November 28, 2024 • 49 mins
When it comes to credit investing (or really any investing), there's an analytic art in deciding the right price to pay for a security. But often that's only part of the challenge. First you need someone to want to sell it to you. In something like public-market equity, this usually isn't hard. Liquidity is deep, and the "ask" price is well known. In something like private credit, it's much trickier. Someone has to sell you the deal. Someone has to call you about it and tell you about it. So how do you get the call? And how do you know when to say yes? On this episode, we speak with Milwood Hobbs, the Managing Director and Head of Sourcing & Origination at Oaktree. Prior to this role, he was at Goldman Sachs, also in leveraged finance origination and sales. So he's been involved in numerous credit deals in his career. On this episode, he talks us through his role, what's involved in it, how he gets offered deals, and how he determines what opportunities are better or worse.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
another episode of the All Thoughts Podcast. I'm Tracy Alloway.
Speaker 2 (00:24):
And I'm Joe.
Speaker 3 (00:25):
Wasn't that Joe?
Speaker 1 (00:26):
Do you remember deal toys? Did you ever see those?
Speaker 2 (00:29):
I never got a deal I never I do know
what they were.
Speaker 1 (00:33):
You wouldn't get a deal toy unless you were working.
Speaker 2 (00:35):
Out, so I'm aware that they existed, but I don't
never had one. I never saw one.
Speaker 1 (00:40):
I used to be slightly obsessed with them.
Speaker 2 (00:42):
Were they toys like or were they like like were
they those sort of looseight Uh?
Speaker 1 (00:47):
Yeah, that's pretty much it. So if you are working
in capital markets or in mergers and acquisitions and you
completed a deal, you would mark the end of that
transaction by, you know, adding some sort of swag I guess.
And it could be really boring. It could just be
a looseight block or something like that. But some of
them were really interesting and fun. And one of the
(01:09):
ones I remember seeing was someone it must have been
working in like capital markets. It was a little toggle,
like an actual like think of like a railroad I
kind of toggle, and it was to celebrate the first
ever pick toggle transaction.
Speaker 2 (01:25):
So can I say something you know we talked to
First of all, it's amazing. Second of all, you know,
we talked to a lot of investors on the podcast.
We talked to a lot of people whose job in
some way resembles our job, which is looking at screens
all day or maybe looking at data. I think if
I ever had gone into finance, I would have some
(01:47):
job that looked involved a lot of looking at screens
and a lot of maybe looking at data, but mostly
just looking at screens. We don't often talk talk to
a lot of people who are in the world of
actually talking to other people about making things happen. I
never think i'd be good at that. No one wants
to hang out with me, you know, stuff like that.
And so I want to learn and talk to more
people about how actually things in finance, whether we're talking
(02:10):
about a deal, whether we're talking about a new issuance,
et cetera, how that actually happens, how an instrument or
security actually comes into the world.
Speaker 1 (02:18):
Well, I'm very pleased to say, Joe that we do,
in fact have the perfect guest for this topic. We're
going to be speaking to someone who's day to day
business is talking to people sourcing and finding deal and
someone who also knows exactly about that Pictoggle deal toy
that I mentioned earlier. So I'm very excited we're going
to be talking. We're going to try to thread the
(02:39):
needle between sourcing deals and also something else we've been
interested in lately, which is private. That's right, all right,
So without further ado, we're speaking with Millwood Hobbes. He
leads Oak Trees Sourcing, an originations group. So really again
the perfect person, Millwood, thank you so much for coming
on all thoughts, Thank you for having me. So I'm
(02:59):
right right about the pictogle toy. You've seen this toy.
Speaker 3 (03:03):
Yes, I've seen it. My favorite deal toys. There's two
that stick out when Ford spun out Hurts in two
thousand and five, I was part of that transaction, and
so I have a set of car keys and there's
from Hurts and it's it's a it's they're called loose Heights. Yeah.
And then the other one, which was pretty cool. I
did the Mars regularly deal with Byron Trott, and so
(03:25):
I have two eminem amazing guys that sort of they
lay out.
Speaker 2 (03:29):
The train a room in your house that's sort of
like I'm imagining high school athletes trophies.
Speaker 3 (03:35):
So so you know, I have we moved there in
Covid in twenty twenty and we bought a house and
I have like a real library. And then that library
are two things from investment banking that I have. I
have bank books from deals we used to we used
to go to a printer and we used to draft.
Oh like the pitch that well, it's like a it's
(03:56):
like an actual it's a glossy picture book of of
the deal. The transaction goes through transaction over youw, it
goes through company, it goes through business, and that was
what folks used to actually underwrite deals back in early
two thousands. Yeah, and then I have loose sites, so
I have a lot of loose sights.
Speaker 1 (04:15):
So the unit that you're leading at oak Tree that
was created I think relatively recently, it was like twenty
What was the thinking behind that?
Speaker 3 (04:24):
So the market private credit in origination and financing of
deals has evolved quite a bit. If you just go
back to kind of pre Dot Frank, most private equity
firms didn't have what we call capital markets professionals, and
post Dot Frank and the migration and creation of a
robust private credit mark. Most of the private equity firms
(04:45):
have capital markets professionals who really spend time drafting, creating,
structuring financings for the private equity buyouts. And what we
figured out oak Tree we were founded in nineteen ninety five,
we managed a couple hundred billion dollars. What we were
figuring out when I first started in twenty thirteen. Every
strategy within oak Tree kind of did its own thing.
(05:06):
So if a deal came into one strategy and it
didn't work, it just kind of died in that strategy.
So what we decided as the market evolved and moved
towards capital solution provider versus this fund does this and
this fund does that. We created my group with the
real purpose of a couple of things. Number one is
making sure we were focused on providing capital solutions versus
(05:30):
trying to figure out what fit a particular strategy. Yeah,
and then the second reason we really did it is that,
you know, capital is the commodity in our business. Everyone
has a lot of money, but how do you get
the first call in the last call? And that's the relationship.
So my team is meant to really spend time and
develop relationships with the counting parties because look, the reality
(05:50):
of it is, we shouldn't. We're not agreeing on We
have different investors, So a private equity firm has a
different investor base than we have. The goal in my
group is to one make sure the entire firm sees
a transaction, and two we're involved in the art of
the deal, right, And so the goal is no one
really should win. Both parties should be just mildly annoyed.
(06:13):
And how do you do that? How do you do that?
In a way you do it the relationship.
Speaker 1 (06:17):
That's funny because we say that in journalism sometimes, like
the goal is for everyone to be like slightly dissatisfied
in the story, because if everyone's happy, then you basically
put out a press.
Speaker 3 (06:28):
Release somebody's wrong. If one side is really happy, the
other side is probably wrong.
Speaker 2 (06:33):
I know Tracy already more or less ask this question,
but I'll just put it in a different way. What
do you just give us a sort of brief overview.
If someone says, what do you do and how'd you
get here? What did you do and how you get here?
Speaker 3 (06:43):
Yeah, so you don't want you don't want my full
full background.
Speaker 1 (06:47):
Oh, I actually do, because you've been in the market
for a really.
Speaker 4 (06:49):
Long time.
Speaker 2 (06:52):
Childhood.
Speaker 3 (06:52):
But okay, okay, I'll start from what I'll start from.
So so look, my my dad was in public accounting,
and originally so I got a fool. I could a
scholarship to Rutgers to go to law school. I sat
in political science and I would fall asleep and wake
up and they were talking about the same thing. So
I said, I don't think I can do four years
of political science. So I switched to accounting. Because my generation,
(07:13):
you did what the adult said to do. And so
I switched to public into accounting, and my dad said,
don't do public accounting, do banking. So I started out
at a firm called Nation's Bank, which is now is
a predecessor to Bank of America. And the most interesting
job I had at Nations Banking, I was a controller
for leverage finance. I was de controlling, the youngest controller
(07:36):
in the firm, and I said, I want to be
a leverage finance banker, you know. And the reason why
it sounds silly when you're at my age, but they
wore a nice time, They were nice shoes, They were
in big in finance, and at that time Nation's Bank
was a pretty big terminobe lender, and so the head
of the group basically said, look, right now, you're just
(07:56):
an accountant. He said, go get a sales job and
then go to the school. So again I went to
g Capitol and I financed commercial equipment, so rolling stock assets, cars, trucks, forklifts.
Did that for one year to today, and then went
to Columbia Business School. I summered at first Boston and
I summered in asset backs and leverage finance, and then
doing deoutsche Bank in two thousand full time. And during
(08:20):
that time period I structured a lot of lbo's sun Guard, Nema,
Marcus Us foods.
Speaker 1 (08:26):
Irridium, first Demon, Marcus being the first ever pick Togles. Yes,
and so you had that deal toy.
Speaker 3 (08:32):
I have it, you know, I'll be honest with you.
I think I gave it to someone more senior. Oh.
Speaker 1 (08:36):
Oh, should have given it to me.
Speaker 3 (08:38):
I know somebody who has one. And then in two
thousand and seven I left Deutsche Bank. And really you
sort of say, why would you leave Deutsche Bank? And
if you go back to two thousand and seven, the
market was very concentrated so versus today. There were eight
underwriters who owned all the leverage finance, right, so you
could see the market. You know, when I got a
(09:02):
call to say, hey, what leverage would you provide on
a deal? I'd ask the private equity firm, well, what
do you think the business work, and they'd say, well,
it's based on you know, leverage, and so you could
see that coming to a head. So in two thousand
and seven I went to Goldman Sachs. I did LBOs
at Goldman Sachs and also did high you sales and
joined oak Tree in twenty thirteen.
Speaker 2 (09:21):
It's always interesting to hear someone's background, but I like
how there's dovetails with the actual development of the industry
itself and this idea that at one point there were
just a handful of very small or a handful of
banks that ran leverage finance, and then of course we
know about the proliferation of all that. So it's pretty useful.
Speaker 1 (09:37):
Yeah, with that background, well, why don't we dive into
that a little bit more so, talk to us about
how the credit market, the capital market has evolved over
the course of your career.
Speaker 3 (09:46):
Yeah, so, look, when I first started, covenants were pretty
standard amendments to deals were actually fairly standard, and as
you moved forward, by two thousand and seven, the majority
market was cove light. The one interesting thing about pre
Dodd Frank was in the credit agreement, which is a
(10:06):
document that sort of governs the loan if you will,
you had to hedge fifty percent of your floating rate risk.
And so going into the cycle, two things that made
since then is one folks were hedged fifty percent, and
then the other thing is lightboar if you remember back
in two thousand and seven was at five percent, so
the spread to deals was two hundred and fifty to
(10:29):
get to that seven and a half percent average LBO. Well,
what happened at when Dodd Frank, when the markets cried
the world the global financial crisis, rates went to zero, right,
So companies actually generated cash flow in that cycle. The
challenge or difference we have today is we've been in
no rate environment, so no one really hedged one and
(10:52):
then two there because there was zero percent base rates,
the spread on deals was much higher. Instead of two
or fifty, you had for fifty five hundred, six hundred.
