that can make this $5 billion loan. So they're not fighting for scraps with all of these fourth tier entrance. They're going to get smoked the lower ones. I'm pretty sure to Josh's point that the contracts with Oracle, at least for now, they're going to they're going to be okay. >> The the contracts that you have with the hyperscalers are some of the most interesting ones. And why? One is because those are between 15 and 30year loans. They are so long. And yes, um you know, if you're worried about public market valuations of those kinds of companies, that's one thing. They have to pay their lease, right? that needs to happen. And >> why wait why are those loans so long? >> Because they're leases. They're data center leases. They That's where I think that the confusion around what's actually happening here. You're talking about what has traditionally been loan known as direct lending and private credit. Yes, fine. But the way the industry is going is also these massive data center leases too that are very long leases. And so they're not just that. Some of these are also also um you know because they're rent, right? It's uh it's data it's it's adjusted to inflation. And so they actually the cash flows grow every year. That's the other pretty interesting. >> All right. So now let me tell you though the second half of what I'm saying. This is what I'm worried about. >> Sure. >> And I have firsthand knowledge of this. >> Okay. >> Because it's very old. >> No. No. >> Do you lose money in a private credit fund? >> No. >> Yeah. Show me on the dollar where the private credit touches. >> No. But I have an analog that I think is that I think is very apppropo of I think could I actually think this my firstirhand experience >> could be emblematic of what's happening all over the country maybe all over the world >> in my industry the wealth management industry >> every single day there's another article in the trades about a private equity deal that's the bubble let me hold on hold on for a firm that I already know is a piece of [ __ ] Okay. Every day, not every week, every day, they are taking other people's money. They are buying firms that have no real enterprise value at absurd multiples, 20 times cash flow. They are retiring the boomer who started the firm 20 years ago, and they're basically smashing this acquisition together with a whole pile of firms just like that, and they're calling it a business. In reality, they're buying salespeople and those salespeople's relationships with their clients and they're counting on the fact that they're only going to have to sue a few of these people who try to leave. These are horrendous horren now I know this >> not everything again dispersion but to your point >> of course not everything but I have to overgeneralize because the question is why is this happening? I will tell you why. All of these funds have raised so much money from investors. They have to do something. And all of the best assets are already spoken for or not for sale because they're good assets. So what's left >> like us, >> what's left is making mediocre investments in mediocre companies at bad valuations competing with 50 other funds. >> There's just no way on the equity side that that's good business. How could it not be similar on the credit side? It's the same firms. Whoa, whoa, whoa, whoa. >> No, not first of all, it's actually not the same firms often because you know what's grabbing headlines. Sometimes it is. When it's the same firms, you're looking at a big buyout and maybe the direct lender is exposed, but they're downside protected, right? That's another aspect of this. >> Why? Because they're at the top of the capital. It's loans versus equities. Yeah, that's a big difference. It's not even close to the same. >> It's the same industry competitive dynamics. If there are thousands of players, >> loans versus equity, loans versus equity. >> But don't you see it's the same competitive dynamic? If we don't put this money to work, we're going to lose we're going to lose the A. >> I understand. But to Shanali's point earlier, the equity dispersions of managers. Yeah, I obviously I agree with you with what we're seeing in our industry. I don't want to invest in those. >> But don't you think every industry is the same thing? >> But loans and equity, they're so different. that is like we'll get back to that because that is the most important part of this. But on private equity to the point that you're making, it's even beyond the bad companies being bought. It's the fact that you have um they call it the DPI issue, right? Have you heard of this a lot? It's a basically that private equity firms have been sitting on ass investors money back. And so when people say that they just mean that it's um they're they're stuck. It's a complete clog right now. Not complete. It's starting to open up. You saw that in the results. >> Well, because valuations got so silly. There's no more buyers. And you know what's happened? This is the problem when it as it pertains to private credit. There is a controversial thing going on right now in the way that people are keeping companies um going via debt just because they can't exit in the private equity universe. So yes, I don't disagree with you. But if you are a credit firm, remember the risk profile is this. Josh Brown, I'm going to lend you money. I'm going to lend you money. You're not that good of a borrower. comes to me at 15% to 20% because you're not a good borrower. And so I'm but what I'm betting is you're not going to default. What I'm betting is you're not going to go bankrupt on me. You're not going to miss your payments. So it has to be a much worse of a borrower than wait the competitive dynamics are bad because if the competitive dynamics are bad, then your equity valuation just sucks. >> So the equity dumb schmucks that are investing in these companies at stupid valuations, they're not going to get money because there's there's no growth. equity. >> I may not intend to default, but in an economic downturn, I know we haven't had one a very long point. We're not going to know any of this until some companies just the cash flow isn't there to support the loans they've taken out. And the smart thing to do is to default and clean the slate or liquidate. Um, and we just So, Ben, what Ben's saying is what I think, which is that okay, we don't have a dry run. >> Yeah, >> we don't have recessions anymore, though. Sorry. had a 7minute recession 5 years ago. >> It's been 50. That's the thing. >> All these systemic risks we're always talking about, we're never going to know until we get another recession. We're >> how could you? We can't do a rehearsal. >> So that's my only point is and now the industry has made more loans than they've ever made. The dollar amounts have gone up >> and the amount of people in this ecosystem borrowing from direct lenders has gone up. And look, there will be losses in public credit, too. >> Yeah. I was about to say everything you're saying is obviously true. >> Yeah. And when the tide comes out, people people eat [ __ ] like >> Well, me and him were talking about this. >> But here's the difference. Wait, wait, no. This is really important. Here's the difference. As a financial adviser, I call my clients and I say, "The economy looks really bad. You got auto companies uh spitting the bit. You got banks reporting losses. You got credit card companies are falling off. Hold on. Let's Let's sell and go to cash. I can do that in HYG whenever the I want. I can't do that. >> Yes, I think that's is good. That's not all good. That that people can panic. >> Not panic. Decide that they don't want to take as much risk in the credit market after deep losses. >> I can't do that. Not after. Maybe in the early innings. You don't know how long that goes on for. >> I to me that's like the least offensive part of it. >> But also remember this goes on >> I've been around a long time. Do you understand? I drank out of glass Snapple bottles. Do you understand this? That's how long I've been around. I'm just saying as an advisor, >> the if you say to a client, we're down in this bond fund because some some of the credits are blowing up and we're just going to take a little bit less risk. We're going to trim. You can't do that. Some of this, what are you going to sell first? If things are really going poorly, are equity. >> No, but you're right that people are going to change their allocation preferences a lot. >> They're going to want more of this. Don't you see that? Yes, they are. There's going to be a lot of people who say >> that just happened in 2022 when people got their asses kicked because their bonds duration killed them. That's why they flooded into the floating rate nature of private credit. And also they wanted good floating rate good illquid floating rate not as good. >> Wait, but that's that's the double digit returns. But also even beyond that 2020 and 2023 when we were talking about when credit ultimately people didn't feel so good about it then, right? You still saw private credit being able to step in in this massive way and buy thing. That's when the things are cheapest. Those are the best investments. >> Can we all agree? >> Can we all agree that investors prize liquidity in a crisis? >> Yes, >> we can all agree that. >> But what you're saying is the 180 180°ree opposite of that. >> I'm saying that if you are if you have a normal responsible portfolio and 10% of your portfolio is illquid, you're going to be fine. >> But also, how much of your portfolios are in cash right now? Because >> 100% I'm super bearish. >> Well, but like the average RAA has what I've heard anywhere. >> The average RAA holds 2% aside mostly so they can bill their clients. >> Wait 2%. But one other thing that we mentioned that we glossed over on the where would you rather be private credit public credit again not to be the defender here but on the private side what you are getting in exchange for the illquidity is a relatively constant spread over sofur 5 600 whatever it is meaningful that's the source of >> public markets right now and granted you could say that the quality in hygi is higher than it used to be because all the [ __ ] is going to the private direct lending fine I'll grant you that but right now credit spreads are so tight in public credit like I don't know is that better? Why is that better? >> Right? But but in general in general in a in an economic downturn people very highly value and I'm going to tell you something about the financial advice business because there was a time where we were all told hedge funds got to be in hedge funds. Hedge funds avoided the dot blow up. Hedge funds made money in the last decade for stocks. Hedge funds play market. >> There there's a lesson here. There's a huge lesson in that. And then the illquidity of a lot of those hedge funds had private market assets. >> Yeah. >> They had to side pocket them. You couldn't get and that pissed people off. Even if the returns 5 years later were good. It was be beside the point. When things are not going well, people really value the ability to reach in and pull cash out for whatever reason. >> I don't disagree by any stretch of the imagine. Well, you're well advisers who have very illquid portfolios with their clients, unfortunately, are going to have a lot of difficult conversations if we ever have a recession. >> Guess what? Those clients will be our clients eventually. >> It shouldn't be you should have a reasonable amount of alts in your portfolio that are not it's not you have to still have a liquid part of your you know, it's interesting. Golden came out with a survey the other day and a fifth a fifth of the respondents in the survey were holding um actually no out of the survey one of all the total assets that were surveyed for were in cash a fifth a fifth still today >> when you say in cash like all in cash what do you mean >> so a fifth of the total portfolios that Right. So >> Morgan Stanley said that on on one of their calls recently 20% of their Yeah. So if you look at the wealth community at large, there's a lot of money in cash. So the liquidity question has clearly been on everybody's mind, especially at these levels, you know, where are we in the market, so on and so is right. Josh is right. If you if you overdid it on the private side with your clients and they're 40 50%, you are fired, you dumb [ __ ] >> I don't I don't hate a barbell. >> You're allowed to curse on here. >> We can do whatever we want. I I don't I don't hate a barbell of I'm 10% cash and I'm 10% illquid high yielding assets and I can make sense of that because it's a total portfolio approach. It's not what I personally that's an advisor problem not a client problem. >> It's an advisor problem. Yeah. No, but it's a real one. It is a real problem and but that's the thing. Thinking about it from a total portfolio is the only way to think about it, right? You can't just like dump all of your assets into >> il people do. But here's the problem though. People um this called mental accounting. People do this all the time. A client looks at their portfolio. They have a conversation with the adviser. 80% of the portfolio is going up. 20% is going down. What do you think the client has questions on? >> Yeah. >> Should we still own this? What are we doing with this? Do you still like this as much as you liked it when you told me to buy it? >> They'll fixate on the part that's down now. They shouldn't because that's probably the part that's about to outperform. I'm just telling you the difference between data and how things actually go when you're when you're helping people with their money. >> If things are going wrong, think about it this way. Let's just draw out that scenario because 2008 and the market structure today for private assets are different. Yes, if I'm holding a hedge fund where you think they're in a bunch of liquid stuff and turns out they're not, that sucks. That totally sucks. It's also not what they really sold you, right? But now what you're looking at is a market that's meant to be illquid, right? And so it's like, wait, okay, to your point, I know I can't pull this money out. And when things do go bad, it's more likely that those public assets have been facing that decline than your private credit, which is, you know, supposed to be less volatile than what's happening in the public markets. And now because of liquidity, >> but you know what I'm bullish on for that reason? I think the most popular category in this in this space is going to be secondaries. Yeah, that's huge >> because that's how you take advantage of all the problems I'm pointing out is you're invested in a fund that's waiting for people to choke and then when those other funds are choking on assets and have to sell things, the secondary fund is there to get that discount. >> Are you a distressed investor? >> I might be. Holy [ __ ] I'm definitely distressed. >> Thing is, there's going to be so many distressed >> there's going to be so many overreactions in the next recession. That's right. That's no matter what. It's been so so long since we've had a real one that wasn't short up immediately. I I think the like knock on effects of whatever the next recession happened is going to be enormous. >> Well, let me ask you a question. You know, we were talking so much about privates to your point on total portfolio. How vulnerable is the stock market to that? >> It'll be fine. >> Very. >> Oh, yeah. >> What does what does a recession really like? You know, people are saying bubble this, bubble that, but realistically speaking, if something actually goes wrong at the with the macro, >> if the loans go bad, could you imagine what the equity is going to look like? Like, could you even imagine? >> It'll be way worse. >> So, I want to just I know we've gone long, but I want to we we can't not talk about the banks, especially because Moody's just put out a big report yesterday that is really important and they talk about the big picture and I would agree with everything that they said here in terms of this risk is rising especially for smaller banks. They talk about growth and competition. They said concentration risk is a concern with banks specifically. Um the true risk can be hard to assess. Of course, we all know that. And then lastly, transparency in bank loans exposure is improven, but new light exposes gaps. So they have these great charts that I want to talk about. They showed that banks help. Ironically, Jamie Diamond, I mean, there's there's a lovehate relationship. So banks, >> this is so wrong though. The data is wrong. >> Oh, go ahead, please. I'm >> sorry. This kills me because they said there's 300 billion. >> Moody's is never wrong about anything. No comment. Say more. >> This data is not Well, here maybe not wrong, but at least a little misleading for this topic. So 96 billion is really what's in private debt funds. They're saying it's 300 billion. What they're accounting for. >> That's percent growth. >> Well, no, but in total, what they're counting, it's percent growth, but that what they're counting is up to 300 billion dollars in loans outstanding. Well, that happened to be the same for no reason. But it's actually when you look at the total, that's the growth off of a almost non-existent base that you're looking at. And then on top of that, it's actually 96 billion, not 300 billion. And out of the entire universe of a non-bank financial credit, which is getting bigger. Um, the private credit is only 4% of that. >> So, this will bother you less. So, is this is is this a better this is better representation. The NDFI on the bottom is >> it kind of, but the NDFI is a really >> non deposit financial institution or shadow. >> That is like online lenders that is like all sorts of specialty lenders that you name it. >> All right, fine. All forget that [ __ ] Here's the important part. Here's the important part. John chart N. I'm going to try one more time. All right. The rise So the rise of private credit. So Bloomberg took the data from Moody. So tell me if this is wrong, too. It might be. So this is the amount of loans in private credit from the banks and JP Morgan. >> Uhoh. They wait. They they found a way around DoddFrank. >> Yes. So Matt Lavine wrote about this yesterday. >> Jamie Diamond's eating chocolate cockroaches. But look, but look, West Fargo, $60 billion in exposure to private debt firms. JP Morgan, they're not making the loans, but they're making the loans to the people that are making the loans. >> They're lending the money to the lenders. It's genius. >> Exactly. >> But but they've all but they've always done that, right? JP Morgan's biggest customers, what? Like mostly regional banks, right? How many do they bank? 4,000 of, right? They >> That's their business. And so when you look at this number with what I just said that it's the private credit definition that they gave is a little misleading because it's those online lenders, it's the specialty lenders, it's all sorts of lenders. So um it doesn't actually show what their private credit exposure is here. It's a lot less than that. And you know, you think about it, people are talking about JP Morgan's private credit exposure, but like they also just increase their provisions for loan losses to the entire economy, right? that they have underwriting that suggests that loans just regular way consumer loans could start to sell a little bit. >> What do you think of this though? Nothing's happened yet and people are this vigilant. Is that a good thing or a bad thing? >> You know, I I I'm with Ben. I like it. I >> We don't have delinquencies in real life and people are like people are like suspect everyone. >> Let's be honest. If this really were systemic risk, everyone's getting bailed out. >> Well, that's true. That's true, too. That's the That's the That's the funny part is that no one will actually have any consequence. But do you feel like that's a good sign that we're all like >> who Jamie Diamond we're scouring all of our books? That's kind of good. Very good >> that we're doing that now before there are actual losses. >> Never hire an optimistic credit, right? Like you >> Next topic. >> Yeah. >> BDC's. Yeah. >> How do you sleep? >> No, I'm just kidding. Uh I wrote So I know you wanted to take interest uh take issue with one of the things I wrote. I wrote about BDC's. >> You called me biased. >> Not to Well, I'm biased, too. >> Wait, wait, wait. Shali, I'm biased. I'm biased toward the stock market. So, we all have our >> Fair enough. >> Okay. Um, I wrote about BDC's because I think they are the exposed part of the wound. >> H >> that if there is a wound in the way that they behave, people are worried about two things with BDC's. The first is um very benal. As interest rates come down, obviously the yields that these companies are able to pay have to come down with them. Nobody should be alarmed by that. That's the way interest rates work. So we know that dividend distributions will come down and these stocks are selling off in that expectation. You had the first rate cut of the cycle in September. Maybe we get another one in a month or two. Okay, no problem. But then the second part of that is, oh, wait a minute. There's fraud at some uh with some of these loans. How much more fraud might there? Okay, what if there's three? What if there's four? >> Zans's Bank came out and said they're suing somebody. We know there's going to be more than two. I'm not saying it has to be 2,000. Um, but a lot of the things people are saying in defense of the BDC's were the same things that they were saying in defense of the mortgage funds 15 years ago. And I know because I was there and it's not terribly different in terms of rhetoric. The reality might be different. What do you make of the panic, minor panic that we saw in the publicly traded BDC's? And would you agree that this is a better gauge of credit risk right now than what we would traditionally look at, which would be junk spreads relative to treasuries? >> There's such a massive difference, I think, between I know. No, well, no, no, no. Between credit risk and between um between spread compression and credit risk, right? Credit risk, we're talking about whether you're lending to a worthy borrower. Spread compression, you're saying returns are going to come down over time. Okay, fine, maybe. But if returns come down in private credit to the point Michael Batnik was just making, it would come down in public credit too and the spread for private would still be higher than that. So okay, the wound which which wound are we talking about? I think is what my question is. Right. >> I'm not worried about spread compression. I don't think that's an emergency. >> And so are you worried about widespread fraud? >> I'm worried about the rush to put money to work. >> Okay. >> That we all have to acknowledge has been a big part of this era. What are what are the ramifications that will stem from that if and when we have a credit cycle? >> So Josh right the only question that I have for for private credit managers as we talk to them is h what if you get $10 billion in in funds tomorrow how quickly to deploy it and how what are your controls is it just cash in got to make loans cash in because you can't it can't possibly work that way and if it does and people are doing business that way and I know a lot of people are you're going to be in trouble. >> Yeah and not just for credit for private equity too. The biggest mistake many managers made the last few years is they made all of these acquisitions in 2021. >> That doesn't look so pretty today. You know, things felt really good. So, people put a lot of money to work and look at where we are now. Um, but you know, if >> I don't think if we saw a scenario in which Ben was talking about which is a widespread recession, who's safe in that scenario? >> Like what is safe in that scenario? and nobody in 2021 when the music was playing and all these giant mega growth funds were investing in these companies and insane valuations. I remember that there was very few people calling it out and saying this is crazy. And one of them was our friend Howard Linden who was like I have cash and I'm not investing because the prices that I keep seeing are stupid. >> They spent it too fast >> and when they stop being stupid I will start investing again. And that's who you want to give your money to in periods of um complacency. And there's no doubt that there is too much lending and it's too much. It's too fast. >> Hey, you know, I mean, if there's anything to take away from all this, right, is do the damn homework, right? Don't put your money just because there's a promise of something interesting in an industry that's a hot asset class. Do the work and say, "Okay, what is this actually investing?" >> And put it in your 401k for God's sakes. >> I was waiting for that to come up today. >> Do you think investors should be biased toward the larger players in the space as it just in case? >> Yes. Uh because I I do I think BR brand and size scale really matters. >> They matter for a lot of reasons but not in every asset class, right? Because things like private equity actually middle market and lower middle market have much attract much more attractive return profiles than you would have in like those large scale buyouts right now. >> It's the opposite. I feel like in venture and with hedge funds that smaller managers do tend to do better >> cuz scale is the enemy at that at that in that space. I think it's the opposite. It's the opposite. You need scale. >> I would agree. I would agree with that. >> Okay. So that's So you're like you're asking people to do their homework, due diligence. Most people listening to this who are being recommended >> you like the adviser. >> Oh, I'm doing zero. Um, so this is going to be this is going to come off as like overly cynical and sardonic, which is right on brand for me. But somebody asked me, "What's your private uh equity, private credit strategy?" And I said, "I'm just going to wait for the disappointment and then take everyone's clients." >> Do you own a house? >> Yeah. Is that my private credit strategy? >> You own you own a hard asset. You own a private asset, right? You and so you know what you're asking someone to do in a private fund is to buy assets that you know you're going to buy hard assets. You could buy infrastructure. You can get into I don't have enough money to be able to buy the things that are private assets that I actually think I would buy. >> You have $25,000. >> Yes. >> That that's >> how will that move the needle for me? But that's what >> the thing is I don't have a billion dollars and I can't buy an NFL team and that's what I that's the private asset that I am interested. >> You need a financial planner. >> I Yeah, I can't really help you there. I know some athletes, >> but that's my that's >> you an intro. >> I I I don't think every market >> Yeah. >> I don't think every market makes sense for every person. >> That's true. >> Okay. So, in the private market, the best managers Yeah. >> who have access to buy the best assets >> Yes. are not going to be accessible by every investor. That's my point. >> That is true. But I would also argue that because there have been there's a lot going on. The the operational efficiency is getting better. The documents are getting more fluent to access and the technology is getting better. Um this the fund structures are changing very meaningfully. The minimums are coming down. That's why we're even talking about this. Honestly speaking, it used to be impossible to access many of these types of assets. >> Even 10 years ago, we wealth managers couldn't do it. >> Even two years ago, >> I agree with that. And those are all good things. Anything that you do that um makes these things more accessible and makes so you can actually research them >> and more transparent >> and lowers the fees and adds transparency is unequivocally good. >> But that means unequivocally good. Lower lower returns. Lower returns. Lower returns. >> It has to. >> It depends. I actually don't agree necessarily on that because these are, you know, when you just because you open up something to a wider array of investors doesn't mean like your 401k plans, that's scale, that's pricing power, and that's net of fees, a better return. Now, I will say this, the liquidity trade-off, that's where the return compression comes in. You're seeing a lot of products