So when twenty two when rates started to move up,
you actually had a situation where a lot of companies
couldn't support the cash flows because no one predicted that
(11:15):
race will movement, and most folks were not hedged like
they were in two thousand and seven.
Speaker 2 (11:35):
Can you talk a little bit, you know, it's a
theme that obviously comes up with every private credit but
also other episodes as well. Talk to us a little
bit more about like the post the immediate the passage
of Dodd Frank and how it's set into people's brands,
that this is going to restructure the financial industry, that
there are to be various activities, whether we're talking about trading,
(11:57):
whether we're talking about lending, et cetera. Right, these are
not to be part of the banks anymore. Right, talk
to us a little bit about those sort of early
posting you know, and they were talking to two thousand
and nine, twenty ten, those initial conversations that people were
having about something new, New opportunities are going to emerge
from them.
Speaker 3 (12:14):
Right. Well, well, if you go back to two thousand
and seven, when a portfolio manager and a public side
was selling risk in the market, the banks were the
shock absorber to that risk. Yeah, right, So you know
when I was sitting at Goldman Sachs, it wasn't unusual
for us to buy two hundred million dollars of an
(12:35):
issue and it would be on your balanchie and it'd
be on our balance sheet. Right post what Dodd Frank
did effectively has said, okay, if you go back to
the leverage. And I hope I'm not being too technical, but.
Speaker 2 (12:45):
No, there's great.
Speaker 3 (12:46):
Banks were levered roughly thirty times pre global financial crisis.
Post they're fifteen times levered. Right, So once you shrunk
that liquidity or capital out of the banks, they can
no longer absorb the deals. And so what happens is
and this is why liquidity is really an important phenomenon.
(13:06):
So when a PM calls the desk and says, hey,
I have to move five, ten, fifteen million, you're not
really sure what their real size is because they know
the market's not liquid. When I was in sales and trading,
Pimco or somebody would call and say, hey, I've got
several million to move, and I'd say, well, this is
your first call or a last call, and they laugh
and they say why, I said, because I give you
(13:27):
two different prices. And so what happens in a market
that's less liquid is as they're trying to sell, they
call relative different banks, and every time they make a call,
a bank then assumes that there's more behind that to go,
and so they rerack the pricing. And so in a
public security, which is different than private, a public security
(13:49):
can actually move pricing wise without anything really trading, but
on the anticipation that there's their supply out there, and
so that created you know, and if you go back
to two thousand and nine, private credit market was like
three hundred billion dollars, right, most of that was more
mes or off the run, not what we call our
(14:11):
regular way direct lending private credit, which we were active in,
but we're doing it more on the distress or opportunistic
credit side, and over time, because of the liquidity and
capital requirements of banks, more of that has just migrated
to the private credit market, supplemented by the fact that
there are these private equity professionals who are very efficient
(14:34):
at looking at both markets and figuring out where they
should play or where they should place their credit or
their deals.
Speaker 1 (14:41):
I'm getting a lot of flashbacks to writing about corporate
bond inventories that the dealers like around twenty twelve, so
just on this note, is the pitch from private credit?
Is it basically execution? Like you don't need to worry
about us actually being able to do or complete this deal.
Where is it a bank? You know they're taking into
(15:01):
into account leverage considerations, regulatory requirements and all that, right.
Speaker 3 (15:06):
Right, So what a proper deal should be? Right? If
you're sitting in private equity, your job is to find
the most efficient, best price capital for your deal. Right.
The public market, what they're very good at doing is saying,
here is the indicative rate for a deal. And let's
just say the indicative on a term loan is sofur
(15:28):
plus four hundred. Right, then the private equity firm comes
to us and says, where will you actually own that risk? Right?
So they get a level where we're owning, which won't
be the indicative because remember the banks are marketing, Hey,
we can get you the best rate and best execution.
We're in the storage business. The banks are in the
moving business, so they're trying to move the risk, and
(15:49):
we own the risk, and so we price the risk
where we'll hold it. And if those two are not aligned,
what then? And then once you add to that four
hundred is you ad what we call flex. So if
you take the indicative plus flex, that gives you an
idea of what the banks are willing to say that
this debt will price. So let's say the flex is
(16:09):
one hundred and fifty basis points, so they know on
the private equity side, they know worst case the banks
will own it at SOFA five point fifty, which the
banks have gotten that sort of flex number based on
their discussions with us to know where we would actually
own that risk.
Speaker 1 (16:25):
I see.
Speaker 3 (16:26):
Yeah, So the process is how do you create an
efficient auction to have the debt in the right market
at the right pricing with the right structure.
Speaker 1 (16:35):
Okay, so here's my other question. When you are about
to do a deal, or when you find a deal,
who are you actually talking to? Is it the banks
or is it like the companies that are borrowing in
the market.
Speaker 3 (16:47):
So so generally in a.
Speaker 2 (16:51):
Yeah, oh wow, so sorry answer questions, but I'm just
sort of like I'm talking question.
Speaker 3 (16:57):
I'm talking to both, right, everyone was my friend. And
the goal is the more conversations I have, the more
informed I am of where the market is right. You know,
the interesting thing about public markets is that market reprices
risk faster than private credit because there's a secondary market.
Private credit doesn't really have a secondary market. So what
(17:19):
we're always trying to make sure we're understanding is relative
value between public and private. And so my conversation, let's
say XYZ sponsor wants to buy a business, right and
let's say it's a public company. The first call, I'll
get his front that sponsor and say, hey, Millwood, we
like you guys to look at a financing opportunity for
public company we're looking to buy. I'm like great, I say, look,
(17:42):
I'll put my compliance on the email and we'll do
a conflicts checks on that business because we don't know
if we own the stock or there's existing debt outstanding.
So it goes through a process where that company is
actually vetted from a conflicts perspective. Once it's vetted and
that clears the process, then we get initial information on it.
And that information could be a selling memoranda, it could
(18:05):
be an initial model, and so then we start the process.
And what the sponsor wants to be able to do
is from the preliminary information is get a sense for
do you want do you like the asset or not?
Do you want to finance it, where do you want
to finance it at, and what's your leverage and what
you're pricing. So there's some high level indication that they
get from us to determine if they if we should
(18:28):
move forward with a more robust diligence process. So that's
that's how it starts. And then at that point we
do a due diligence process on the asset. Right, so
we may have we may call third party consultants, we
may do some background on it. We have a call
with a sponsor, we understand their investment thesis, like why
are they making the investment, and then we talk internally
(18:51):
and we have an investment committee and we discuss it,
and then we'll iterate with the sponsor on diligence questions.
And then at that point it becomes are you in
a you out? And so then once the sponsor kind
of has a sense for who's in and who's out,
now their goal is to get the right terms, and
so there's a process around sending us their thoughts on
(19:12):
the terms right and our job is to figure out
which of those we want to negotiate and which are
we fine with.
Speaker 2 (19:19):
First of all, this fantastic stuff. I want to talk
more about, you know what, or get to what it takes,
what it takes to be the first call, because you
said that's that's important, and I'm like curious, Like, you know,
Tracy and I are competitors, how does one of us
get the first call out? But but even before we get
into that question, and it occurs to me that you know,
(19:41):
because you work for oak Tree and there are multiple
strategies within it, and you work ass with like different
people on different committees and different funds, et cetera, is
there ever tension that arises between your recognition of the
need to make the get that first call versus what
people on investment committees see as the fair price right.
(20:03):
Because if the investor is always trying to get every
penny fun right, then at some point I'm going to
stop calling talk to us about reconciling that. And I
also have to imagine, just to sort of add on
a part read to this question. You know, it would
be one thing if like it was a small shop
and one strategy, but you're looking at this holistically correct,
Where's the investor who's running a specific line there, cares
(20:26):
about their returns and doesn't care so much about the
returns of the other fund or just the general So
talk to us about reconciling some of these tensions.
Speaker 3 (20:33):
Right. So the biggest tension is, like I said earlier,
we don't necessarily agree on price, structure, leverage. Right. But
what we're doing is I'm talking to that sponsor or
that client or that company all the time. Hey, how's
your family? I know where they get is go to school.
(20:53):
I may do zooms with their kids.
Speaker 2 (20:56):
Hey, Milwolle really is a part of my big.
Speaker 3 (20:59):
He say, no, I want to I want to go
to Ocean Prime. I know you know the manager. I'm
bringing a family. So yeah, so we are full service here.
And again, like I said, the relationship is getting the
first call and the last call. And by the way,
out of twenty deals, I only care about the last two.
So how do I pass eighteen times so I can
see the last two? So it really is a form
(21:22):
of art, if you will. And what we're trying to
do is demystify the negotiation and we're institutionalizing relationships. So
if XYZ sponsors in LA, they'll call me and say, hey, mil,
what who should I talk to the Okay, let me
give you a list of folks. Because the more that
that private equity firm or that sponsor or whatever client
(21:42):
is feels like they understand our firm, the better the relationship.
So we spend time making sure that they know who
our CEO Army is or Bob o'lary, that they know
the pms at the different strategies, so it's not a
scary monster. You know, when I when I joined in
originally oak Tree, remember we were more opportunistic and as
(22:02):
the market has evolved, and as we have evolved as
a firm, we're sort of private credit and opportunists. And
by the way, the client will say, no, I don't
really care about one side of the house versus the other.
Your oak Tree, right, So we have to sort of
in your oak Tree. I'm oak Tree, right, And so
I have to go to the market as one as
(22:22):
one firm.
Speaker 1 (22:24):
Wait, talk to us a little bit more about what
negotiations are actually like, because I will say, we just
had Suji endap On wrote a great book about the
Caesar's Palace LBO. Yeah, you're in that, not you specifically,
but oak Tree certainly is. And there's certainly like there
are some very dramatic negotiations that take place in sure.
Speaker 3 (22:47):
Oh yeah, I mean look, sometimes you just you get up,
you throw your pencil in air, and you walk out
of room. And sometimes you know, so you know, at
the art of negotiation is what I say to what
I say to my team is it's not the negotiating
point you're discussing at the moment, it's the points that
are coming two points later. Right, You're always thinking ahead
(23:07):
on the negotiation. You know, we did a deal for
a business that wasn't really loved in the leverage finance market.
And I knew that the type of business because I
had done an LBO and the market really didn't understand it.
But it was a great management team. Sometimes sometimes deals
do well because the management team is very good and
very articulate. And I knew this deal would struggle at
(23:29):
a bank, and so when it was hung, which means
the bank had the funded.
Speaker 1 (23:33):
They got stuck with it.
Speaker 3 (23:34):
They got stuck with it. I called in and I said, hey, sorry,
but I'll buy fifty million at ninety okay, right, Oh gosh,
what ninety Wow, that's that's a deep discount. Da da
da da dah. I said, well, you know, I think
as you now realize that business is not it's a
little tricky business. And it was a public tool private.