come to market that are like, oh yeah, you know, we're private, but we're liquid. You go one level deeper. Well, but it's also not private. It's it's it's blended. So, >> the more liquid something is, right? By definition, it's not >> it's not liquid. It's not even liquid. >> It's not private. >> It's not private. And so, a lot of these funds are like, "Okay, well, we're part this and part that and like really the private allocation is like this big." And um yes, you're going to have a tradeoff there where you're not getting paid for that ili liquidity premium. >> Human nature. Okay, just answer me this. If something is an amazing investment, >> whether it's an asset class or a particular property or a particular whatever, >> if something is amazing, are billionaires going to let dentists get in? No way. Right. >> Well, the billionaires, you know, it's funny. Tony James wrote a book about this. >> The billionaires need the dentist though now. >> Yeah, the billionaires need >> as exit liquidity. >> Dude, stop. What are you talking about? Who's saying this is an amazing investment? Private loans do 8 to 10% a year. >> No, no, We're now we switch topics. We're talking about private equity now. Okay. >> I'm saying if something is like an incredible opportunity, >> right? >> And Mark Cuban buys Mark Cuban buys 20% of it and uh and someone else buys 20% and someone else and all these wealthy, well-connected, famous, brilliant people. >> Josh, what team do you want to buy? >> Wait, let us know. >> And then there's 10% of it left. Why would there be 10% of it left for the public? >> Let's put it this way. Why? Why wouldn't they just buy >> You're right. You're right. Of course. The the best investments are for the for the ultra wealthy >> and that will never change. >> Never. Ever. >> So, anytime you're democratizing something, you're telling me this is third tier. >> First of all, are sports teams always good investments? >> Yes. Name one that isn't. >> I don't know. It's funny. I once asked Mark Lazy why he got out of the Bucks, right? >> Best trade ever. >> Well, he said >> he bought it for $400 million and sold it for billions. That's a good enough reason. But he he then went to other kind of more esoteric sports like pickle ball, right? Because the return profile was better there. And yes, these are not available to everybody. But I would say, >> you know, the you know the Jets are probably worth $5 billion. >> Oh, I'm so glad you mentioned that. Sorry. >> There's no sports franchise that goes down in value. >> So last night I went to the Nick, >> but the return rate can slow. That's what I'm saying. >> True. >> Last night I went to the Nick and I was genuinely thinking about this. What are the Knicks worth? I don't know, six billion, 8 billion, 10 billion, whatever it is. >> 15 in real life. >> Okay, whatever. Fine. Let's just let's just say it's 10. Um, Olo is worth like 25 billion. Like all of these like nonsense pre-revenue companies or like when you put it into that context and I know it's apples and computers like it's not the but it is kind of hilarious. >> But by the way, I don't think we're that far off from having individual investors being able to be in sports teams too because >> they're there private equity is there. >> That's what I'm saying. So actually the universe of investments is just getting a lot bigger. So I I don't disagree that there's exclusive investments that are maintained for the ultra wealthy, but I'm saying the universe of investments that only used to be for the ultra wealthy is now expanding. >> So I think that's good. I do think people should leave room in a portfolio. People who are wealthy >> did we win you all the boxing judges already there. But I also know so um I'm a firm believer I'm a firm believer that 90% of everything is [ __ ] That's what that's what I think. Okay. >> You know, I will I will actually agree with you. >> So most of these So most of these uh investments most investment they don't have to go bad. I I wouldn't say that. I would just say like do you want to own the fifth best fund in a sector? And you just showed us dispersion is really a big deal in this space. You do not want to own the fifth best manager. You want to own number one or two or your returns will be radically different. that from from my perspective, I think that's why uh I Capital has been so uh successful. People need someone to tell them this is the good one, that's the bad one, >> you know, and it's the beauty of my job. And it's so funny because I asked my husband, I'm like, how do I fight with Josh Brown about the bias comment? >> We're not So, we're we agree on we agree on almost everything. >> We do. And I I would say it's not about there's no interest in being biased. The interest is in in same for both of us in being right. Right. and being able to do as much diligence as humanly possible on behalf of everyone else. Right? That's what I got to do as a journalist and it's what I get to do. >> So my last question then, is it realistic for somebody who has $200,000 in a 401k to be able to take 25,000 of that and put it into a top tier private equity manager >> or private credit manager? Do you think that's actually what's going to happen? >> I do. >> You do? I I think it'll take a minute to get this ironed out properly, but >> private assets writ large. >> Do you think the better managers will make themselves available to inflows? >> Oh, that's definitely from a 401k,000. >> Yeah. Don't they have to? Because if they if if they they go into 41ks and it's a disaster, then like this is going to that's going to be really bad. They're going to have to put some decent funds forward, don't you think? >> Uh yeah, they'll get kicked off the they'll get kicked out of the plans if they blow up right out of the gate. >> Yeah, they have to do that. It has to be top tier quality and also I mean that the idea of putting assets in a form you're holding that for a long time. >> Yeah. >> That's one of the best possible structures for private assets. >> Yeah. So I don't think Schwab and Vanguard will work with terrible firms or dodgy. I agree with that. I do think there will be marquee names in private assets working with the marquee names that manage most of the country's 401ks. So, I don't think it's a case where bad product is going to be shoved down people's throats. I guess I just question it's probably not bad, but is it even good? Is it even will it be materially better than what they could do with lowcost uh index bonds and and stocks? I don't know the answer. I don't know the answer, but that's the question. >> You know, um a couple months ago, remember made a lot of news when Goldman came out with their assumptions for where the S&P and 500 is heading in the next 10 years. And just because of valuations where we are today, I mean that is one of the big problems, right? It's just capital markets assumptions where we are in valuations and the expected returns over 10, 20, 30, 40 years, >> right? Why overpay in public markets? You could overpay in private markets. >> Well, hopefully nobody's overpaying with us, right? >> Chanala, you're so good at this. It's scary. Uh I I just I want to thank you so much for coming here and um pointing out all of these things that are getting lost in the conversation. Did you have fun on the show? I I I love the show. I'm your neighbor. I'll come to >> Can we do a Rocky versus Apollo for the thumbnail of you two? >> We But we like agree on like 90% of this, I think. >> I think we both want what's best for the investing public. That's pretty obvious. >> Yes. >> 1,000%. >> All right. >> Optionality and >> I think I'm in on secondaries because I like buying other people's pain. I like that. >> I'm just going to call him Vulture for >> I almost forgot to mention this. We have to disclose this. We are a shareholder of I Capital. >> You are. >> We're so technically Michael's your boss. I don't know if you know that. >> Scary. >> I Capital. >> Go get me a glass of water. >> I Capital one of our bought one of our companies. So we have shares in. >> Look at that. >> I'm hoping you're in trouble. >> Don't screw up our kids. 129 is counting. >> That's why he's a spokesman for >> No kidding. I love that you threw that at me at the end there. Would have been nicer to you guys. >> All right. So, we always end the We always end the show um asking people what they're looking forward to. And uh I'd love to uh I'd love to hear from you guys. What's what's hot in your world? What's going on on the horizon? What are you excited about? Chanel, you can start. >> All I can think about is a CPI print tomorrow. Is that horrible? >> Are we even going to get Are we even going to get one? You and Cali both. You Callie's excited, too. >> It's the only like it's a data starvation for the last 3 weeks. Um, I guess I'm sort of excited about it, too. Uh, I I think just in general, I think we'll just get one more rate cut at the end of the year, no matter what the CPI print. >> Just one. You think? Definitely just one, not two. >> Maybe more. But I think we're definitely getting one. >> Yeah, I I would agree. I would agree with that. >> What are you excited about? What What uh economic data point can you not sleep until we get >> So, I'm excited this weekend. My son plays third and fourth grade football. Okay. >> In his last game, >> following in his old man's footsteps. >> He's on the line. He's not like me. Uh okay. They're playing their last game of the year at the big house in Ann Arbor. >> Oh wow. >> It kind of came out the >> Is Rasnic gonna be there? >> Yeah. Is Jason Rasnic gonna have a front row seat for that? >> I don't know. Uh so I something about football was my sport. So watching one of my children play football has been like so gratifying for me. It's it's unbelievable. So much fun. >> What do you think of the Lions season this year? I thought they'd be better. >> They're not bad. >> They're good. I just thought they'd be better. >> Yeah, but everybody thought lo their coaches from Detroit. >> I'm a Packers fan, so I think we're not friends. Okay. No, wait. They lost their offensive and defensive quarter and they're still kicking ass. >> Yeah. And we have the best running back in the league. >> Yeah. >> Oh, that guy's freakishly fast, too. >> Yeah. >> Yeah. Um All right. So, but overall, it's not a terrible season. It's just I I guess I thought they'd be more dominant. >> Aren't they 4-2? What's their record? Five or something? No, they're super They're going to Super Bowl. >> You think so? >> Yeah. >> Okay. I don't know how >> better than them in the NFC. Nobody. >> I I have very low expectations for the Lions every year. So, >> Grand Rapids hedge. When were they last in the Super Bowl? >> Never. >> I was going to say, >> yeah, they should have been last year. >> Sorry. >> Yeah, they got so many injuries. Yeah, >> they should have been. Um, so he's going to play So, he's going to play in front of 100,000 seats. >> 100,000 seats. Yeah, >> 100,000 seats. >> They're playing They give him an hour to play this game. So, they got like no halftime. Like, we got it because there's all these games, but he gets to finish the season. >> He's eight. >> Eight. That's He'll remember that. He'll remember that for the rest of his life. >> Yes. >> Can I say what I'm excited for? I'm excited for tomorrow. If somebody told me 15 years ago that I'd be interviewing Jim Kramer with Josh, I would have told him smoke and dust. >> Oh, is he on the pod? >> Yeah, >> he's on the pod tomorrow night. We're gonna do it live. Uh, it won't air until next week. Um, I don't know how long we have him for, but we're going to do like the Jim Kramer on the compound experience. >> Where are you guys doing it at? >> Uh, we have a venue holds about 120 people. It's fairly exclusive and uh custom cocktails in the financial district. Um, I don't know about that's a Nicole question. We're gonna do it. We're gonna I don't know, Rob. We're gonna do it right. >> And thank you KKR for sponsoring the show tomorrow. >> All right. Anyway, something to look forward to. Uh, guys, we want to thank our guest Ali Bas. Where can people learn more and get more of your insights cuz uh I feel like you just absolutely lit it up on the show tonight. >> Yeah, we keep we keep it real on LinkedIn. We are on Twitter. We try to share as much as we can. Okay. And on icap.com. >> Your Twitter as your your real name. iapital.com people could subscribe to the the research that you guys put out. >> Yep. Yeah. We have a newsletter where we share a lot of that research and uh we have a tab under thought leadership where we publish every week. >> All right. You're the best. Thank you so much for being here. Appreciate it. Thanks to all the listeners. Like and subscribe. We'll see you soon.
It’s Only a Bubble If You Panic | TCAF 214
Summary
```html- Private Credit Concerns: The podcast delves into the misconceptions and fears surrounding private credit, emphasizing that while concerns exist, they are often overblown and not indicative of systemic risk.
- Blackstone's Performance: Blackstone's private credit and equity businesses have shown strong performance, with both sectors up nearly 13% over the past year, despite broader market fears.
- Private Credit Transparency: The discussion highlights the importance of transparency in private credit, noting that increased availability of monthly reporting is improving investor insight.
- Market Dynamics: The podcast explores the growth of private credit, driven by regulatory changes post-financial crisis and recent banking system freezes, positioning it as a vital component of the economy.
- Investment Strategy: Emphasis is placed on the need for thorough due diligence in private credit investments, with a focus on management selection as a key driver of returns.
- Liquidity and Risk: The illiquid nature of private credit is discussed as both a risk and a protective factor, with the inability to quickly liquidate potentially preventing panic selling during downturns.
- Future Outlook: The podcast suggests that while private credit is expanding, the industry must be cautious of over-leveraging and maintain robust underwriting standards to mitigate potential risks.
```Transcript
There we go. >> Give me a count to three. One, two, three. >> Three, two, one. >> Wait, can we have Ben say confident in his assertions? Over confident. A one, two. >> Very confident. >> Very confident assertions. >> All right, >> I just got back from Las Vegas. >> Oh, yeah. >> Yeah. >> For fun or for work? >> For work. All I do is work. Um, >> Las Vegas is my nightmare. >> It's You know what? >> I love it. I love all the depression and the tears and >> 36 hours, right? >> I had fun. I was there 18 hours >> and uh >> That's probably all right. >> I didn't I I did I was there on a Monday and a Tuesday or no a Tuesday and a Wednesday >> and it was still happen. >> Yeah. I mean the encore So the encore is always going >> Yeah. Yeah. I'd go for the sphere. I've never been to the sphere. >> The sphere is insane. It's one of the things that lives up to the hype. I saw you too. >> All right. >> I'm going back in May. >> Okay. >> For no doubt. I'm so I'm so excited. >> Mike and I are going like two weeks to Vegas. What are you? Are you going to see something at the sphere? >> We were going to go. It's Wizard of Oz, but >> just go. >> Just go >> to go see a movie. >> It's beyond It's so much more than a movie. It's fully immersive experience. >> I don't know. >> Just go. >> All right. You sound like a Chamber of Commerce person. >> No, because why wouldn't what I mean, unless you have other cool things to do. >> Blackjack. >> How How much Blackjack can you really play? >> We could bet Josh brought this back for me and Chris. >> Yeah. Check that out. That's a troy ounce of silver. You ever see this before? >> This This is the top. So, >> it crashed right as he bought it. >> So, can I tell you something? I walk I walk there's a guy >> there's a guy with coins, gold coins, silver coins on a display at the event that I'm at and I go >> better as a hard asset. Good alternative. >> So, I want to I want to buy I want to buy a few of those. How much are they? He goes, "Well, it's an ounce of silver." I'm like, "Okay, well, I don't know off hand what that means. I don't know how much an ounce of silver is." He's like, "No problem. I'll tell you how much it is. He looks on the Bloomberg app for the price of silver. He goes, "It's uh 4048." So I'm like, "Okay, two, please." He's like, "No problem. No problem." >> That's how he charged you. >> That'll be $96. Yeah. >> Huh. Go figure. >> Like right off the like what? Right off the quote screen. Cuz it's an ounce of silver. I thought that was >> He wasn't comfortable with the Google pricing. >> I think that was kind of cool. >> Wait, can I send one of you a chart that's I love? Yeah. Yeah. >> Um we don't need to use it. It's just kind of interesting and informative. What's your email? We want it. >> Uh, Michael Holtz. >> Are you crazy? >> I think people can figure it out. >> I get a lot of emails. >> Ridolts. >> Uh, >> you got hosed. It's already down to $42 an ounce. >> Bellagio has a new Carbone restaurant. That's Carbone Seafood. You have to take a boat to get to it. >> Are you joking? >> No, I'm not. >> Wait, where are we where are we staying in Vegas? >> We are staying at the casino. >> I don't know which hotel we're staying at. >> Okay. >> Bet and I going for a night. >> So, I'll tell you the I'll tell you what I've learned. I stay at the tower suites. >> Oh, we're at the MJM Grand. >> Okay. >> There are So, there are three of these. >> You stay where there's no casino, right? >> No, there is, but it's it's a separate building. It's connected. So, there's the Waldorf, which is just a tower. It's like a Manhattan high-rise. None of the [ __ ] in the lobby. Like, you don't hear ding ding ding ding ding. No, none of the the dregs of society. >> I need the [ __ ] I need I need the stale cigarette smoke in the air. I need it all. I love it. >> And then there's the from Batman. the encore the encore tower suite separate entrance you pull up to there's nobody there's security guard and a few few people working behind the desk you check in in two seconds you walk into your elevator you go right up and you're like in a you're almost like in an apartment building not >> I was in LA sort of I was in Nashville Opriand have you been there >> yes >> it's like Vegas >> opriand opland I've heard both >> grand old opri >> grand old opri >> yes in opera >> I didn't like it >> um You went to the wrong thing. You're supposed to go to the Ryman Auditorium. >> Ah, >> can we do 10 seconds on this? It's important, actually. >> The original >> The original Grand Old Aubrey. >> Okay. >> Was at this >> 1800's era church >> that became the Ryman Auditorium. That's where like Dolly Parton became famous. >> Yeah. >> That's like >> for country music, >> maybe for all of American music. That is like the That's like the Vatican. >> Okay. >> The Ryman Auditorium. >> I got to try it. the Grand Old Opry that they they tape they tape like a TV show. That's 20 that's 20 miles outside of Nashville. >> What was this for? >> For Chenali. >> It's you know that's the tourist trap you went to. >> I mean I went to Well, it was very corporate, right? It was like the Delta Lounge this and like you know another >> So if you really want to see like a country music show in the heart of Nashville in downtown Aubry, >> that's the Ryman Auditorium. Ah, I got to brush up on my Nashville. Beyond that, Nashville is the most amazing place. >> It really is. >> I'd move there if I could. >> Um, we have employees there. It's pretty sick because you have the you have uh Belmont, which is like one of the best music colleges in the country. Vanderbilt is right downtown. You have all of like Google and everybody is opened up. And then you've got the whole music component to it like Broadway with all the honky tonks and all. So, you've got good music taste, but like is Batnick like music just betting on the side? Like, what are you doing? >> Yeah, >> Batnick just wants a cool Nashville. There's live music everywhere I go. So cool. >> We used to saw like a band at a holiday in there and it was amazing. Everyone's carrying a guitar down the street. It's so cool. >> So, Shan, you're the perfect person to have here this week. We're going to be talking a lot about the cockroaches >> and I want to say this before we get into the show. So, I relatively early on, probably two years ago, was like, why the am I getting so many emails from private credit companies? What is happening? Like, I I've been on this corner for a long time now, right? It's been a minute. >> Mhm. And I also think that a lot of the conversation that is happening and I'm like how did I turn into like the the the voice the spokesperson for the private credit industry? It was never that's not like what I'm here to do. But I think a lot of the hyperbolic fears are just a way overblown. >> You know, it's like any other asset class. Why would you paint it with a broad brush? It doesn't make sense to me. If you're picking fund managers in public markets, you would look at those fund managers. You would look at their track record. You'd see how they've been doing over time. You would see importantly, which to me this drives me crazy, nobody asks what they're actually invested in. What are they underwriting? So those questions you've got to ask them. And if you look under the hood, you know, today was a great example. One of the biggest alternative managers had published their report. Blackstone, did you see the results? >> I did. Phenomenal. I'm a shareholder. So, Blackstone's private credit business alone was up 13 uh almost 13%. Private equity also 13% over the last 12 months. So, doing well despite all the cockroach fears. So, I had sent you that chart over there too. >> Went down 4% today. >> Gives a [ __ ] >> You know, actually all year long these managers have been reporting record assets and >> boy that laugh. >> All right. Uh that was Ben. All right, guys. They're doing the show before we start the show. >> Well, let's get started. I just wanted to get because I'm I want I want to give I want you to have the mic. It's enough of me. >> Three claps coming in. >> Wait, do you feel like you've spent the last week defending private equ uh private credit? >> Not def a little bit. I I don't I feel like I have been and I don't >> How did this happen? How did you become Today's show is sponsored by Public. Public is the investing platform for those who take it seriously. You can build a multi-asset portfolio of stocks, bonds, options, crypto, and more. >> You can also access industryleading yields like the 3.8% APY you can earn on your cash with no fees minimums. But what sets Public apart? AI isn't just a feature, it's woven into the entire experience. From portfolio insights to earnings call recaps, Public gives you smarter contacts at every touch point. Plus, earn an uncapped 1% match when you transfer your portfolio, including IRA transfers, rollovers, and even contributions. >> On your account in 5 minutes or less, paid for by public investing. Full disclosures in the podcast description. >> How did you become How did you become >> I was the first person to say it's it's [ __ ] And now I'm defending you. >> All right, ladies and gentlemen, welcome to the Joe Rogan Experience. My name is Downtown Josh Brown. Today is going to be one of the most epic episodes we have ever done. and I could not be more excited. We have in the house John Duncan, Nicole, Rob, the Compound crew. In addition, joining us today, you know him, you love him from several other shows on this network and anytime he joins us in person, it's a barrel of monkeys. Ladies and gentlemen, Ben Carlson. >> I don't have a bio written for you. >> Star of Broken Arrow and several other 90s action classes. Ben Ben is a collegiate football star. Um, well, you were >> I flamed out in high school. >> You flamed. All right. That was Oh, that was high school. >> That was high school. >> Uh, I played in college for a couple years, but it didn't happen. I was too busy partying. >> All right. More importantly, Ben is uh Ben is the head of institutional asset management here at Riddle's Wealth. He is the author of A Wealth of Common Sense. He is the co-host of Animal Spirits with Michael Batnik and uh just an all-around gem of a human being. Welcome back, uh, Ben. So happy you're here. And first time guest. She is, in my opinion, she was, in my opinion, one of the best reporters covering high finance. That's what I call it. I like the upper echelons of of finance. >> What happened to finance? >> No, no, no. Yeah, high finance. >> I mean, that's your beat. >> Finance. Uh, >> you changed him. >> I went with finance. You have interviewed before I even say your name, you have interviewed like every impressive person on Wall Street. You would agree with that? >> And even some non-impressive ones. >> Sure. Sure. Sure. That's true too. Uh Chanali Basic is the chief investment strategist for I Capital, responsible for developing market views and research. Prior to joining I Capital, Chanel anchored Bloomberg television show Open Interest while serving as the network's chief global finance correspondent. Welcome to the show. You happy to be here? >> I am so excited to be here. Longtime listener, longtime fan, first time guest, though. >> Thank you. All right. My first question. How dare you defend private credit? All right. So, this is going to be this is going to be a show that's fairly focused on private equity, private credit, clearing up some of the misconceptions that I have been spreading in the media. And no, what we want to do is get to the bottom of what somebody who is very connected within this world has to say. I know you've probably spent the last two or three weeks speaking to people at a very high level about this, both investors and fund managers and corporate executives. >> Yeah, we've been speaking to people about it, but we've also been doing a lot of research because we wanted to be so clear about what is and what isn't. Okay. And it's funny because private credit in particular, we were joking around Batnik and I just a second ago about how you were getting pitches for private credit funds for years now. Uh and most of my career at Bloomberg was very much around the private markets because that's where so much of the activity was moving. So similarly, you couldn't avoid it. So where are we now? It's grown so many. >> So let's start there. Like how much are we all about to lose? >> Well, we did this analysis. You shared it. I have one bone to pick, but I'll pick it later. Good. And so, because I know you like a little spiciness. Uh, and so if you look at the exposure across the business development corp universe, this is the private credit verse universe you'd really look at. Did you see how small the actual exposure was to two bankruptcies? >> Yeah. >> Try close zero. >> Well, >> not only small, but so dispersed that no one player is really affected at all other than Jeff. We looked at more than 165 BDC's and just over a dozen had any exposure at all and most of the exposure within those funds was 0.05%. >> Can we back up and tell the audience what what we're talking about when you say exposure to first brands for people that aren't paying very close attention? What what's like the synopsis of why all of a sudden everybody's worried about this? So there's two companies in a row first band andricolor that faced bankruptcy by the way I would actually argue for different reasons there was a third company that no one talks about the primolind company right but because it wasn't tied to private credit no one talked about it >> or because it didn't have a private credit >> not salacious enough >> exactly the private credit world draws a lot of questions and attention so when they went bankrupt we did see losses tied to banks and then a lot of questions around how exposed banks were to private credit firms terms because you saw those types of losses uh within these two what you know what Jamie Diamond is calling cockroaches what people have heard for the last couple of weeks what um you know people are calling the idiosyncratic risk tied to certain private credit but really this was a banking problem ultimately at the end of the day these were bank lines that at the end of the day >> I want to be clear also in one of these cases someone is alleging fraud >> yes >> which is not the same thing as quote unquote reckless lending it's its Fraud is just a part of unfortunately it's a risk that every financial institution faces. >> But even beyond that, there were a lot of questions about loans that were not disclosed to investors among those firms, right? Fraud. But you know, was there diligence enough? Was there not enough diligence? This is a big question among the firms that were exposed to each of those companies. >> Don't you think that this is actually a positive for the industry though? Because there's people wouldn't have talked about this stuff a few years ago. Now, I think there's just going to be more transparency. I think in the end, that's a good thing. >> Yeah, I I I couldn't agree more because we were saying a little earlier, if you are invested in a public market manager, you are looking at their holdings. You're looking at what they're invested in. You are asking about track records. Why wouldn't you do the same thing for private credit? If you call up your manager, I did it throughout the last two weeks. I