So a private equity firm was taking a public company
(23:57):
and making it private. And even though it was a
climing margin business, there was a view that the public
company expenses were high. So you could sort of map
you can map a scenario where over twelve months they
were going to cut some of the public company calls
and create a more efficient which would create more ebadah yep. Right,
(24:18):
So they sold it to us. So now I'm a
top five lender right with the right responsor. You had
the right relationship right, well, sponsor, which you know they're
they're meant to be opportunistic too. Cap structure ibadadh gru
cap structure looked good. So they wanted to do a dividend. Now, again,
in a negotiation, if you're doing a dividend, that means
(24:40):
you're putting more debt on my capital structure.
Speaker 2 (24:42):
Right, that's money that could go to you.
Speaker 3 (24:44):
That's money that could go to anybody with them, right.
And so you know the job of a sponsor at
that moment is to call the top five lenders and say, hey,
I'm doing a dividend deal, and they take me from
violently upset to miley annoyed. That's the job. So this
sponsor did not call it on that dividend deal, and
so now I have a I'm in a unique situation.
(25:05):
They went to other lenders and got the fifty one
percent to do the deal, and I felt some kind
of way about that, some kind of way, and so
I proceeded to try to figure out why folks would
agree to this dividend deal. And so I called the
market and a sponsor sort of said, you know, he
calls me and he says, no, what I hear? You're
(25:27):
working against me on my dividend deal. I said, well,
that's not actually true, because you didn't call me when
you launched it. So he said, but I thought we
had a good relationship. I said, we do. I thought
so too, but you didn't call me, all right, And so,
long story short, the dividend didn't go through, right, and
so then we changed the structure of the dividend to
allow we shrunk the size of the dividend, We changed
(25:49):
the original issue discount, and I told the sponsor, I said, look, unfortunately,
I'm going to sell the position when this closes. And
the point of that story is sometimes it's life's too
short and not all, not all relationships are meant to
go on forever. We still talk, I'm still a good friend,
he's still a good friend, but we haven't done a
(26:11):
lot together since then, because sometimes you know, in our
in our in a negotiation, if you don't see IDI
and that deal worked out, what happens if it doesn't
work out? Yeah, right, So sometimes sometimes you're managing relationships
to keep, and sometimes you're managing relationships to not do
on a business side, but you always want to be
(26:32):
friendly in this market because you're usually one person away
from somebody that matters in business.
Speaker 2 (26:37):
Actually, since we're on this point, that strikes me as
very savvy and very wise and like probably a lesson
many of us should learn in many realms that sometimes
it's okay to uh take the l or let a
proposal fall apart because life is long and other things
happen at some point. We have listeners who are in
college or young and they think about, you know, career trajectories,
(27:00):
et cetera. I'm curious, just from your perspective, this is
probably a sort of attitude that you would hope the
people who work for you cultivate, internalize, so to speak.
How do you recognize who has that? And like, when
you think about like people that you want on your team,
are you able to sort of like build intuitions about Yeah,
the people who can think that way.
Speaker 3 (27:23):
Yeah, So good, good question. So I would say, on
my team, everyone is uniquely different, and everyone's exceptional at
something and very good at everything else. And I think
where you make a mistake in building teams, especially in
our business, is you try to find someone who can
be exceptional at more than one thing. So I'll tell
you a good story. So when I was first starting out,
(27:44):
I would fly to Dallas, Texas, and I would meet
with folks in Texas, and I thought I was a
pretty charming, knowledgeable person on the markets, and everyone in
Texas was friendly. But what I figured out was by
the time the deals made it to me in New York,
in Texas, that already passed. So it's almost like wrong
way risk and so well, because you're in Texas, right,
(28:10):
it's a different culture, different in New York and and
and in some markets folks want to do business with
folks they may see on the weekend or see in
the gym or you know, and so it's it's more
of a that person sits in New York. They don't
really know me, right ye. So but if people in
Texas didn't really like the deal, then you call the
(28:33):
people in New York. So so I decided that I
needed to put someone in Texas. So how do you
hire people? Right? So this is for the year young audience.
So I went to a conference and he was kind
of managing a room really nicely. So I gave him
my business card. I said, hey, we'd love to spend
some time with you. So I called him and we
set up two days and meetings. Well, he didn't realize
(28:54):
I was actually interviewing him for two days. Because everyone
says they have great relationships, right, says, oh, yeah, I've
got the best relationship, Da da da da, But how
do you actually test that? So I spent two days
with this person, and look, you know, high school football
matters in Texas. I didn't play high school for I
played high school baseball. This person plays high school football.
And so you put someone in that territory that understands
(29:18):
the local culture. And what we're trying to do is
have a hub and spoke origination model where we where
we where. We have a global firm, but we try
to talk on a more regional, local level, and that's
what I think makes our sourcing origination a little bit different.
And again, people matter in this business, and again the
(29:39):
goal is to get the first call. On the last call,
that person may spend a lot of time, you know,
going to events, spending time with the families, and ultimately,
what you want folks to do is to show you
deals because they.
Speaker 4 (29:52):
Trust you, and it's still a trust your business.
Speaker 1 (30:10):
One thing I wanted to ask you, just going back
to something you said about the management of a particular
company being good in credit. We've spoken about this on
the podcast before, but we tend to think about it
as avoiding losers, right, whereas equities are more about finding
the winners. So I guess my question is, like, when
(30:32):
you're looking at a particular deal, do you feel that
you're making a bet on that business or is it
just about looking at the numbers and making sure that
you know you're not going to yes?
Speaker 3 (30:43):
So so interesting enough, what we're trying to do in
a diligence process is figure out where there may be
holes in that investment. We did one deal with accounter
party that we required them to switch to CFO just
because the questions it took too long. The answer like
if I ask you how many days does it take
(31:03):
you to close your books? What percentage of that is
manual versus automated? What do your management letters say in
the auditor? You know, those types of questions if you
have to think about them, where you say, I'll come
back to you as a CFO, that would be concerning.
So you know, our job is to protect our investors. Yeah,
that's our job, and what we're trying to do is
(31:24):
make sure we understand the investment. And no one bats
a thousand, right. If you look at the top ten
hitters in Major League Baseball, they strike out as much
as they hit. So you know, our job is to
avoid losers, like you said, and we have to manage
that through a process.
Speaker 2 (31:39):
Can you say actually a little more. I thought that
was really interesting about some of the questions that you
asked and the idea like why can't the CFO just
quickly answer how long it takes to you.
Speaker 3 (31:47):
Would think that would be an easy Yeah.
Speaker 2 (31:49):
I'm always surprised. Also, just generally there's a bit of
a tangent that even you know, in twenty twenty four
with like all the computer and accounting systems, that like
fraud still happens, that there are still way or you know,
companies like we have a material weakness and we're gonna
have to it. I'm always a little surprised that that curious,
like how you like this world of things just being
wrong or ambiguous at companies. And I'd love to hear
(32:11):
you talk more about that.
Speaker 3 (32:12):
When you're when you buy a business as a platform
and then you then buy successive businesses, more than likely
they didn't have all the same financial stea and the
integration process depending on how quickly you want to grow,
it drives how long you actually integrate and so time
what time. What happens sometimes is you don't fully integrate
these businesses and systems. If you go back to failures
(32:35):
of businesses in our market SAP, integration is a big
sort of point of contention. And so businesses you focus
on risk that you see time and time. So fraud fraud,
you know, there was a water business that was you
know that was fraud fraudulent that you know, some banks
lost a lot of money. You know, if you go
back to like Collins and Aikman, which was an LBO
(32:58):
long time ago, there was some fraud and you could
see what you're doing in a diligence process. You are
looking for sort of what I call inherent weaknesses. And
the information you get back and management letters which the
auditors produced is a good document that sort of highlights
the risk of accounting systems, financial systems, and that's a
(33:19):
pretty systems tends to be a big driver of sort
of integration issues.
Speaker 1 (33:24):
So this isn't necessarily fraud. But you just reminded me
of ad backs and deals and you know, adjusted earnings
and things that can be inflated to make a transaction
look a lot better than it actually is. The last
time I remember writing about this was I guess, gosh,
five or six years ago, and the feeling back then
(33:44):
was that there was more sketchy stuff happening on the
valuation side of credit deals. Is that still the case
or has that been your observation over the years.
Speaker 3 (33:54):
Well, so, the ad backs, it's an assumption and it's
an ask to get credit for something that may happen
in the future, right, or it's saying something's happened previously
that hasn't fully been flown through the financial statements, and
we want to get credit or we don't want it
to affect our earnings. Every deal has adjustments, okay, so
(34:15):
just start with the premise that adjustedy badah will exist.
And part of our job is to trust our partners
that they're adjusting the right things. What happens is if
you watch the financial statements over time, sometimes the adjustments
never go away, right, and then you start to say, okay,
this is recurring, not RecA. Right. We did a deal
(34:36):
for a sponsor and we were and it was near
your end, and the sponsors going through each line item
of what they wanted to add back, and you know what,
I said, Wow, we could we could go through this
for three days, right, explaining one to add I say,
you know what, you can add back five million, call
it whatever you want. Right. So, at the end of
the day, what we're trying to do is understand the
(35:00):
rationale for the ad back in a market like today,
the problem is the rationale isn't fully explained all the time,
and the amount of time you want to add it
back it's kind of almost infinite. So you start to
say okay, and the sponsor's perspective would be I'm paying
for that right, because I'm paying off that Adjustinbadasa, you
(35:21):
should leverage against that. The counter would be I'm capped
upside right, I'm capped at par And if you go
back to seven, A lot of the ad backs in
some of the largelbos never truly came to fruition. So
if you take cap structures that will leverage seven times.
If you're adding back one hundred million a seven hundred
(35:42):
million more debt, that if one hundred million ever comes
through at some level, you could be over levered. So
that's why you have to look at ad backs. And
in the one notion, folks say documents are loose, well,
I would argue it's about asset selection, right. A document
is not going to help you if you just underwrote
(36:03):
the wrong asset. At the same time, a document, if
you're doing well and I'm not letting you lend more,
what do you think I'm going to do. If you're
doing well, I'm probably going to figure out a way
to fix the document to allow you to lend more.
So I think part of our you know, business, You're
right on app bats, but you know cove like the
market is mostly cove light. And even when you think
(36:24):
about structures with a covenant, a lot of times if
you actually hit that covenant, it's unclear that business right
is a is a going concern at that point.
Speaker 2 (36:33):
If you need the document to save you, right, then
you've got a problem. You've already got a problem.
Speaker 3 (36:38):
You're you're you're in.
Speaker 2 (36:39):
Well, since we're actually talking about documents, and we have
done a recent episode about so called creditor on credit
or violence and how that works, et cetera. One thing
that came up with that, and I'm also curious about it.
Speaker 3 (36:50):
It's like.