called a bunch of managers and I said, "What are you holding? What are you holding? And how sensitive is it to the broader economy?" >> You have the ability to do that. Everyone else doesn't. You know, the thing that's really interesting about private credit now because it's opening up to a broader market of individual investors, you are seeing more managers be more and more clear with as many adviserss that they could be really open the doors to the ability to >> I agree I agree with that. But but I but I also want to point out these things don't have QIPS. This is the fundamental difference. So when you own a public when you own a public bond fund >> Yeah. the manager is buying all sorts of bonds, all sorts of um loans in some cases, and for the most part, they tend to have a QIP, which means an end investor can look these things up, which is way more transparency than by definition you would get from private credit, from direct lending. There's no there's no way to know what anything's worth until the manager files and says, "Here's the mark. This is what we think it's worth." But don't you think it's interesting? You know, there was a story on Bloomberg today that's consistent with what we're seeing. As these products become much more available, these investments become more available, you're all of a sudden seeing, you know, what was impossible a few years ago possible now. Now we have monthly reporting from many funds, for example. And so that transparency, it has to increase as availability increases. But with that said, like let's talk about just private credit for a second. Shouldn't we just take a big step back here and say, why are we even talking about this? If you think about it, why did my why is it that I have spent so much time on private credit? It's because so much of my career was after the financial crisis. After the financial crisis, regulations really hamstrung the banks in certain areas. But then there's two other moments arguably that really accelerated this co when the banking system froze up in a lot of ways during COVID. It was actually private credit that moved a lot faster into many parts of the economy. You saw >> people still needed loans. >> Totally. And so that was one thing. And then when Silicon Valley Bank happened, right, you had seen that kind of regional banking crisis of 2023. And that was another big moment for private credit to really expand its wings in a massive way because again, you saw the banking system freeze up in certain ways, especially among smaller and middle medium-sized lenders. So, private credit firms started to backs stop many of those lenders and become what is now a more uh critical lifeblood to the American economy than it was a decade ago. So you're you're still relatively new to the space. I'm curious like what you've learned being on the inside now that we don't see from the outside. >> I actually the the chart that I sent you of returns, right? I think a lot of people are asking. >> Let's put that up. >> Yeah, you have it. John has it. >> Yeah, it's really really interesting chart here and what you're seeing is that you have doubledigit returns in many parts of the private markets. I thought this was the most clarifying >> management selection has been an important driver of return outcomes and alternatives. We're looking at we're looking at dispersion and I think I want to speak for you. What's your point? Cuz I think I think I know what it is. But you go. >> So a lot of people talk about volatility. I don't think volatility is the problem. I think dispersion is the problem. And if you're not in the better funds, if you're not doing the diligence that many people, as you were saying, Ben, are not doing by the way, then you're not getting what is possible from this industry. And a lot is possible. Remember, this is also an asset class that institutions were more privy to than individual investors. And we had a great I pulled this out for you, Josh Brown. You're asking how big of an opportunity the RAA channel is for al alternatives. If you are an RAA with assets above 500 million, you could have they they have had much much much more exposure to alts. Makes sense. You might have bigger clients in that book and more money then to put aside to alts. you used to have bigger minimum ticket sizes, but now you could invest $25,000 in an alternative fund with um with a fair degree of I hate this is a whole other topic. We should get into liquidity, right? And so >> that's the that's I think that's the biggest that's why we're never going to have a plane crash in private markets because it'll be like let's say this really was it would be a death by a thousand cuts because the investors can't panic, right? You could you can you can't get out of it quickly. How would you panic as a private credit investor? You would have to buy CDS against the basket of the loans that you you're on the hook. >> So, because of the illquid nature of the funds like that that would make it worse if there was a credit problem and everyone said, "All right, get me out now." You can't do that. You literally can't because of the way the funds are structured. >> So, John, >> we actually but so just like a little bit of nuance there. >> We saw a small version. Some would say if the people that said this is a canary in the coal mine ended up being wrong, but we saw an episode where Black Rockck has a semi-liquid uh >> Black Stone, >> excuse me, Blackstone Bed >> semi-liquid and Blackstone had to gate redemptions because the alternative is allow people to have their money back and sell things at a depressed valuation. >> Wait, hang on. And that's not good for anyone if the portfolio is forced to liquidate things at prices that they don't want to. So they gated redemptions. Eventually the redemption requests cooled off and BE is still trading and it's okay. >> But that if you go back to that time, it's such an interesting moment, right? Because it actually worked the way it was supposed to work. A gate is only a gate if you're not legal. Like they they had limits. All of these funds, to Ben's point, have limits on how it's not full liquidity. It's and it's also not a gate. And so to talk about these funds as though they're liquid is a big mistake. >> Starwood gated, right? Wasn't it Starwood that said there's no more money coming back? >> We could people could fact check. I don't want to like spit. All right. So be So John chart 10. So we're fast forwarding for a little bit here. This was going to be my ultimate take. I have been of the mind that the episode that we just experienced withricolor and first brand it's not nothing there is something happening is it systemic I don't think so I think that it ultimately blows over in a very similar way that be blew over and guess what the stress in the real estate market particularly the office space which they don't have a ton of exposure to at least not anymore this was so much more significant and potentially systemic. Think about the stress in the real estate sector, the actual stress. And here we are a couple years later and it's fine. >> Yeah, Nick, you know, I'm just going to call you on Tuesday nights now and just be like, let's talk about this. >> I mean, I I think that's I think Michael's point, the asset the assets in this the assets in this fund have been between 50 and 60 billion for the last two years straight. And that that disruption that everyone said this is going to be the death nail for these semi-liquid real estate vehicles turned out not to be true. And to Michael's point like the the uh the hysteria cooled off. So >> but if there are real losses though the clients are going to have to eat them. >> Sure. >> That's the thing. That's the that's the difference. >> So that goes back to the dispersion chart too. It's not that you people don't lose money in this asset class but they lose they also make a lot of money. Those are going to be the stories someday is like look at how terrible this fund did. The people were overpromised or there was too much leverage or whatever it was. Those are going to be the stories. >> Okay. So, >> but my comment at the time was what you think you can't lose money in a publicly traded REIT? Like what are we talking here? >> So, BE the returns have not been great over the past couple of years. Yeah, real estate's been challenged. We know. But is it a catastrophe for investors? No. Is it great? No, it's not great. It's basically flat for the last few years. But let's get back to Shanali's chart that she showed on in terms of dispersion. Okay, I think this is really important. When you are investing in things with highly idiosyncratic manager access risk like venture, like growth equity, the dispersion of returns are a mile wide. And if you're not in the top whatever >> Yeah. >> decile cile, >> you might as well >> the better the better managers versus the run-of-the-mill managers or the bad managers. >> Direct lending is the opposite. We aren't we? The industry is making loans and guess what? most of the loans get paid back. So this is an interesting I tal I like I said in the last week I've talked to a lot of managers about this and it's not like you know if you're Stan Ducken Miller right Stan Ducken Miller is known for big concentrated bets right that is the secret to his success but those are like 40% returns right venture capital's like that too but different different type of asset direct lending super diversified there are hundreds and hundreds of loans that are being underwritten such that if one loan were to go add it's a typical >> what is the typical position size for one of these funds I know it's there's a lot of different funds but I mean what is it 1% two like how how big are the position sizes in these funds >> well let's put it this way when first brands the losses that we saw like I said it was 05% that was lost for most of these funds >> so who has taken who has taken the losses >> so it's a half of 1% >> that those are just the BC >> okay >> so you'll take in a bankruptcy you're taking basically a total loss >> less than half zero 5% and the problem with that is that the collateral the leans were no good because there was fraud. >> Yes, >> double count double counting assets. >> Even then how small that was relative to the overall portfolio. That's kind of the point. But with that said, I actually was pulling up an email because I asked our diligence team how they go about picking funds as well. And they said uh there are two rules. There are two rules when it comes to underwriting. Protect capital and don't forget no definitely not that. Have you ever heard protect your capital and don't forget rule number one. How do you ever finish a thought? >> That's a B that's a Buffett that's a Buffett quote. >> Yeah. >> Rule number one, don't lose money. Let me give you another number two. Don't forget rule number one. >> Who's who is the one that said don't ever hire an optimistic credit manager. >> Right. >> I like that one. >> So, so my take is there is >> if you look at just rolling returns, not rolling returns, rolling like inflows, >> the institution has pulled back dramatically because they're good. They're full, right? And distributions on the private equity side have just not materialized. So they're not really allocating as much there on private credit >> or equity. >> And the the flows have been replaced by wealth managers. We we know the story. It's very it's very transparent. But it's not as if the inflows have triple xed. So even though I guess my skepticism would say there's so much money coming in that there can't possibly be this many good loans to make and therefore the underwriting standards have probably come down. There's probably some sloppy behavior which we're seeing and it's not going to be in my estimation a systemic holy [ __ ] I can't believe we were so blind to the risk. it'll probably be lower returns. Now, the counterpoint is well, but it's sold for plus six and that's just kind of what it is. And so, if rates come down, returns will come down, but let's say that there's a tick up in defaults. Returns will come down, too. So, fine. So, it's not 9 to 11%, it's 7 to 9%. >> And again, it depends on the manager because the one we were talking about this morning is still double digits, right? But with that said, yes, you're right. Um, there is an element here. I call them tourists. There are a lot of people who have entered the space that don't know what they're doing. That's for sure. Right. And why do I believe? >> Stop sub tweeting, Michael. >> Is that Oh my god, you used to be my favorite. >> I have a fund. I have a private credit fund. Uh taking investors now. >> Well, you know, the thing about the tourists here is that we haven't seen a real market cycle here since 2008. Not not to a severe degree. And so a lot of people who are entering the industry have not experienced that pain. And you know, a lot of people when they look at their managers say, okay, well, what kind of pain have you experienced? And have you navigated it? to the point you were making Ben on uh it's not just the ability to withstand pain in the market the bigger managers because of scale there is a benefit right if you have management teams and big teams that can work with the portfolio companies you're also at greater um you know greater protection of even making it to a workout and if you make it to a workout by the way a lot of these people have been through distress cycles before they know how to work those >> for the listener the workout is all right we can't actually make these payments as currently structured. What else can we do so that the underlying company survives? And then the lender has all the incentive in the world. And a lot of times these are bilateral things. It's not a syndicated loan >> where you know it it just gets adjudicated in court and there's nothing you could do about it. These are like phone calls between people who trust each other. >> When were we in Charlotte with uh with with Cam Harvey? >> 23. >> Okay. So in 23 I was talking to Cam and this is back when I was like why am I getting several emails a dozen a week from private credit managers and I spoke to Cam and I said does this worry you at all and he's I don't that he's not kn he's not known as a pessimist but he's a risk guy right and he was like no and I said really tell me more and he said well because these loans were otherwise syndicated by a by banks and there was a million different investors and knife fights galore and lawsuits like I'd much rather this go I didn't say blackstone per se but I'd much rather the the risk in the hand of a single operator that can negotiate with these companies and work it out. And so there's like been a lot of talk about this payment in kind stuff. Oh, it's all just payment in kind. They're just adding to the end of the loan. They're extended because they can't pay. And if you look at the data, that's actually just not happening. And if it were, I would be sharing it and people would be talking about it. But it's not. John, can you throw up chart two? >> So this is from Hulahan Loki and we next chart, please. I'm sorry. Chart three like we're talking we're just talking stories without like fundamentals and data and look at the top chart payment in kind >> as slow down define for for did >> but what does that what does that mean what does that mean for somebody >> because you weren't listening so payment in kind is payment is missed and it is added to the end of the loan it extend it makes the principal payment >> in lie of making a payment today we'll just give you more money we'll lend you even more money and you'll owe us So that is like the buzzword that people keep talking about. >> That's what the Financial Times looks at and says this is going to this will end badly. >> Okay, but look at the data please. So payment in kind as a percent of total interest income, it's steady. And if you look at non-acrruel investments, which are which are uh uh uh borrowers that miss a payment, there's nothing there. You know, and I've got to say, I've tried to look at this in so many ways and stress test all these ideas because, you know, not only has this remained steady when you look at the markets, are you more worried at this juncture honestly about public credit or private credit? >> Private credit. >> Why credit spreads are in honestly? >> Don't the yields have to come down though there if there's that many lenders out? Josh said Josh said, "Well, it's it's the sofur plus whatever." Don't they have to come down if there's that much competition for the loans? >> That's what I'm worried about. >> Okay. Let me let me address this too. There's two things going on. The traditional way private credit used to be defined was direct lending. This was, you know, levered loans by and large. That's estimated to be a $ 1.7 trillion industry. Broadly syndicated loans are actually less than that. >> What's the difference between those two? I thought they're like kind of the same thing. >> Bilateral versus a syndicate where there's a million lenders and and everyone has a tiny slice. >> Levered loans and bank loans aren't the same thing. >> So broadly syndicated loans, levered loans are in the same bucket, but direct lending versus BSL. Okay. I got it. That's what I'm talking about. Direct lending is now a bigger by many estimates industry than broadly syndicated loans. So, it's kind of how much bigger can it really get when they're kind of the same type of borrower? We'll see. The high yield market is, you know, different estimates, but just a little bigger, 2.6 trillion. So, where now has private credit been going next? Why is it growing so much? It's not all direct lending. >> Data centers. >> There's a lot of data centers which are absolutely >> great more exposure to AI. I know >> that's what everyone's missing in their portfolio is more AI exposure. >> There's so many funky things, right? Assetbacked lending, music royalties, um there's consumer finance which is more weighted to the credit cycle. And so, uh I think the industry is evolving in different ways. You're just seeing it's just lending. It's just lending. >> Direct lending is Aries raises a fund. they raise $10 billion. >> Mid midsized companies >> that are not going to issue bonds in the public market go to Aries and say we have a contract to supply X number of gigawatts of electricity to this AI um to this AI data center. Here's the contract. Meta is paying. We know it's money good. Basically, it's almost like factoring. But but let's go to the data center thing for a second. >> So wait, so Aries makes that loan. >> Yes. >> In their fund. >> Yes, >> I'm comfortable with that because it's Aries on the hook for it. >> I thought you hated private markets into it. >> No, no, no. I want to I want to point this out. I think it's important. A lot of people are making the comparison, myself included, to the mortgage bond the the mortgage bond era. >> Interesting. >> The difference between this and that. This actually seems safer to me because in the mortgage bond era, nobody knew who owned what. It was syndicated to death and trunched >> and it was backed by the strawberry farmer who had eight houses. >> This is backed by Meta. >> So that's So >> it's not the same. I'm so I'm saying something very constructive here, which is that I feel pretty confident the guys running Blue Owl and Aries and Apollo, they're not complete insane maniacs that are just randomly spitting money at at lending opportunities >> and and hoping for their back. >> Yes. And they all have seen a credit cycle, right? Um >> these guys were all these guys all came out of >> like Drexel. >> Yeah, they've seen it all. So I I'm comfortable with that aspect of it. This is what I This is what I've been saying. They're not the only players in the market. >> Yeah, >> that's one. >> Now you have a second tier. >> Yeah, cuz those big firms, they can short up and they're not the ones pitching Michael. >> But wait, okay, so this is a very important point. So all of this [ __ ] in my inbox, these these these funds are nonsense, right? Even if it's like a third tier asset manager that we know, no chance, buddy. Sorry, not going to happen. But the Blackstone Aries, KKR, Carlos of the world, there is only like six of them that can make this $5 billion loan. So they're not fighting for scraps with all of these fourth tier entrance. They're going to get smoked the lower ones. I'm pretty sure to Josh's point that the contracts with Oracle, at least for now, they're going to they're going to be okay. >> The the contracts that you have with the hyperscalers are some of the most interesting ones. And why? One is because those are between 15 and 30year loans. They are so long. And yes, um you know, if you're worried about public market valuations of those kinds of companies, that's one thing. They have to pay their lease, right? that needs to happen. And >> why wait why are those loans so long? >> Because they're leases. They're data center leases. They That's where I think that the confusion around what's actually happening here. You're talking about what has traditionally been loan known as direct lending and private credit. Yes, fine. But the way the industry is going is also these massive data center leases too that are very long leases. And so they're not just that. Some of these are also also um you know because they're rent, right? It's uh it's data it's it's adjusted to inflation. And so they actually the cash flows grow every year. That's the other pretty interesting. >> All right. So now let me tell you though the second half of what I'm saying. This is what I'm worried about. >> Sure. >> And I have firsthand knowledge of this. >> Okay. >> Because it's very old. >> No. No. >> Do you lose money in a private credit fund? >> No. >> Yeah. Show me on the dollar where the private credit touches. >> No. But I have an analog that I think is that I think is very apppropo of I think could I actually think this my firstirhand experience >> could be emblematic of what's happening all over the country maybe all over the world >> in my industry the wealth management industry >> every single day there's another article in the trades about a private equity deal that's the bubble let me hold on hold on for a firm that I already know is a piece of [ __ ] Okay. Every day, not every week, every day, they are taking other people's money. They are buying firms that have no real enterprise value at absurd multiples, 20 times cash flow. They are retiring the boomer who started the firm 20 years ago, and they're basically smashing this acquisition together with a whole pile of firms just like that, and they're calling it a business. In reality, they're buying salespeople and those salespeople's relationships with their clients and they're counting on the fact that they're only going to have to sue a few of these people who try to leave. These are horrendous horren now I know this >> not everything again dispersion but to your point >> of course not everything but I have to overgeneralize because the question is why is this happening? I will tell you why. All of these funds have raised so much money from investors. They have to do something. And all of the best assets are already spoken for or not for sale because they're good assets. So what's left >> like us, >> what's left is making mediocre investments in mediocre companies at bad valuations competing with 50 other funds. >> There's just no way on the equity side that that's good business. How could it not be similar on the credit side? It's the same firms. Whoa, whoa, whoa, whoa. >> No, not first of all, it's actually not the same firms often because you know what's grabbing headlines. Sometimes it is. When it's the same firms, you're looking at a big buyout and maybe the direct lender is exposed, but they're downside protected, right? That's another aspect of this. >> Why? Because they're at the top of the capital. It's loans versus equities. Yeah, that's a big difference. It's not even close to the same. >> It's the same industry competitive dynamics. If there are thousands of players, >> loans versus equity, loans versus equity. >> But don't you see it's the same competitive dynamic? If we don't put this money to work, we're going to lose we're going to lose the A. >> I understand. But to Shanali's point earlier, the equity dispersions of managers. Yeah, I obviously I agree with you with what we're seeing in our industry. I don't want to invest in those. >> But don't you think every industry is the same thing? >> But loans and equity, they're so different. that is like we'll get back to that because that is the most important part of this. But on private equity to the point that you're making, it's even beyond the bad companies being bought. It's the fact that you have um they call it the DPI issue, right? Have you heard of this a lot? It's a basically that private equity firms have been sitting on ass investors money back. And so when people say that they just mean that it's um they're they're stuck. It's a complete clog right now. Not complete. It's starting to open up. You saw that in the results. >> Well, because valuations got so silly. There's no more buyers. And you know what's happened? This is the problem when it as it pertains to private credit. There is a controversial thing going on right now in the way that people are keeping companies um going via debt just because they can't exit in the private equity universe. So yes, I don't disagree with you. But if you are a credit firm, remember the risk profile is this. Josh Brown, I'm going to lend you money. I'm going to lend you money. You're not that good of a borrower. comes to me at 15% to 20% because you're not a good borrower. And so I'm but what I'm betting is you're not going to default. What I'm betting is you're not going to go bankrupt on me. You're not going to miss your payments. So it has to be a much worse of a borrower than wait the competitive dynamics are bad because if the competitive dynamics are bad, then your equity valuation just sucks. >> So the equity dumb schmucks that are investing in these companies at stupid valuations, they're not going to get money because there's there's no growth. equity. >> I may not intend to default, but in an economic downturn, I know we haven't had one a very long point. We're not going to know any of this until some companies just the cash flow isn't there to support the loans they've taken out. And the smart thing to do is to default and clean the slate or liquidate. Um, and we just So, Ben, what Ben's saying is what I think, which is that okay, we don't have a dry run. >> Yeah, >> we don't have recessions anymore, though. Sorry. had a 7minute recession 5 years ago. >> It's been 50. That's the thing. >> All these systemic risks we're always talking about, we're never going to know until we get another recession. We're >> how could you? We can't do a rehearsal. >> So that's my only point is and now the industry has made more loans than they've ever made. The dollar amounts have gone up >> and the amount of people in this ecosystem borrowing from direct lenders has gone up. And look, there will be losses in public credit, too. >> Yeah. I was about to say everything you're saying is obviously true. >> Yeah. And when the tide comes out, people people eat [ __ ] like >> Well, me and him were talking about this. >> But here's the difference. Wait, wait, no. This is really important. Here's the difference. As a financial adviser, I call my clients and I say, "The economy looks really bad. You got auto companies uh spitting the bit. You got banks reporting losses. You got credit card companies are falling off. Hold on. Let's Let's sell and go to cash. I can do that in HYG whenever the I want. I can't do that. >> Yes, I think that's is good. That's not all good. That that people can panic. >> Not panic. Decide that they don't want to take as much risk in the credit market after deep losses. >> I can't do that. Not after. Maybe in the early innings. You don't know how long that goes on for. >> I to me that's like the least offensive part of it. >> But also remember this goes on >> I've been around a long time. Do you understand? I drank out of glass Snapple bottles. Do you understand this? That's how long I've been around. I'm just saying as an advisor, >> the if you say to a client, we're down in this bond fund because some some of the credits are blowing up and we're just going to take a little bit less risk. We're going to trim. You can't do that. Some of this, what are you going to sell first? If things are really going poorly, are equity. >> No, but you're right that people are going to change their allocation preferences a lot. >> They're going to want more of this. Don't you see that? Yes, they are. There's going to be a lot of people who say >> that just happened in 2022 when people got their asses kicked because their bonds duration killed them. That's why they flooded into the floating rate nature of private credit. And also they wanted good floating rate good illquid floating rate not as good. >> Wait, but that's that's the double digit returns. But also even beyond that 2020 and 2023 when we were talking about when credit ultimately people didn't feel so good about it then, right? You still saw private credit being able to step in in this massive way and buy thing. That's when the things are cheapest. Those are the best investments. >> Can we all agree? >> Can we all agree that investors prize liquidity in a crisis? >> Yes, >> we can all agree that. >> But what you're saying is the 180 180°ree opposite of that. >> I'm saying that if you are if you have a normal responsible portfolio and 10% of your portfolio is illquid, you're going to be fine. >> But also, how much of your portfolios are in cash right now? Because >> 100% I'm super bearish. >> Well, but like the average RAA has what I've heard anywhere. >> The average RAA holds 2% aside mostly so they can bill their clients. >> Wait 2%. But one other thing that we mentioned that we glossed over on the where would you rather be private credit public credit again not to be the defender here but on the private side what you are getting in exchange for the illquidity is a relatively constant spread over sofur 5 600 whatever it is meaningful that's the source of >> public markets right now and granted you could say that the quality in hygi is higher than it used to be because all the [ __ ] is going to the private direct lending fine I'll grant you that but right now credit spreads are so tight in public credit like I don't know is that better? Why is that better? >> Right? But but in general in general in a in an economic downturn people very highly value and I'm going to