Speaker 2 (36:52):
Legal expenses and you will detail, like you know, every
comma and all that stuff in these documents. I'm just curious, like,
over the course of your career, yes, how much have
you seen and to the perhaps to the point that
it extends exchanges, your expected return on investment, legal costs,
(37:14):
and the sort of rising lawyer fees, et cetera. To
check those documents regardless of how many covenants they have
in them, and if you've seen an evolution over time
since you've just been in the business of how much
of a deal resources end up going to the legal sete.
Speaker 1 (37:28):
Yeah, how much do the lawyers bill you everywhere?
Speaker 2 (37:31):
What have you seen?
Speaker 3 (37:32):
So while I while I said I'm going to now
counter myself, okay, while I said the document won't save
you any deal, it's very important you have a document
that sort of expressly documents what what it is, the
intentions of the transaction. And it's very it's very good
to have governance in a document. Right. So if you
(37:53):
just think about public versus private markets, in a public
market situation, you're given two to three days to review
a three hundred pay lead to a document. Now, if
the deal is going very very well, arguably there isn't
a lot of opportunity for you to push back on
the document, right, so you kind of take the document
as is. In the public market and the issue with that,
(38:13):
there's a lot of and you said credit and current balance,
but there are a lot of opportunities for you to
take assets out of a restricted group, create new ass
new co and lending against that and take value away
from existing lenders. I think one thing that Private Credit
is very good at, and it's focused on that part
of the document. We've been very firm on making sure
(38:35):
that the ability to take assets out and create new
assets or new financing or new capital. We've limited that
quite a bit in private credit. But I will tell
you lawyers what argue inflation is real for them too
write so you know, and a lot of that deal
cost gets kind of you know, born at the beginning.
But yeah, lawyers. But you need lawyers, right, you need them.
(38:57):
You know, there's two reasons why deal usually gets hung up.
Is usually illegal or tax reason on the m and
a side on the financing side. And so lawyers are
an important part of our process, and we spend a
lot of time making sure we have the right cancel
who can understand and be able to move with us
if this goes sideways. We want to make sure your
(39:18):
bankruptcy and attorneys are really good. We want to make
sure that you are put You know, if you're thinking
about biotech or something where IP is important, how do
we make sure that IP you can't overlicense it. There's
a lot of nuances in the document that we find.
Lawyers are very valuable in our process.
Speaker 1 (39:36):
So I just have one more question. But you know,
you've had such a long history in this market and
you've worked on so many interesting transactions. What deal are
you most proud of?
Speaker 3 (39:47):
So when I was doing LBOs, it's almost like you're
watching the company and the sponsor get married and you
sit in the middle of that marriage and you're kind
of playing consultant. And all of my deals. I still
talk to the CEOs of those deals because you get
to know these people, your own planes with them for
(40:08):
ten days, you know, I know some of the quirks
or some CEOs. You know, you just get to know people.
You know, when I was doing the buyout, when Hughes
spun out direct TV, ROXE and Austin was a rock star, right,
a female CEO running direct TV a very profitable business,
and really really get to know interesting people. So I
would tell you they're all the deals I'm pretty proud.
(40:28):
There's probably one that was a bit of a disaster
that that you know. You know, we used to say,
if you made one bond payment, tell us.
Speaker 1 (40:36):
About the deal that you're at least proud of.
Speaker 2 (40:38):
Yeah, so that was probably It's actually just a question,
but nobody really wants to ask that.
Speaker 3 (40:44):
That deal was hard. That deal was hard. It made
one coupon payment and filed it is no okay, I
want to protect those involved. Okay, Yeah, but good question.
And I think you know so, I've done a lot
of deals, and most of them I'm pretty happy about.
All right.
Speaker 2 (41:01):
I think you mentioned you take all right, you want
to be the first call, and to some extent, being
the first call is some combination of, you know, the
ability to give decent pricing and also just being a
likable guy that people want to talk to about their family.
Speaker 3 (41:15):
Right.
Speaker 2 (41:16):
But I think you said you take twenty calls and
you maybe take two. Like what's so?
Speaker 3 (41:20):
So what you're saying what I'm saying is out of
twenty calls, I get the last two or the most interesting.
So how do you actually well, like, engage eighteen times
and it goes nowhere?
Speaker 2 (41:31):
Yeah, but like is there a minimum, like you have
to say yes to You can't say no forever otherwise
at some point you'll no longer be the first call.
Right If I like, yeah, I might like talking to
Tracy a lot. But if she never, like in the end,
wants to consummate the deal, eventually she's no longer going
to be my first one.
Speaker 3 (41:47):
That's how you say no.
Speaker 2 (41:48):
Okay, so talk to us about saying no but still
maintaining first.
Speaker 3 (41:52):
Sometimes we don't say no, We say here's how we
can get to a yes. Okay, right, So sometimes you
give a path to a yes.
Speaker 2 (41:57):
All right.
Speaker 3 (41:58):
Sometimes and I'm more like we're in today, you know,
I'm not clear, it's not clear that someone takes my
no offensively. There's a lot of capital, so it's easier
to say no in this market than a market where
there's not a lot of capital. And generally we may
say no. It may be a concentration issue. Maybe we
feel like we have too much of that type of
risk on our books. It could be an attachment issue
(42:20):
like leverage or attachment could be a problem. It could
be that we had an issue with a similar business
and maybe our LPs are fatigued in that in that
type of space, and we don't want to, you know,
sort of bring it up again. There there hosts of
reasons why we may say no. We may not get
there fast enough. Right, That happens in this market. But generally,
I think we're a pretty quick study. And what we
(42:42):
are very good at is we do exactly what we
say we're going to do. So if we put something
on paper, we're going to stand by that. And I
think that that goes a long ways. And I think
if people say, well, why do they call what do
they call? Oak Tree? I think we price risk right.
So in some markets that's a real big compe at
an advantage. And I think we don't. We don't be
as people. We say what we can do, We do
(43:05):
what we say, and that's it. And so sometimes our
answer is yeah, we like it, but we don't love it.
But if the sponsor or somebody's able to say, well,
OA Tree's involved, right, that gives credibility to the deal
and we can help them get it get it done
by saying we're involved, but we may not be the anchor,
we may not lead it, you know. And and when
(43:26):
you're when you're managing the size capital, we need to
write three to five hundred million dollar checks on most situations.
So we're always looking at the biggest deals with the
largest sponsors. Generally those are safer plays than the lower
lower middle markets. So we think there's less competition when
there's only seven seven of us that can write large
checks versus in smaller deals, hundreds of folks can write
(43:49):
small sex.
Speaker 1 (43:50):
I have one more question. Actually I just remembered, but
you mentioned earlier that you want to be friendly with everyone,
including the banks that you know you're ostensibly incompetition with.
One thing that's been happening recently, it seems, is that
a lot of deals that were originally done in the
private credit market are getting refine out in the public market.
Speaker 3 (44:10):
Great.
Speaker 1 (44:12):
Yeah, so first of all, why is that happening? And
then secondly, like is that a concern for someone like
oak Tree?
Speaker 3 (44:18):
That is great? Like if we can be on two
or three year interim capital in most situations, that's good.
The reason why they're going back to the public market
is there's a spread between public and private, so there's
a cost reduction element, and then for the sponsor there's
more flexibility. Private credit is not meant to be the
(44:38):
most flexible. It's the most efficient, but it's not necessarily
the most flexible. And if I can create an institutionalize
and have a broader investor base, right, sometimes I can
get more things done if a lot more people own
it at very small sizes versus five or six owning
and at chunky sizes. So it's actually you want a
(44:59):
healthy market public and private, right. And when most folks say, oh,
you're losing deals to publicer I'm like, we probably should
have gone to a public market anyway. Right, it's rated,
it's it's an exten existing issuer. It's been into public markets.
It's just stay in public markets. You know. If you
think about the private credit market, we're one point seven
one point eight trillion going to probably three trillion. There's
(45:21):
ABF asset based finance, which is a new phenomenon, which
isn't really new, right. G Capital was a large ABF under.
But there's three trillion dollars of dry powder at private
equity firms. There's enough for us all to do and
be happy.
Speaker 1 (45:34):
All right, Millwood Hobbes, thank you so much for coming
on all thoughts. Fantastic good Thank you so much.
Speaker 3 (45:40):
I'm so glad we made this.
Speaker 1 (45:41):
Happen, Joe. That was so much fun.
Speaker 2 (45:57):
That was an unusually fun good episodes, even though all
of our guests are the perfect guest. You know, I'm
I really like and I think we should do more
about talking with the people whose job it is to
be nice to people and hanging.
Speaker 1 (46:11):
Out with other people.
Speaker 2 (46:12):
Yeah, because that's like an element there's a lot. Yeah,
we could, we could, but that's like an element in
finance that's still you know, Like I said, we talked
to a lot of screen people, and I'm as screen people,
I'm glad that there are still parts of the industry
where there's a big role for likable people who can
maintain relationships.
Speaker 1 (46:30):
And stuff like that, play golf.
Speaker 2 (46:31):
But that's part of being human, right.
Speaker 1 (46:33):
Uh don't you have a whole song with the title
like all my friends are online or something, all my friends.
Speaker 2 (46:38):
Are on my phone? Yeah, like I want to I
want to know more people who have friends, who.
Speaker 1 (46:43):
Have friends, I RL. Yeah, all right, there's a lot
to pull out that. I did think like Millwood's early
point about banks being in the business of like pricing
end moving risk very quickly was a good one because
I think like that's kind of a fundamental difference with
private credit.
Speaker 2 (47:04):
That was really interesting. I also and it was really
interesting hearing him talk about the tensions that emerge because
you want to be the first call and you want
to have a reputation for at least saying yes ten
percent of the time or something like that. Yeah, with
the demands of the actual PM who doesn't care about
all the times you have to say no. You know,
I think this is probably a sort of asymmetry that
(47:27):
comes up in a lot of sales based businesses, right
where you have some salesperson and their job is to
hit a commission or something like that, and then you
have like a product manager who's like, no, you can't
price it at this or we can't move the product
this fast. Yeah, this is just sort of like an
interesting dynamic that emerges in all businesses. And I really
enjoyed hearing him describe how he negotiates that implicitly.
Speaker 1 (47:51):
The negotiations, because a lot of these deals involve like
so many different entities who are all coming at it
from a different angle with a different incentive.
Speaker 2 (47:59):
Yeah, so much, so much there, We'll have to talk
to Melody.
Speaker 1 (48:02):
Yeah we should, all right, shall we leave it there?
Speaker 2 (48:03):
Let's leave it there.
Speaker 1 (48:04):
This has been another episode of the Odd Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (48:10):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carman Rodriguez at Carman Ermann, dash Ol
Bennett at Dashbot and Kilbrooks at Kilbrooks. Thank you to
our producer Moses On On more Oddlots content, go to
Bloomberg dot com slash odd Lots. We have transcripts, a blog,
and a daily newsletter. You can chat about all of
these topics twenty four to seven in our discord Discord
(48:31):
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Speaker 1 (48:32):
Odlats and if you enjoy odd Lots, if you like
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(48:54):
Bloomberg channel on Apple Podcasts and follow the instructions there.