tell you something about the financial advice business because there was a time where we were all told hedge funds got to be in hedge funds. Hedge funds avoided the dot blow up. Hedge funds made money in the last decade for stocks. Hedge funds play market. >> There there's a lesson here. There's a huge lesson in that. And then the illquidity of a lot of those hedge funds had private market assets. >> Yeah. >> They had to side pocket them. You couldn't get and that pissed people off. Even if the returns 5 years later were good. It was be beside the point. When things are not going well, people really value the ability to reach in and pull cash out for whatever reason. >> I don't disagree by any stretch of the imagine. Well, you're well advisers who have very illquid portfolios with their clients, unfortunately, are going to have a lot of difficult conversations if we ever have a recession. >> Guess what? Those clients will be our clients eventually. >> It shouldn't be you should have a reasonable amount of alts in your portfolio that are not it's not you have to still have a liquid part of your you know, it's interesting. Golden came out with a survey the other day and a fifth a fifth of the respondents in the survey were holding um actually no out of the survey one of all the total assets that were surveyed for were in cash a fifth a fifth still today >> when you say in cash like all in cash what do you mean >> so a fifth of the total portfolios that Right. So >> Morgan Stanley said that on on one of their calls recently 20% of their Yeah. So if you look at the wealth community at large, there's a lot of money in cash. So the liquidity question has clearly been on everybody's mind, especially at these levels, you know, where are we in the market, so on and so is right. Josh is right. If you if you overdid it on the private side with your clients and they're 40 50%, you are fired, you dumb [ __ ] >> I don't I don't hate a barbell. >> You're allowed to curse on here. >> We can do whatever we want. I I don't I don't hate a barbell of I'm 10% cash and I'm 10% illquid high yielding assets and I can make sense of that because it's a total portfolio approach. It's not what I personally that's an advisor problem not a client problem. >> It's an advisor problem. Yeah. No, but it's a real one. It is a real problem and but that's the thing. Thinking about it from a total portfolio is the only way to think about it, right? You can't just like dump all of your assets into >> il people do. But here's the problem though. People um this called mental accounting. People do this all the time. A client looks at their portfolio. They have a conversation with the adviser. 80% of the portfolio is going up. 20% is going down. What do you think the client has questions on? >> Yeah. >> Should we still own this? What are we doing with this? Do you still like this as much as you liked it when you told me to buy it? >> They'll fixate on the part that's down now. They shouldn't because that's probably the part that's about to outperform. I'm just telling you the difference between data and how things actually go when you're when you're helping people with their money. >> If things are going wrong, think about it this way. Let's just draw out that scenario because 2008 and the market structure today for private assets are different. Yes, if I'm holding a hedge fund where you think they're in a bunch of liquid stuff and turns out they're not, that sucks. That totally sucks. It's also not what they really sold you, right? But now what you're looking at is a market that's meant to be illquid, right? And so it's like, wait, okay, to your point, I know I can't pull this money out. And when things do go bad, it's more likely that those public assets have been facing that decline than your private credit, which is, you know, supposed to be less volatile than what's happening in the public markets. And now because of liquidity, >> but you know what I'm bullish on for that reason? I think the most popular category in this in this space is going to be secondaries. Yeah, that's huge >> because that's how you take advantage of all the problems I'm pointing out is you're invested in a fund that's waiting for people to choke and then when those other funds are choking on assets and have to sell things, the secondary fund is there to get that discount. >> Are you a distressed investor? >> I might be. Holy [ __ ] I'm definitely distressed. >> Thing is, there's going to be so many distressed >> there's going to be so many overreactions in the next recession. That's right. That's no matter what. It's been so so long since we've had a real one that wasn't short up immediately. I I think the like knock on effects of whatever the next recession happened is going to be enormous. >> Well, let me ask you a question. You know, we were talking so much about privates to your point on total portfolio. How vulnerable is the stock market to that? >> It'll be fine. >> Very. >> Oh, yeah. >> What does what does a recession really like? You know, people are saying bubble this, bubble that, but realistically speaking, if something actually goes wrong at the with the macro, >> if the loans go bad, could you imagine what the equity is going to look like? Like, could you even imagine? >> It'll be way worse. >> So, I want to just I know we've gone long, but I want to we we can't not talk about the banks, especially because Moody's just put out a big report yesterday that is really important and they talk about the big picture and I would agree with everything that they said here in terms of this risk is rising especially for smaller banks. They talk about growth and competition. They said concentration risk is a concern with banks specifically. Um the true risk can be hard to assess. Of course, we all know that. And then lastly, transparency in bank loans exposure is improven, but new light exposes gaps. So they have these great charts that I want to talk about. They showed that banks help. Ironically, Jamie Diamond, I mean, there's there's a lovehate relationship. So banks, >> this is so wrong though. The data is wrong. >> Oh, go ahead, please. I'm >> sorry. This kills me because they said there's 300 billion. >> Moody's is never wrong about anything. No comment. Say more. >> This data is not Well, here maybe not wrong, but at least a little misleading for this topic. So 96 billion is really what's in private debt funds. They're saying it's 300 billion. What they're accounting for. >> That's percent growth. >> Well, no, but in total, what they're counting, it's percent growth, but that what they're counting is up to 300 billion dollars in loans outstanding. Well, that happened to be the same for no reason. But it's actually when you look at the total, that's the growth off of a almost non-existent base that you're looking at. And then on top of that, it's actually 96 billion, not 300 billion. And out of the entire universe of a non-bank financial credit, which is getting bigger. Um, the private credit is only 4% of that. >> So, this will bother you less. So, is this is is this a better this is better representation. The NDFI on the bottom is >> it kind of, but the NDFI is a really >> non deposit financial institution or shadow. >> That is like online lenders that is like all sorts of specialty lenders that you name it. >> All right, fine. All forget that [ __ ] Here's the important part. Here's the important part. John chart N. I'm going to try one more time. All right. The rise So the rise of private credit. So Bloomberg took the data from Moody. So tell me if this is wrong, too. It might be. So this is the amount of loans in private credit from the banks and JP Morgan. >> Uhoh. They wait. They they found a way around DoddFrank. >> Yes. So Matt Lavine wrote about this yesterday. >> Jamie Diamond's eating chocolate cockroaches. But look, but look, West Fargo, $60 billion in exposure to private debt firms. JP Morgan, they're not making the loans, but they're making the loans to the people that are making the loans. >> They're lending the money to the lenders. It's genius. >> Exactly. >> But but they've all but they've always done that, right? JP Morgan's biggest customers, what? Like mostly regional banks, right? How many do they bank? 4,000 of, right? They >> That's their business. And so when you look at this number with what I just said that it's the private credit definition that they gave is a little misleading because it's those online lenders, it's the specialty lenders, it's all sorts of lenders. So um it doesn't actually show what their private credit exposure is here. It's a lot less than that. And you know, you think about it, people are talking about JP Morgan's private credit exposure, but like they also just increase their provisions for loan losses to the entire economy, right? that they have underwriting that suggests that loans just regular way consumer loans could start to sell a little bit. >> What do you think of this though? Nothing's happened yet and people are this vigilant. Is that a good thing or a bad thing? >> You know, I I I'm with Ben. I like it. I >> We don't have delinquencies in real life and people are like people are like suspect everyone. >> Let's be honest. If this really were systemic risk, everyone's getting bailed out. >> Well, that's true. That's true, too. That's the That's the That's the funny part is that no one will actually have any consequence. But do you feel like that's a good sign that we're all like >> who Jamie Diamond we're scouring all of our books? That's kind of good. Very good >> that we're doing that now before there are actual losses. >> Never hire an optimistic credit, right? Like you >> Next topic. >> Yeah. >> BDC's. Yeah. >> How do you sleep? >> No, I'm just kidding. Uh I wrote So I know you wanted to take interest uh take issue with one of the things I wrote. I wrote about BDC's. >> You called me biased. >> Not to Well, I'm biased, too. >> Wait, wait, wait. Shali, I'm biased. I'm biased toward the stock market. So, we all have our >> Fair enough. >> Okay. Um, I wrote about BDC's because I think they are the exposed part of the wound. >> H >> that if there is a wound in the way that they behave, people are worried about two things with BDC's. The first is um very benal. As interest rates come down, obviously the yields that these companies are able to pay have to come down with them. Nobody should be alarmed by that. That's the way interest rates work. So we know that dividend distributions will come down and these stocks are selling off in that expectation. You had the first rate cut of the cycle in September. Maybe we get another one in a month or two. Okay, no problem. But then the second part of that is, oh, wait a minute. There's fraud at some uh with some of these loans. How much more fraud might there? Okay, what if there's three? What if there's four? >> Zans's Bank came out and said they're suing somebody. We know there's going to be more than two. I'm not saying it has to be 2,000. Um, but a lot of the things people are saying in defense of the BDC's were the same things that they were saying in defense of the mortgage funds 15 years ago. And I know because I was there and it's not terribly different in terms of rhetoric. The reality might be different. What do you make of the panic, minor panic that we saw in the publicly traded BDC's? And would you agree that this is a better gauge of credit risk right now than what we would traditionally look at, which would be junk spreads relative to treasuries? >> There's such a massive difference, I think, between I know. No, well, no, no, no. Between credit risk and between um between spread compression and credit risk, right? Credit risk, we're talking about whether you're lending to a worthy borrower. Spread compression, you're saying returns are going to come down over time. Okay, fine, maybe. But if returns come down in private credit to the point Michael Batnik was just making, it would come down in public credit too and the spread for private would still be higher than that. So okay, the wound which which wound are we talking about? I think is what my question is. Right. >> I'm not worried about spread compression. I don't think that's an emergency. >> And so are you worried about widespread fraud? >> I'm worried about the rush to put money to work. >> Okay. >> That we all have to acknowledge has been a big part of this era. What are what are the ramifications that will stem from that if and when we have a credit cycle? >> So Josh right the only question that I have for for private credit managers as we talk to them is h what if you get $10 billion in in funds tomorrow how quickly to deploy it and how what are your controls is it just cash in got to make loans cash in because you can't it can't possibly work that way and if it does and people are doing business that way and I know a lot of people are you're going to be in trouble. >> Yeah and not just for credit for private equity too. The biggest mistake many managers made the last few years is they made all of these acquisitions in 2021. >> That doesn't look so pretty today. You know, things felt really good. So, people put a lot of money to work and look at where we are now. Um, but you know, if >> I don't think if we saw a scenario in which Ben was talking about which is a widespread recession, who's safe in that scenario? >> Like what is safe in that scenario? and nobody in 2021 when the music was playing and all these giant mega growth funds were investing in these companies and insane valuations. I remember that there was very few people calling it out and saying this is crazy. And one of them was our friend Howard Linden who was like I have cash and I'm not investing because the prices that I keep seeing are stupid. >> They spent it too fast >> and when they stop being stupid I will start investing again. And that's who you want to give your money to in periods of um complacency. And there's no doubt that there is too much lending and it's too much. It's too fast. >> Hey, you know, I mean, if there's anything to take away from all this, right, is do the damn homework, right? Don't put your money just because there's a promise of something interesting in an industry that's a hot asset class. Do the work and say, "Okay, what is this actually investing?" >> And put it in your 401k for God's sakes. >> I was waiting for that to come up today. >> Do you think investors should be biased toward the larger players in the space as it just in case? >> Yes. Uh because I I do I think BR brand and size scale really matters. >> They matter for a lot of reasons but not in every asset class, right? Because things like private equity actually middle market and lower middle market have much attract much more attractive return profiles than you would have in like those large scale buyouts right now. >> It's the opposite. I feel like in venture and with hedge funds that smaller managers do tend to do better >> cuz scale is the enemy at that at that in that space. I think it's the opposite. It's the opposite. You need scale. >> I would agree. I would agree with that. >> Okay. So that's So you're like you're asking people to do their homework, due diligence. Most people listening to this who are being recommended >> you like the adviser. >> Oh, I'm doing zero. Um, so this is going to be this is going to come off as like overly