Thanks for listening in
Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
another episode of the All Thoughts Podcast. I'm Tracy Alloway.
Speaker 2 (00:24):
And I'm Joe.
Speaker 3 (00:25):
Wasn't that Joe?
Speaker 1 (00:26):
Do you remember deal toys? Did you ever see those?
Speaker 2 (00:29):
I never got a deal I never I do know
what they were.
Speaker 1 (00:33):
You wouldn't get a deal toy unless you were working.
Speaker 2 (00:35):
Out, so I'm aware that they existed, but I don't
never had one. I never saw one.
Speaker 1 (00:40):
I used to be slightly obsessed with them.
Speaker 2 (00:42):
Were they toys like or were they like like were
they those sort of looseight Uh?
Speaker 1 (00:47):
Yeah, that's pretty much it. So if you are working
in capital markets or in mergers and acquisitions and you
completed a deal, you would mark the end of that
transaction by, you know, adding some sort of swag I guess.
And it could be really boring. It could just be
a looseight block or something like that. But some of
them were really interesting and fun. And one of the
(01:09):
ones I remember seeing was someone it must have been
working in like capital markets. It was a little toggle,
like an actual like think of like a railroad I
kind of toggle, and it was to celebrate the first
ever pick toggle transaction.
Speaker 2 (01:25):
So can I say something you know we talked to
First of all, it's amazing. Second of all, you know,
we talked to a lot of investors on the podcast.
We talked to a lot of people whose job in
some way resembles our job, which is looking at screens
all day or maybe looking at data. I think if
I ever had gone into finance, I would have some
(01:47):
job that looked involved a lot of looking at screens
and a lot of maybe looking at data, but mostly
just looking at screens. We don't often talk talk to
a lot of people who are in the world of
actually talking to other people about making things happen. I
never think i'd be good at that. No one wants
to hang out with me, you know, stuff like that.
And so I want to learn and talk to more
people about how actually things in finance, whether we're talking
(02:10):
about a deal, whether we're talking about a new issuance,
et cetera, how that actually happens, how an instrument or
security actually comes into the world.
Speaker 1 (02:18):
Well, I'm very pleased to say, Joe that we do,
in fact have the perfect guest for this topic. We're
going to be speaking to someone who's day to day
business is talking to people sourcing and finding deal and
someone who also knows exactly about that Pictoggle deal toy
that I mentioned earlier. So I'm very excited we're going
to be talking. We're going to try to thread the
(02:39):
needle between sourcing deals and also something else we've been
interested in lately, which is private. That's right, all right,
So without further ado, we're speaking with Millwood Hobbes. He
leads Oak Trees Sourcing, an originations group. So really again
the perfect person, Millwood, thank you so much for coming
on all thoughts, Thank you for having me. So I'm
(02:59):
right right about the pictogle toy. You've seen this toy.
Speaker 3 (03:03):
Yes, I've seen it. My favorite deal toys. There's two
that stick out when Ford spun out Hurts in two
thousand and five, I was part of that transaction, and
so I have a set of car keys and there's
from Hurts and it's it's a it's they're called loose Heights. Yeah.
And then the other one, which was pretty cool. I
did the Mars regularly deal with Byron Trott, and so
(03:25):
I have two eminem amazing guys that sort of they
lay out.
Speaker 2 (03:29):
The train a room in your house that's sort of
like I'm imagining high school athletes trophies.
Speaker 3 (03:35):
So so you know, I have we moved there in
Covid in twenty twenty and we bought a house and
I have like a real library. And then that library
are two things from investment banking that I have. I
have bank books from deals we used to we used
to go to a printer and we used to draft.
Oh like the pitch that well, it's like a it's
(03:56):
like an actual it's a glossy picture book of of
the deal. The transaction goes through transaction over youw, it
goes through company, it goes through business, and that was
what folks used to actually underwrite deals back in early
two thousands. Yeah, and then I have loose sites, so
I have a lot of loose sights.
Speaker 1 (04:15):
So the unit that you're leading at oak Tree that
was created I think relatively recently, it was like twenty
What was the thinking behind that?
Speaker 3 (04:24):
So the market private credit in origination and financing of
deals has evolved quite a bit. If you just go
back to kind of pre Dot Frank, most private equity
firms didn't have what we call capital markets professionals, and
post Dot Frank and the migration and creation of a
robust private credit mark. Most of the private equity firms
(04:45):
have capital markets professionals who really spend time drafting, creating,
structuring financings for the private equity buyouts. And what we
figured out oak Tree we were founded in nineteen ninety five,
we managed a couple hundred billion dollars. What we were
figuring out when I first started in twenty thirteen. Every
strategy within oak Tree kind of did its own thing.
(05:06):
So if a deal came into one strategy and it
didn't work, it just kind of died in that strategy.
So what we decided as the market evolved and moved
towards capital solution provider versus this fund does this and
this fund does that. We created my group with the
real purpose of a couple of things. Number one is
making sure we were focused on providing capital solutions versus
(05:30):
trying to figure out what fit a particular strategy. Yeah,
and then the second reason we really did it is that,
you know, capital is the commodity in our business. Everyone
has a lot of money, but how do you get
the first call in the last call? And that's the relationship.
So my team is meant to really spend time and
develop relationships with the counting parties because look, the reality
(05:50):
of it is, we shouldn't. We're not agreeing on We
have different investors, So a private equity firm has a
different investor base than we have. The goal in my
group is to one make sure the entire firm sees
a transaction, and two we're involved in the art of
the deal, right, And so the goal is no one
really should win. Both parties should be just mildly annoyed.
(06:13):
And how do you do that? How do you do that?
In a way you do it the relationship.
Speaker 1 (06:17):
That's funny because we say that in journalism sometimes, like
the goal is for everyone to be like slightly dissatisfied
in the story, because if everyone's happy, then you basically
put out a press.
Speaker 3 (06:28):
Release somebody's wrong. If one side is really happy, the
other side is probably wrong.
Speaker 2 (06:33):
I know Tracy already more or less ask this question,
but I'll just put it in a different way. What
do you just give us a sort of brief overview.
If someone says, what do you do and how'd you
get here? What did you do and how you get here?
Speaker 3 (06:43):
Yeah, so you don't want you don't want my full
full background.
Speaker 1 (06:47):
Oh, I actually do, because you've been in the market
for a really.
Speaker 4 (06:49):
Long time.
Speaker 2 (06:52):
Childhood.
Speaker 3 (06:52):
But okay, okay, I'll start from what I'll start from.
So so look, my my dad was in public accounting,
and originally so I got a fool. I could a
scholarship to Rutgers to go to law school. I sat
in political science and I would fall asleep and wake
up and they were talking about the same thing. So
I said, I don't think I can do four years
of political science. So I switched to accounting. Because my generation,
(07:13):
you did what the adult said to do. And so
I switched to public into accounting, and my dad said,
don't do public accounting, do banking. So I started out
at a firm called Nation's Bank, which is now is
a predecessor to Bank of America. And the most interesting
job I had at Nations Banking, I was a controller
for leverage finance. I was de controlling, the youngest controller
(07:36):
in the firm, and I said, I want to be
a leverage finance banker, you know. And the reason why
it sounds silly when you're at my age, but they
wore a nice time, They were nice shoes, They were
in big in finance, and at that time Nation's Bank
was a pretty big terminobe lender, and so the head
of the group basically said, look, right now, you're just
(07:56):
an accountant. He said, go get a sales job and
then go to the school. So again I went to
g Capitol and I financed commercial equipment, so rolling stock assets, cars, trucks, forklifts.
Did that for one year to today, and then went
to Columbia Business School. I summered at first Boston and
I summered in asset backs and leverage finance, and then
doing deoutsche Bank in two thousand full time. And during
(08:20):
that time period I structured a lot of lbo's sun Guard, Nema,
Marcus Us foods.
Speaker 1 (08:26):
Irridium, first Demon, Marcus being the first ever pick Togles. Yes,
and so you had that deal toy.
Speaker 3 (08:32):
I have it, you know, I'll be honest with you.
I think I gave it to someone more senior. Oh.
Speaker 1 (08:36):
Oh, should have given it to me.
Speaker 3 (08:38):
I know somebody who has one. And then in two
thousand and seven I left Deutsche Bank. And really you
sort of say, why would you leave Deutsche Bank? And
if you go back to two thousand and seven, the
market was very concentrated so versus today. There were eight
underwriters who owned all the leverage finance, right, so you
could see the market. You know, when I got a
(09:02):
call to say, hey, what leverage would you provide on
a deal? I'd ask the private equity firm, well, what
do you think the business work, and they'd say, well,
it's based on you know, leverage, and so you could
see that coming to a head. So in two thousand
and seven I went to Goldman Sachs. I did LBOs
at Goldman Sachs and also did high you sales and
joined oak Tree in twenty thirteen.
Speaker 2 (09:21):
It's always interesting to hear someone's background, but I like
how there's dovetails with the actual development of the industry
itself and this idea that at one point there were
just a handful of very small or a handful of
banks that ran leverage finance, and then of course we
know about the proliferation of all that. So it's pretty useful.
Speaker 1 (09:37):
Yeah, with that background, well, why don't we dive into
that a little bit more so, talk to us about
how the credit market, the capital market has evolved over
the course of your career.
Speaker 3 (09:46):
Yeah, so, look, when I first started, covenants were pretty
standard amendments to deals were actually fairly standard, and as
you moved forward, by two thousand and seven, the majority
market was cove light. The one interesting thing about pre
Dodd Frank was in the credit agreement, which is a
(10:06):
document that sort of governs the loan if you will,
you had to hedge fifty percent of your floating rate risk.
And so going into the cycle, two things that made
since then is one folks were hedged fifty percent, and
then the other thing is lightboar if you remember back
in two thousand and seven was at five percent, so
the spread to deals was two hundred and fifty to
(10:29):
get to that seven and a half percent average LBO. Well,
what happened at when Dodd Frank, when the markets cried
the world the global financial crisis, rates went to zero, right,
So companies actually generated cash flow in that cycle. The
challenge or difference we have today is we've been in
no rate environment, so no one really hedged one and
(10:52):
then two there because there was zero percent base rates,
the spread on deals was much higher. Instead of two
or fifty, you had for fifty five hundred, six hundred.
So when twenty two when rates started to move up,
you actually had a situation where a lot of companies
couldn't support the cash flows because no one predicted that
(11:15):
race will movement, and most folks were not hedged like
they were in two thousand and seven.
Speaker 2 (11:35):
Can you talk a little bit, you know, it's a
theme that obviously comes up with every private credit but
also other episodes as well. Talk to us a little
bit more about like the post the immediate the passage
of Dodd Frank and how it's set into people's brands,
that this is going to restructure the financial industry, that
there are to be various activities, whether we're talking about trading,
(11:57):
whether we're talking about lending, et cetera. Right, these are
not to be part of the banks anymore. Right, talk
to us a little bit about those sort of early
posting you know, and they were talking to two thousand
and nine, twenty ten, those initial conversations that people were
having about something new, New opportunities are going to emerge
from them.
Speaker 3 (12:14):
Right. Well, well, if you go back to two thousand
and seven, when a portfolio manager and a public side
was selling risk in the market, the banks were the
shock absorber to that risk. Yeah, right, So you know
when I was sitting at Goldman Sachs, it wasn't unusual
for us to buy two hundred million dollars of an
(12:35):
issue and it would be on your balanchie and it'd
be on our balance sheet. Right post what Dodd Frank
did effectively has said, okay, if you go back to
the leverage. And I hope I'm not being too technical, but.
Speaker 2 (12:45):
No, there's great.
Speaker 3 (12:46):
Banks were levered roughly thirty times pre global financial crisis.
Post they're fifteen times levered. Right, So once you shrunk
that liquidity or capital out of the banks, they can
no longer absorb the deals. And so what happens is
and this is why liquidity is really an important phenomenon.
(13:06):
So when a PM calls the desk and says, hey,
I have to move five, ten, fifteen million, you're not
really sure what their real size is because they know
the market's not liquid. When I was in sales and trading,
Pimco or somebody would call and say, hey, I've got
several million to move, and I'd say, well, this is
your first call or a last call, and they laugh
and they say why, I said, because I give you
(13:27):
two different prices. And so what happens in a market
that's less liquid is as they're trying to sell, they
call relative different banks, and every time they make a call,
a bank then assumes that there's more behind that to go,
and so they rerack the pricing. And so in a
public security, which is different than private, a public security
(13:49):
can actually move pricing wise without anything really trading, but
on the anticipation that there's their supply out there, and
so that created you know, and if you go back
to two thousand and nine, private credit market was like
three hundred billion dollars, right, most of that was more
mes or off the run, not what we call our
(14:11):
regular way direct lending private credit, which we were active in,
but we're doing it more on the distress or opportunistic
credit side, and over time, because of the liquidity and
capital requirements of banks, more of that has just migrated
to the private credit market, supplemented by the fact that
there are these private equity professionals who are very efficient
(14:34):
at looking at both markets and figuring out where they
should play or where they should place their credit or
their deals.
Speaker 1 (14:41):
I'm getting a lot of flashbacks to writing about corporate
bond inventories that the dealers like around twenty twelve, so
just on this note, is the pitch from private credit?
Is it basically execution? Like you don't need to worry
about us actually being able to do or complete this deal.
Where is it a bank? You know they're taking into
(15:01):
into account leverage considerations, regulatory requirements and all that, right.
Speaker 3 (15:06):
Right, So what a proper deal should be? Right? If
you're sitting in private equity, your job is to find
the most efficient, best price capital for your deal. Right.
The public market, what they're very good at doing is saying,
here is the indicative rate for a deal. And let's
just say the indicative on a term loan is sofur
(15:28):
plus four hundred. Right, then the private equity firm comes
to us and says, where will you actually own that risk? Right?
So they get a level where we're owning, which won't
be the indicative because remember the banks are marketing, Hey,
we can get you the best rate and best execution.
We're in the storage business. The banks are in the
moving business, so they're trying to move the risk, and
(15:49):
we own the risk, and so we price the risk
where we'll hold it. And if those two are not aligned,
what then? And then once you add to that four
hundred is you ad what we call flex. So if
you take the indicative plus flex, that gives you an
idea of what the banks are willing to say that
this debt will price. So let's say the flex is
(16:09):
one hundred and fifty basis points, so they know on
the private equity side, they know worst case the banks
will own it at SOFA five point fifty, which the
banks have gotten that sort of flex number based on
their discussions with us to know where we would actually
own that risk.
Speaker 1 (16:25):
I see.
Speaker 3 (16:26):
Yeah, So the process is how do you create an
efficient auction to have the debt in the right market
at the right pricing with the right structure.
Speaker 1 (16:35):
Okay, so here's my other question. When you are about
to do a deal, or when you find a deal,
who are you actually talking to? Is it the banks
or is it like the companies that are borrowing in
the market.
Speaker 3 (16:47):
So so generally in a.
Speaker 2 (16:51):
Yeah, oh wow, so sorry answer questions, but I'm just
sort of like I'm talking question.
Speaker 3 (16:57):
I'm talking to both, right, everyone was my friend. And
the goal is the more conversations I have, the more
informed I am of where the market is right. You know,
the interesting thing about public markets is that market reprices
risk faster than private credit because there's a secondary market.
Private credit doesn't really have a secondary market. So what
(17:19):
we're always trying to make sure we're understanding is relative
value between public and private. And so my conversation, let's
say XYZ sponsor wants to buy a business, right and
let's say it's a public company. The first call, I'll
get his front that sponsor and say, hey, Millwood, we
like you guys to look at a financing opportunity for
public company we're looking to buy. I'm like great, I say, look,
(17:42):
I'll put my compliance on the email and we'll do
a conflicts checks on that business because we don't know
if we own the stock or there's existing debt outstanding.
So it goes through a process where that company is
actually vetted from a conflicts perspective. Once it's vetted and
that clears the process, then we get initial information on it.
And that information could be a selling memoranda, it could
(18:05):
be an initial model, and so then we start the process.
And what the sponsor wants to be able to do
is from the preliminary information is get a sense for
do you want do you like the asset or not?
Do you want to finance it, where do you want
to finance it at, and what's your leverage and what
you're pricing. So there's some high level indication that they
get from us to determine if they if we should
(18:28):
move forward with a more robust diligence process. So that's
that's how it starts. And then at that point we
do a due diligence process on the asset. Right, so
we may have we may call third party consultants, we
may do some background on it. We have a call
with a sponsor, we understand their investment thesis, like why
are they making the investment, and then we talk internally
(18:51):
and we have an investment committee and we discuss it,
and then we'll iterate with the sponsor on diligence questions.
And then at that point it becomes are you in
a you out? And so then once the sponsor kind
of has a sense for who's in and who's out,
now their goal is to get the right terms, and
so there's a process around sending us their thoughts on
(19:12):
the terms right and our job is to figure out
which of those we want to negotiate and which are
we fine with.
Speaker 2 (19:19):
First of all, this fantastic stuff. I want to talk
more about, you know what, or get to what it takes,
what it takes to be the first call, because you
said that's that's important, and I'm like curious, Like, you know,
Tracy and I are competitors, how does one of us
get the first call out? But but even before we get
into that question, and it occurs to me that you know,
(19:41):
because you work for oak Tree and there are multiple
strategies within it, and you work ass with like different
people on different committees and different funds, et cetera, is
there ever tension that arises between your recognition of the
need to make the get that first call versus what
people on investment committees see as the fair price right.
(20:03):
Because if the investor is always trying to get every
penny fun right, then at some point I'm going to
stop calling talk to us about reconciling that. And I
also have to imagine, just to sort of add on
a part read to this question. You know, it would
be one thing if like it was a small shop
and one strategy, but you're looking at this holistically correct,
Where's the investor who's running a specific line there, cares
(20:26):
about their returns and doesn't care so much about the
returns of the other fund or just the general So
talk to us about reconciling some of these tensions.
Speaker 3 (20:33):
Right. So the biggest tension is, like I said earlier,
we don't necessarily agree on price, structure, leverage. Right. But
what we're doing is I'm talking to that sponsor or
that client or that company all the time. Hey, how's
your family? I know where they get is go to school.
(20:53):
I may do zooms with their kids.
Speaker 2 (20:56):
Hey, Milwolle really is a part of my big.
Speaker 3 (20:59):
He say, no, I want to I want to go
to Ocean Prime. I know you know the manager. I'm
bringing a family. So yeah, so we are full service here.
And again, like I said, the relationship is getting the
first call and the last call. And by the way,
out of twenty deals, I only care about the last two.
So how do I pass eighteen times so I can
see the last two? So it really is a form
(21:22):
of art, if you will. And what we're trying to
do is demystify the negotiation and we're institutionalizing relationships. So
if XYZ sponsors in LA, they'll call me and say, hey, mil,
what who should I talk to the Okay, let me
give you a list of folks. Because the more that
that private equity firm or that sponsor or whatever client
(21:42):
is feels like they understand our firm, the better the relationship.
So we spend time making sure that they know who
our CEO Army is or Bob o'lary, that they know
the pms at the different strategies, so it's not a
scary monster. You know, when I when I joined in
originally oak Tree, remember we were more opportunistic and as
(22:02):
the market has evolved, and as we have evolved as
a firm, we're sort of private credit and opportunists. And
by the way, the client will say, no, I don't
really care about one side of the house versus the other.
Your oak Tree, right, So we have to sort of
in your oak Tree. I'm oak Tree, right, And so
I have to go to the market as one as
(22:22):
one firm.
Speaker 1 (22:24):
Wait, talk to us a little bit more about what
negotiations are actually like, because I will say, we just
had Suji endap On wrote a great book about the
Caesar's Palace LBO. Yeah, you're in that, not you specifically,
but oak Tree certainly is. And there's certainly like there
are some very dramatic negotiations that take place in sure.
Speaker 3 (22:47):
Oh yeah, I mean look, sometimes you just you get up,
you throw your pencil in air, and you walk out
of room. And sometimes you know, so you know, at
the art of negotiation is what I say to what
I say to my team is it's not the negotiating
point you're discussing at the moment, it's the points that
are coming two points later. Right, You're always thinking ahead
(23:07):
on the negotiation. You know, we did a deal for
a business that wasn't really loved in the leverage finance market.
And I knew that the type of business because I
had done an LBO and the market really didn't understand it.
But it was a great management team. Sometimes sometimes deals
do well because the management team is very good and
very articulate. And I knew this deal would struggle at
(23:29):
a bank, and so when it was hung, which means
the bank had the funded.
Speaker 1 (23:33):
They got stuck with it.
Speaker 3 (23:34):
They got stuck with it. I called in and I said, hey, sorry,
but I'll buy fifty million at ninety okay, right, Oh gosh,
what ninety Wow, that's that's a deep discount. Da da
da da dah. I said, well, you know, I think
as you now realize that business is not it's a
little tricky business. And it was a public tool private.
So a private equity firm was taking a public company
(23:57):
and making it private. And even though it was a
climing margin business, there was a view that the public
company expenses were high. So you could sort of map
you can map a scenario where over twelve months they
were going to cut some of the public company calls
and create a more efficient which would create more ebadah yep. Right,
(24:18):
So they sold it to us. So now I'm a
top five lender right with the right responsor. You had
the right relationship right, well, sponsor, which you know they're
they're meant to be opportunistic too. Cap structure ibadadh gru
cap structure looked good. So they wanted to do a dividend. Now, again,
in a negotiation, if you're doing a dividend, that means
(24:40):
you're putting more debt on my capital structure.