cynical and sardonic, which is right on brand for me. But somebody asked me, "What's your private uh equity, private credit strategy?" And I said, "I'm just going to wait for the disappointment and then take everyone's clients." >> Do you own a house? >> Yeah. Is that my private credit strategy? >> You own you own a hard asset. You own a private asset, right? You and so you know what you're asking someone to do in a private fund is to buy assets that you know you're going to buy hard assets. You could buy infrastructure. You can get into I don't have enough money to be able to buy the things that are private assets that I actually think I would buy. >> You have $25,000. >> Yes. >> That that's >> how will that move the needle for me? But that's what >> the thing is I don't have a billion dollars and I can't buy an NFL team and that's what I that's the private asset that I am interested. >> You need a financial planner. >> I Yeah, I can't really help you there. I know some athletes, >> but that's my that's >> you an intro. >> I I I don't think every market >> Yeah. >> I don't think every market makes sense for every person. >> That's true. >> Okay. So, in the private market, the best managers Yeah. >> who have access to buy the best assets >> Yes. are not going to be accessible by every investor. That's my point. >> That is true. But I would also argue that because there have been there's a lot going on. The the operational efficiency is getting better. The documents are getting more fluent to access and the technology is getting better. Um this the fund structures are changing very meaningfully. The minimums are coming down. That's why we're even talking about this. Honestly speaking, it used to be impossible to access many of these types of assets. >> Even 10 years ago, we wealth managers couldn't do it. >> Even two years ago, >> I agree with that. And those are all good things. Anything that you do that um makes these things more accessible and makes so you can actually research them >> and more transparent >> and lowers the fees and adds transparency is unequivocally good. >> But that means unequivocally good. Lower lower returns. Lower returns. Lower returns. >> It has to. >> It depends. I actually don't agree necessarily on that because these are, you know, when you just because you open up something to a wider array of investors doesn't mean like your 401k plans, that's scale, that's pricing power, and that's net of fees, a better return. Now, I will say this, the liquidity trade-off, that's where the return compression comes in. You're seeing a lot of products come to market that are like, oh yeah, you know, we're private, but we're liquid. You go one level deeper. Well, but it's also not private. It's it's it's blended. So, >> the more liquid something is, right? By definition, it's not >> it's not liquid. It's not even liquid. >> It's not private. >> It's not private. And so, a lot of these funds are like, "Okay, well, we're part this and part that and like really the private allocation is like this big." And um yes, you're going to have a tradeoff there where you're not getting paid for that ili liquidity premium. >> Human nature. Okay, just answer me this. If something is an amazing investment, >> whether it's an asset class or a particular property or a particular whatever, >> if something is amazing, are billionaires going to let dentists get in? No way. Right. >> Well, the billionaires, you know, it's funny. Tony James wrote a book about this. >> The billionaires need the dentist though now. >> Yeah, the billionaires need >> as exit liquidity. >> Dude, stop. What are you talking about? Who's saying this is an amazing investment? Private loans do 8 to 10% a year. >> No, no, We're now we switch topics. We're talking about private equity now. Okay. >> I'm saying if something is like an incredible opportunity, >> right? >> And Mark Cuban buys Mark Cuban buys 20% of it and uh and someone else buys 20% and someone else and all these wealthy, well-connected, famous, brilliant people. >> Josh, what team do you want to buy? >> Wait, let us know. >> And then there's 10% of it left. Why would there be 10% of it left for the public? >> Let's put it this way. Why? Why wouldn't they just buy >> You're right. You're right. Of course. The the best investments are for the for the ultra wealthy >> and that will never change. >> Never. Ever. >> So, anytime you're democratizing something, you're telling me this is third tier. >> First of all, are sports teams always good investments? >> Yes. Name one that isn't. >> I don't know. It's funny. I once asked Mark Lazy why he got out of the Bucks, right? >> Best trade ever. >> Well, he said >> he bought it for $400 million and sold it for billions. That's a good enough reason. But he he then went to other kind of more esoteric sports like pickle ball, right? Because the return profile was better there. And yes, these are not available to everybody. But I would say, >> you know, the you know the Jets are probably worth $5 billion. >> Oh, I'm so glad you mentioned that. Sorry. >> There's no sports franchise that goes down in value. >> So last night I went to the Nick, >> but the return rate can slow. That's what I'm saying. >> True. >> Last night I went to the Nick and I was genuinely thinking about this. What are the Knicks worth? I don't know, six billion, 8 billion, 10 billion, whatever it is. >> 15 in real life. >> Okay, whatever. Fine. Let's just let's just say it's 10. Um, Olo is worth like 25 billion. Like all of these like nonsense pre-revenue companies or like when you put it into that context and I know it's apples and computers like it's not the but it is kind of hilarious. >> But by the way, I don't think we're that far off from having individual investors being able to be in sports teams too because >> they're there private equity is there. >> That's what I'm saying. So actually the universe of investments is just getting a lot bigger. So I I don't disagree that there's exclusive investments that are maintained for the ultra wealthy, but I'm saying the universe of investments that only used to be for the ultra wealthy is now expanding. >> So I think that's good. I do think people should leave room in a portfolio. People who are wealthy >> did we win you all the boxing judges already there. But I also know so um I'm a firm believer I'm a firm believer that 90% of everything is [ __ ] That's what that's what I think. Okay. >> You know, I will I will actually agree with you. >> So most of these So most of these uh investments most investment they don't have to go bad. I I wouldn't say that. I would just say like do you want to own the fifth best fund in a sector? And you just showed us dispersion is really a big deal in this space. You do not want to own the fifth best manager. You want to own number one or two or your returns will be radically different. that from from my perspective, I think that's why uh I Capital has been so uh successful. People need someone to tell them this is the good one, that's the bad one, >> you know, and it's the beauty of my job. And it's so funny because I asked my husband, I'm like, how do I fight with Josh Brown about the bias comment? >> We're not So, we're we agree on we agree on almost everything. >> We do. And I I would say it's not about there's no interest in being biased. The interest is in in same for both of us in being right. Right. and being able to do as much diligence as humanly possible on behalf of everyone else. Right? That's what I got to do as a journalist and it's what I get to do. >> So my last question then, is it realistic for somebody who has $200,000 in a 401k to be able to take 25,000 of that and put it into a top tier private equity manager >> or private credit manager? Do you think that's actually what's going to happen? >> I do. >> You do? I I think it'll take a minute to get this ironed out properly, but >> private assets writ large. >> Do you think the better managers will make themselves available to inflows? >> Oh, that's definitely from a 401k,000. >> Yeah. Don't they have to? Because if they if if they they go into 41ks and it's a disaster, then like this is going to that's going to be really bad. They're going to have to put some decent funds forward, don't you think? >> Uh yeah, they'll get kicked off the they'll get kicked out of the plans if they blow up right out of the gate. >> Yeah, they have to do that. It has to be top tier quality and also I mean that the idea of putting assets in a form you're holding that for a long time. >> Yeah. >> That's one of the best possible structures for private assets. >> Yeah. So I don't think Schwab and Vanguard will work with terrible firms or dodgy. I agree with that. I do think there will be marquee names in private assets working with the marquee names that manage most of the country's 401ks. So, I don't think it's a case where bad product is going to be shoved down people's throats. I guess I just question it's probably not bad, but is it even good? Is it even will it be materially better than what they could do with lowcost uh index bonds and and stocks? I don't know the answer. I don't know the answer, but that's the question. >> You know, um a couple months ago, remember made a lot of news when Goldman came out with their assumptions for where the S&P and 500 is heading in the next 10 years. And just because of valuations where we are today, I mean that is one of the big problems, right? It's just capital markets assumptions where we are in valuations and the expected returns over 10, 20, 30, 40 years, >> right? Why overpay in public markets? You could overpay in private markets. >> Well, hopefully nobody's overpaying with us, right? >> Chanala, you're so good at this. It's scary. Uh I I just I want to thank you so much for coming here and um pointing out all of these things that are getting lost in the conversation. Did you have fun on the show? I I I love the show. I'm your neighbor. I'll come to >> Can we do a Rocky versus Apollo for the thumbnail of you two? >> We But we like agree on like 90% of this, I think. >> I think we both want what's best for the investing public. That's pretty obvious. >> Yes. >> 1,000%. >> All right. >> Optionality and >> I think I'm in on secondaries because I like buying other people's pain. I like that. >> I'm just going to call him Vulture for >> I almost forgot to mention this. We have to disclose this. We are a shareholder of I Capital. >> You are. >> We're so technically Michael's your boss. I don't know if you know that. >> Scary. >> I Capital. >> Go get me a glass of water. >> I Capital one of our bought one of our companies. So we have shares in. >> Look at that. >> I'm hoping you're in trouble. >> Don't screw up our kids. 129 is counting. >> That's why he's a spokesman for >> No kidding. I love that you threw that at me at the end there. Would have been nicer to you guys. >> All right. So, we always end the We always end the show um asking people what they're looking forward to. And uh I'd love to uh I'd love to hear from you guys. What's what's hot in your world? What's going on on the horizon? What are you excited about? Chanel, you can start. >> All I can think about is a CPI print tomorrow. Is that horrible? >> Are we even going to get Are we even going to get one? You and Cali both. You Callie's excited, too. >> It's the only like it's a data starvation for the last 3 weeks. Um, I guess I'm sort of excited about it, too. Uh, I I think just in general, I think we'll just get one more rate cut at the end of the year, no matter what the CPI print. >> Just one. You think? Definitely just one, not two. >> Maybe more. But I think we're definitely getting one. >> Yeah, I I would agree. I would agree with that. >> What are you excited about? What What uh economic data point can you not sleep until we get >> So, I'm excited this weekend. My son plays third and fourth grade football. Okay. >> In his last game, >> following in his old man's footsteps. >> He's on the line. He's not like me. Uh okay. They're playing their last game of the year at the big house in Ann Arbor. >> Oh wow. >> It kind of came out the >> Is Rasnic gonna be there? >> Yeah. Is Jason Rasnic gonna have a front row seat for that? >> I don't know. Uh so I something about football was my sport. So watching one of my children play football has been like so gratifying for me. It's it's unbelievable. So much fun. >> What do you think of the Lions season this year? I thought they'd be better. >> They're not bad. >> They're good. I just thought they'd be better. >> Yeah, but everybody thought lo their coaches from Detroit. >> I'm a Packers fan, so I think we're not friends. Okay. No, wait. They lost their offensive and defensive quarter and they're still kicking ass. >> Yeah. And we have the best running back in the league. >> Yeah. >> Oh, that guy's freakishly fast, too. >> Yeah. >> Yeah. Um All right. So, but overall, it's not a terrible season. It's just I I guess I thought they'd be more dominant. >> Aren't they 4-2? What's their record? Five or something? No, they're super They're going to Super Bowl. >> You think so? >> Yeah. >> Okay. I don't know how >> better than them in the NFC. Nobody. >> I I have very low expectations for the Lions every year. So, >> Grand Rapids hedge. When were they last in the Super Bowl? >> Never. >> I was going to say, >> yeah, they should have been last year. >> Sorry. >> Yeah, they got so many injuries. Yeah, >> they should have been. Um, so he's going to play So, he's going to play in front of 100,000 seats. >> 100,000 seats. Yeah, >> 100,000 seats. >> They're playing They give him an hour to play this game. So, they got like no halftime. Like, we got it because there's all these games, but he gets to finish the season. >> He's eight. >> Eight. That's He'll remember that. He'll remember that for the rest of his life. >> Yes. >> Can I say what I'm excited for? I'm excited for tomorrow. If somebody told me 15 years ago that I'd be interviewing Jim Kramer with Josh, I would have told him smoke and dust. >> Oh, is he on the pod? >> Yeah, >> he's on the pod tomorrow night. We're gonna do it live. Uh, it won't air until next week. Um, I don't know how long we have him for, but we're going to do like the Jim Kramer on the compound experience. >> Where are you guys doing it at? >> Uh, we have a venue holds about 120 people. It's fairly exclusive and uh custom cocktails in the financial district. Um, I don't know about that's a Nicole question. We're gonna do it. We're gonna I don't know, Rob. We're gonna do it right. >> And thank you KKR for sponsoring the show tomorrow. >> All right. Anyway, something to look forward to. Uh, guys, we want to thank our guest Ali Bas. Where can people learn more and get more of your insights cuz uh I feel like you just absolutely lit it up on the show tonight. >> Yeah, we keep we keep it real on LinkedIn. We are on Twitter. We try to share as much as we can. Okay. And on icap.com. >> Your Twitter as your your real name. iapital.com people could subscribe to the the research that you guys put out. >> Yep. Yeah. We have a newsletter where we share a lot of that research and uh we have a tab under thought leadership where we publish every week. >> All right. You're the best. Thank you so much for being here. Appreciate it. Thanks to all the listeners. Like and subscribe. We'll see you soon.