Speaker 2 (24:42):
Right, that's money that could go to you.
Speaker 3 (24:44):
That's money that could go to anybody with them, right.
And so you know the job of a sponsor at
that moment is to call the top five lenders and say, hey,
I'm doing a dividend deal, and they take me from
violently upset to miley annoyed. That's the job. So this
sponsor did not call it on that dividend deal, and
so now I have a I'm in a unique situation.
(25:05):
They went to other lenders and got the fifty one
percent to do the deal, and I felt some kind
of way about that, some kind of way, and so
I proceeded to try to figure out why folks would
agree to this dividend deal. And so I called the
market and a sponsor sort of said, you know, he
calls me and he says, no, what I hear? You're
(25:27):
working against me on my dividend deal. I said, well,
that's not actually true, because you didn't call me when
you launched it. So he said, but I thought we
had a good relationship. I said, we do. I thought
so too, but you didn't call me, all right, And so,
long story short, the dividend didn't go through, right, and
so then we changed the structure of the dividend to
allow we shrunk the size of the dividend, We changed
(25:49):
the original issue discount, and I told the sponsor, I said, look, unfortunately,
I'm going to sell the position when this closes. And
the point of that story is sometimes it's life's too
short and not all, not all relationships are meant to
go on forever. We still talk, I'm still a good friend,
he's still a good friend, but we haven't done a
(26:11):
lot together since then, because sometimes you know, in our
in our in a negotiation, if you don't see IDI
and that deal worked out, what happens if it doesn't
work out? Yeah, right, So sometimes sometimes you're managing relationships
to keep, and sometimes you're managing relationships to not do
on a business side, but you always want to be
(26:32):
friendly in this market because you're usually one person away
from somebody that matters in business.
Speaker 2 (26:37):
Actually, since we're on this point, that strikes me as
very savvy and very wise and like probably a lesson
many of us should learn in many realms that sometimes
it's okay to uh take the l or let a
proposal fall apart because life is long and other things
happen at some point. We have listeners who are in
college or young and they think about, you know, career trajectories,
(27:00):
et cetera. I'm curious, just from your perspective, this is
probably a sort of attitude that you would hope the
people who work for you cultivate, internalize, so to speak.
How do you recognize who has that? And like, when
you think about like people that you want on your team,
are you able to sort of like build intuitions about Yeah,
the people who can think that way.
Speaker 3 (27:23):
Yeah, So good, good question. So I would say, on
my team, everyone is uniquely different, and everyone's exceptional at
something and very good at everything else. And I think
where you make a mistake in building teams, especially in
our business, is you try to find someone who can
be exceptional at more than one thing. So I'll tell
you a good story. So when I was first starting out,
(27:44):
I would fly to Dallas, Texas, and I would meet
with folks in Texas, and I thought I was a
pretty charming, knowledgeable person on the markets, and everyone in
Texas was friendly. But what I figured out was by
the time the deals made it to me in New York,
in Texas, that already passed. So it's almost like wrong
way risk and so well, because you're in Texas, right,
(28:10):
it's a different culture, different in New York and and
and in some markets folks want to do business with
folks they may see on the weekend or see in
the gym or you know, and so it's it's more
of a that person sits in New York. They don't
really know me, right ye. So but if people in
Texas didn't really like the deal, then you call the
(28:33):
people in New York. So so I decided that I
needed to put someone in Texas. So how do you
hire people? Right? So this is for the year young audience.
So I went to a conference and he was kind
of managing a room really nicely. So I gave him
my business card. I said, hey, we'd love to spend
some time with you. So I called him and we
set up two days and meetings. Well, he didn't realize
(28:54):
I was actually interviewing him for two days. Because everyone
says they have great relationships, right, says, oh, yeah, I've
got the best relationship, Da da da da, But how
do you actually test that? So I spent two days
with this person, and look, you know, high school football
matters in Texas. I didn't play high school for I
played high school baseball. This person plays high school football.
And so you put someone in that territory that understands
(29:18):
the local culture. And what we're trying to do is
have a hub and spoke origination model where we where
we where. We have a global firm, but we try
to talk on a more regional, local level, and that's
what I think makes our sourcing origination a little bit different.
And again, people matter in this business, and again the
(29:39):
goal is to get the first call. On the last call,
that person may spend a lot of time, you know,
going to events, spending time with the families, and ultimately,
what you want folks to do is to show you
deals because they.
Speaker 4 (29:52):
Trust you, and it's still a trust your business.
Speaker 1 (30:10):
One thing I wanted to ask you, just going back
to something you said about the management of a particular
company being good in credit. We've spoken about this on
the podcast before, but we tend to think about it
as avoiding losers, right, whereas equities are more about finding
the winners. So I guess my question is, like, when
(30:32):
you're looking at a particular deal, do you feel that
you're making a bet on that business or is it
just about looking at the numbers and making sure that
you know you're not going to yes?
Speaker 3 (30:43):
So so interesting enough, what we're trying to do in
a diligence process is figure out where there may be
holes in that investment. We did one deal with accounter
party that we required them to switch to CFO just
because the questions it took too long. The answer like
if I ask you how many days does it take
(31:03):
you to close your books? What percentage of that is
manual versus automated? What do your management letters say in
the auditor? You know, those types of questions if you
have to think about them, where you say, I'll come
back to you as a CFO, that would be concerning.
So you know, our job is to protect our investors. Yeah,
that's our job, and what we're trying to do is
(31:24):
make sure we understand the investment. And no one bats
a thousand, right. If you look at the top ten
hitters in Major League Baseball, they strike out as much
as they hit. So you know, our job is to
avoid losers, like you said, and we have to manage
that through a process.
Speaker 2 (31:39):
Can you say actually a little more. I thought that
was really interesting about some of the questions that you
asked and the idea like why can't the CFO just
quickly answer how long it takes to you.
Speaker 3 (31:47):
Would think that would be an easy Yeah.
Speaker 2 (31:49):
I'm always surprised. Also, just generally there's a bit of
a tangent that even you know, in twenty twenty four
with like all the computer and accounting systems, that like
fraud still happens, that there are still way or you know,
companies like we have a material weakness and we're gonna
have to it. I'm always a little surprised that that curious,
like how you like this world of things just being
wrong or ambiguous at companies. And I'd love to hear
(32:11):
you talk more about that.
Speaker 3 (32:12):
When you're when you buy a business as a platform
and then you then buy successive businesses, more than likely
they didn't have all the same financial stea and the
integration process depending on how quickly you want to grow,
it drives how long you actually integrate and so time
what time. What happens sometimes is you don't fully integrate
these businesses and systems. If you go back to failures
(32:35):
of businesses in our market SAP, integration is a big
sort of point of contention. And so businesses you focus
on risk that you see time and time. So fraud fraud,
you know, there was a water business that was you
know that was fraud fraudulent that you know, some banks
lost a lot of money. You know, if you go
back to like Collins and Aikman, which was an LBO
(32:58):
long time ago, there was some fraud and you could
see what you're doing in a diligence process. You are
looking for sort of what I call inherent weaknesses. And
the information you get back and management letters which the
auditors produced is a good document that sort of highlights
the risk of accounting systems, financial systems, and that's a
(33:19):
pretty systems tends to be a big driver of sort
of integration issues.
Speaker 1 (33:24):
So this isn't necessarily fraud. But you just reminded me
of ad backs and deals and you know, adjusted earnings
and things that can be inflated to make a transaction
look a lot better than it actually is. The last
time I remember writing about this was I guess, gosh,
five or six years ago, and the feeling back then
(33:44):
was that there was more sketchy stuff happening on the
valuation side of credit deals. Is that still the case
or has that been your observation over the years.
Speaker 3 (33:54):
Well, so, the ad backs, it's an assumption and it's
an ask to get credit for something that may happen
in the future, right, or it's saying something's happened previously
that hasn't fully been flown through the financial statements, and
we want to get credit or we don't want it
to affect our earnings. Every deal has adjustments, okay, so
(34:15):
just start with the premise that adjustedy badah will exist.
And part of our job is to trust our partners
that they're adjusting the right things. What happens is if
you watch the financial statements over time, sometimes the adjustments
never go away, right, and then you start to say, okay,
this is recurring, not RecA. Right. We did a deal
(34:36):
for a sponsor and we were and it was near
your end, and the sponsors going through each line item
of what they wanted to add back, and you know what,
I said, Wow, we could we could go through this
for three days, right, explaining one to add I say,
you know what, you can add back five million, call
it whatever you want. Right. So, at the end of
the day, what we're trying to do is understand the
(35:00):
rationale for the ad back in a market like today,
the problem is the rationale isn't fully explained all the time,
and the amount of time you want to add it
back it's kind of almost infinite. So you start to
say okay, and the sponsor's perspective would be I'm paying
for that right, because I'm paying off that Adjustinbadasa, you
(35:21):
should leverage against that. The counter would be I'm capped
upside right, I'm capped at par And if you go
back to seven, A lot of the ad backs in
some of the largelbos never truly came to fruition. So
if you take cap structures that will leverage seven times.
If you're adding back one hundred million a seven hundred
(35:42):
million more debt, that if one hundred million ever comes
through at some level, you could be over levered. So
that's why you have to look at ad backs. And
in the one notion, folks say documents are loose, well,
I would argue it's about asset selection, right. A document
is not going to help you if you just underwrote
(36:03):
the wrong asset. At the same time, a document, if
you're doing well and I'm not letting you lend more,
what do you think I'm going to do. If you're
doing well, I'm probably going to figure out a way
to fix the document to allow you to lend more.
So I think part of our you know, business, You're
right on app bats, but you know cove like the
market is mostly cove light. And even when you think
(36:24):
about structures with a covenant, a lot of times if
you actually hit that covenant, it's unclear that business right
is a is a going concern at that point.
Speaker 2 (36:33):
If you need the document to save you, right, then
you've got a problem. You've already got a problem.
Speaker 3 (36:38):
You're you're you're in.
Speaker 2 (36:39):
Well, since we're actually talking about documents, and we have
done a recent episode about so called creditor on credit
or violence and how that works, et cetera. One thing
that came up with that, and I'm also curious about it.
Speaker 3 (36:50):
It's like.
Speaker 2 (36:52):
Legal expenses and you will detail, like you know, every
comma and all that stuff in these documents. I'm just curious, like,
over the course of your career, yes, how much have
you seen and to the perhaps to the point that
it extends exchanges, your expected return on investment, legal costs,
(37:14):
and the sort of rising lawyer fees, et cetera. To
check those documents regardless of how many covenants they have
in them, and if you've seen an evolution over time
since you've just been in the business of how much
of a deal resources end up going to the legal sete.
Speaker 1 (37:28):
Yeah, how much do the lawyers bill you everywhere?
Speaker 2 (37:31):
What have you seen?
Speaker 3 (37:32):
So while I while I said I'm going to now
counter myself, okay, while I said the document won't save
you any deal, it's very important you have a document
that sort of expressly documents what what it is, the
intentions of the transaction. And it's very it's very good
to have governance in a document. Right. So if you
(37:53):
just think about public versus private markets, in a public
market situation, you're given two to three days to review
a three hundred pay lead to a document. Now, if
the deal is going very very well, arguably there isn't
a lot of opportunity for you to push back on
the document, right, so you kind of take the document
as is. In the public market and the issue with that,
(38:13):
there's a lot of and you said credit and current balance,
but there are a lot of opportunities for you to
take assets out of a restricted group, create new ass
new co and lending against that and take value away
from existing lenders. I think one thing that Private Credit
is very good at, and it's focused on that part
of the document. We've been very firm on making sure
(38:35):
that the ability to take assets out and create new
assets or new financing or new capital. We've limited that
quite a bit in private credit. But I will tell
you lawyers what argue inflation is real for them too
write so you know, and a lot of that deal
cost gets kind of you know, born at the beginning.
But yeah, lawyers. But you need lawyers, right, you need them.
(38:57):
You know, there's two reasons why deal usually gets hung up.
Is usually illegal or tax reason on the m and
a side on the financing side. And so lawyers are
an important part of our process, and we spend a
lot of time making sure we have the right cancel
who can understand and be able to move with us
if this goes sideways. We want to make sure your
(39:18):
bankruptcy and attorneys are really good. We want to make
sure that you are put You know, if you're thinking
about biotech or something where IP is important, how do
we make sure that IP you can't overlicense it. There's
a lot of nuances in the document that we find.
Lawyers are very valuable in our process.
Speaker 1 (39:36):
So I just have one more question. But you know,
you've had such a long history in this market and
you've worked on so many interesting transactions. What deal are
you most proud of?
Speaker 3 (39:47):
So when I was doing LBOs, it's almost like you're
watching the company and the sponsor get married and you
sit in the middle of that marriage and you're kind
of playing consultant. And all of my deals. I still
talk to the CEOs of those deals because you get
to know these people, your own planes with them for
(40:08):
ten days, you know, I know some of the quirks
or some CEOs. You know, you just get to know people.
You know, when I was doing the buyout, when Hughes
spun out direct TV, ROXE and Austin was a rock star, right,
a female CEO running direct TV a very profitable business,
and really really get to know interesting people. So I
would tell you they're all the deals I'm pretty proud.
(40:28):
There's probably one that was a bit of a disaster
that that you know. You know, we used to say,
if you made one bond payment, tell us.
Speaker 1 (40:36):
About the deal that you're at least proud of.
Speaker 2 (40:38):
Yeah, so that was probably It's actually just a question,
but nobody really wants to ask that.
Speaker 3 (40:44):
That deal was hard. That deal was hard. It made
one coupon payment and filed it is no okay, I
want to protect those involved. Okay, Yeah, but good question.
And I think you know so, I've done a lot
of deals, and most of them I'm pretty happy about.
All right.
Speaker 2 (41:01):
I think you mentioned you take all right, you want
to be the first call, and to some extent, being
the first call is some combination of, you know, the
ability to give decent pricing and also just being a
likable guy that people want to talk to about their family.
Speaker 3 (41:15):
Right.
Speaker 2 (41:16):
But I think you said you take twenty calls and
you maybe take two. Like what's so?
Speaker 3 (41:20):
So what you're saying what I'm saying is out of
twenty calls, I get the last two or the most interesting.
So how do you actually well, like, engage eighteen times
and it goes nowhere?
Speaker 2 (41:31):
Yeah, but like is there a minimum, like you have
to say yes to You can't say no forever otherwise
at some point you'll no longer be the first call.
Right If I like, yeah, I might like talking to
Tracy a lot. But if she never, like in the end,
wants to consummate the deal, eventually she's no longer going
to be my first one.
Speaker 3 (41:47):
That's how you say no.
Speaker 2 (41:48):
Okay, so talk to us about saying no but still
maintaining first.
Speaker 3 (41:52):
Sometimes we don't say no, We say here's how we
can get to a yes. Okay, right, So sometimes you
give a path to a yes.
Speaker 2 (41:57):
All right.
Speaker 3 (41:58):
Sometimes and I'm more like we're in today, you know,
I'm not clear, it's not clear that someone takes my
no offensively. There's a lot of capital, so it's easier
to say no in this market than a market where
there's not a lot of capital. And generally we may
say no. It may be a concentration issue. Maybe we
feel like we have too much of that type of
risk on our books. It could be an attachment issue
(42:20):
like leverage or attachment could be a problem. It could
be that we had an issue with a similar business
and maybe our LPs are fatigued in that in that
type of space, and we don't want to, you know,
sort of bring it up again. There there hosts of
reasons why we may say no. We may not get
there fast enough. Right, That happens in this market. But generally,
I think we're a pretty quick study. And what we
(42:42):
are very good at is we do exactly what we
say we're going to do. So if we put something
on paper, we're going to stand by that. And I
think that that goes a long ways. And I think
if people say, well, why do they call what do
they call? Oak Tree? I think we price risk right.
So in some markets that's a real big compe at
an advantage. And I think we don't. We don't be
as people. We say what we can do, We do
(43:05):
what we say, and that's it. And so sometimes our
answer is yeah, we like it, but we don't love it.
But if the sponsor or somebody's able to say, well,
OA Tree's involved, right, that gives credibility to the deal
and we can help them get it get it done
by saying we're involved, but we may not be the anchor,
we may not lead it, you know. And and when
(43:26):
you're when you're managing the size capital, we need to
write three to five hundred million dollar checks on most situations.
So we're always looking at the biggest deals with the
largest sponsors. Generally those are safer plays than the lower
lower middle markets. So we think there's less competition when
there's only seven seven of us that can write large
checks versus in smaller deals, hundreds of folks can write
(43:49):
small sex.
Speaker 1 (43:50):
I have one more question. Actually I just remembered, but
you mentioned earlier that you want to be friendly with everyone,
including the banks that you know you're ostensibly incompetition with.
One thing that's been happening recently, it seems, is that
a lot of deals that were originally done in the
private credit market are getting refine out in the public market.
Speaker 3 (44:10):
Great.
Speaker 1 (44:12):
Yeah, so first of all, why is that happening? And
then secondly, like is that a concern for someone like
oak Tree?
Speaker 3 (44:18):
That is great? Like if we can be on two
or three year interim capital in most situations, that's good.
The reason why they're going back to the public market
is there's a spread between public and private, so there's
a cost reduction element, and then for the sponsor there's
more flexibility. Private credit is not meant to be the
(44:38):
most flexible. It's the most efficient, but it's not necessarily
the most flexible. And if I can create an institutionalize
and have a broader investor base, right, sometimes I can
get more things done if a lot more people own
it at very small sizes versus five or six owning
and at chunky sizes. So it's actually you want a
(44:59):
healthy market public and private, right. And when most folks say, oh,
you're losing deals to publicer I'm like, we probably should
have gone to a public market anyway. Right, it's rated,
it's it's an exten existing issuer. It's been into public markets.
It's just stay in public markets. You know. If you
think about the private credit market, we're one point seven
one point eight trillion going to probably three trillion. There's
(45:21):
ABF asset based finance, which is a new phenomenon, which
isn't really new, right. G Capital was a large ABF under.
But there's three trillion dollars of dry powder at private
equity firms. There's enough for us all to do and
be happy.
Speaker 1 (45:34):
All right, Millwood Hobbes, thank you so much for coming
on all thoughts. Fantastic good Thank you so much.
Speaker 3 (45:40):
I'm so glad we made this.
Speaker 1 (45:41):
Happen, Joe. That was so much fun.
Speaker 2 (45:57):
That was an unusually fun good episodes, even though all
of our guests are the perfect guest. You know, I'm
I really like and I think we should do more
about talking with the people whose job it is to
be nice to people and hanging.
Speaker 1 (46:11):
Out with other people.
Speaker 2 (46:12):
Yeah, because that's like an element there's a lot. Yeah,
we could, we could, but that's like an element in
finance that's still you know, Like I said, we talked
to a lot of screen people, and I'm as screen people,
I'm glad that there are still parts of the industry
where there's a big role for likable people who can
maintain relationships.
Speaker 1 (46:30):
And stuff like that, play golf.
Speaker 2 (46:31):
But that's part of being human, right.
Speaker 1 (46:33):
Uh don't you have a whole song with the title
like all my friends are online or something, all my friends.
Speaker 2 (46:38):
Are on my phone? Yeah, like I want to I
want to know more people who have friends, who.
Speaker 1 (46:43):
Have friends, I RL. Yeah, all right, there's a lot
to pull out that. I did think like Millwood's early
point about banks being in the business of like pricing
end moving risk very quickly was a good one because
I think like that's kind of a fundamental difference with
private credit.
Speaker 2 (47:04):
That was really interesting. I also and it was really
interesting hearing him talk about the tensions that emerge because
you want to be the first call and you want
to have a reputation for at least saying yes ten
percent of the time or something like that. Yeah, with
the demands of the actual PM who doesn't care about
all the times you have to say no. You know,
I think this is probably a sort of asymmetry that
(47:27):
comes up in a lot of sales based businesses, right
where you have some salesperson and their job is to
hit a commission or something like that, and then you
have like a product manager who's like, no, you can't
price it at this or we can't move the product
this fast. Yeah, this is just sort of like an
interesting dynamic that emerges in all businesses. And I really
enjoyed hearing him describe how he negotiates that implicitly.
Speaker 1 (47:51):
The negotiations, because a lot of these deals involve like
so many different entities who are all coming at it
from a different angle with a different incentive.
Speaker 2 (47:59):
Yeah, so much, so much there, We'll have to talk
to Melody.
Speaker 1 (48:02):
Yeah we should, all right, shall we leave it there?
Speaker 2 (48:03):
Let's leave it there.
Speaker 1 (48:04):
This has been another episode of the Odd Loots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2 (48:10):
And I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carman Rodriguez at Carman Ermann, dash Ol
Bennett at Dashbot and Kilbrooks at Kilbrooks. Thank you to
our producer Moses On On more Oddlots content, go to
Bloomberg dot com slash odd Lots. We have transcripts, a blog,
and a daily newsletter. You can chat about all of
these topics twenty four to seven in our discord Discord
(48:31):
dot gg slash.
Speaker 1 (48:32):
Odlats and if you enjoy odd Lots, if you like
it when we talk about how to source deals in
the private credit market, then please leave us a positive
review on your favorite podcast platform. And remember, if you
are a Bloomberg subscriber, in addition to getting our daily newsletter,
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(48:54):
Bloomberg channel on Apple Podcasts and follow the instructions there.
Thanks for listening in
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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