October 16, 2025 • 48 mins
Private credit is better placed than public to avoid blowups being seen in liquid debt, according to Ares Management Corp. “The level and amount of work you can do from a diligence standpoint is dramatically more extensive,” Joel Holsinger, partner and co-head of alternative credit at the company, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s David Havens in the latest Credit Edge podcast. “There probably would have been more ability to do some of the work to unearth some of the stuff that has been alleged,” he adds, referring to recent bankruptcies of First Brands and Tricolor. They also discuss significant risk transfers, data-center lending, fund and asset-based finance, as well as philanthropy.
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Episode Transcript
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Speaker 1 (00:17):
Hello, Welcome to the Credit Edge, a Wiki markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm David Haven's, a senior analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Joel Holsinger, co
head of Arias Alternative Credit.
Speaker 3 (00:31):
Joel, how are you doing great today?
Speaker 4 (00:33):
Thank you?
Speaker 2 (00:34):
Good to hear. Joel is also a member of the
Areas Operating Committee. Areas Alternative Credit tactically invests in scale
across assets based finance, and he serves as a member
of Areas Credit Group's Alternative Credit Executive Committee and Alternative
Credit Pathfinder and Pathfinder Core Investment Committees. Pathlind Fun Family
promotes giving through a pre defined structure of social purpose,
(00:56):
pledging to donate five to ten percent of the carried
interest profits to global health educational charities, and I think
we might be up to about twenty million dollars or
so of charitable contributions in the works already. Joel joined
Areas in twenty nineteen Fortress Investment Group, reserved on the
management committee there and co edit its ill Liquid Credit Group.
Needless to say, Joel, you have a fascinating credit background,
(01:20):
and it's incredibly topical because private asset back credit is
exploding in a good way. Numbers may vary, but more
than five trillion dollars globally and likely to tack on
another fifty percent by twenty twenty nine based on number
of estimates that are out there. The address bold market
tens of trillions of dollars in scale, and we seem
to have a few things we're starting to worry about
(01:42):
in private credit. So let's get on with it.
Speaker 5 (01:45):
Thanks David.
Speaker 1 (01:45):
I know we all want to talk about private markets
and asset based finance, but I do want to start
with a more broad question about corporate credit. After months
of very bullish sentiment and record type spreads, we are
starting to see some trouble, triggered by the collapse of
first brands and associated losses or some fairly large financial
institutions and investors have been quick to blame the tariffs.
Speaker 5 (02:05):
There were other blow.
Speaker 1 (02:06):
Ups in the auto sector, which is very exposed to
the trade wars. Most have dismissed the problem as idiosyncratic,
name specific, and unlikely to affect others, but we are
now seeing spreads widened significantly across the board, there's a
lot more scrutiny of weak companies that raise a lot
of debt during the good times. Third quarter earnings will
be the next big test, and some are even calling
(02:27):
it a wily coyote moment for credit. But what's your take, Joel,
How worried should we be about the outlook from here?
Speaker 4 (02:34):
We're jumping right into it. Huh.
Speaker 6 (02:35):
Look, I think it's There's been obviously a lot of
news and a lot of headlines around both First Brands
as well as treet Color, and I think that, you know,
there's a couple of things that are interesting if you
take a step back from that, and I think one
of my partners, Jenna, got quoted on something she spoke
at a conference recently, which is ironically, if you let's
(02:57):
take them each deal by deal. If you look at
First Brands, you know twelve billion dollars or so of
reported liabilities. Three billion or so of that is across
the broadly syndicated loan market, nine billion of that is
across kind of the trade, finance and other portions. And
if you look at that, most of that exposure is banks.
Most of that is kind of in traditional markets and
(03:18):
so the headlines have really been more towards the private
markets or private credit. The reality is is that you know,
in many ways, if it had been across the private market,
there probably would have been more ability to do some
of the work to unearth some of the stuff that
has been just that has been alleged, as well as
obviously you know, more extensive covenant packages and other things.
(03:41):
I mean, I always like to use the analogy if
you think of the liquid markets versus the private credit
markets is basically the difference between being a chef and
being a food critic. You know, when you're play in
the liquid markets, you can look at the meal, you
can decide if you're going to eat the meal, you
can take the meal, you can write about the meal.
(04:02):
But you're not a chef, and the reality is you're
limited on how many questions you can even ask and
how much work can be done. When you're a chef,
you're sitting there, you're buying the groceries, you're putting together
the menu, you're testing it out, you're rolling it out,
and you're dealing with it from beginning to end. And
it's really true in all private markets, whether it be
private equity, whether it be private credit or others. The
(04:24):
level and amount of work you can do from a
diligent standpoint is dramatically more extensive than what you can
in the liquid markets. And so the headlines have really
tried to speak about treek lore as well as first
brands as a private credit issue, but ninety five percent
or more of the exposure will effectively is being held
(04:45):
by banks and kind of liquid credit markets in some
form or fashion. And so, you know, I think from
our standpoint, look, we're constantly partnering with banks, We're constantly
working across what we do. But I look at it
from the standpoint of know the exposures and where the
exposures have actually been have been a little misreported with
(05:06):
regards to where that is held today. And you know,
if you spoke about earlier James about asset based finance,
trade finance has never really been part of asset based finance.
That's really if you think of asset based lending, which
is always inventory or commercial receivables. And I don't want
to geek out too much as it relates to this,
that's really its own separate world and has always played
(05:28):
and that is always played in a very different portion
of that. In ninety nine percent of trade finance is
a bank world, and it's normally done with IG counterparties
or others.
Speaker 2 (05:38):
So, Jill, you guys are sitting on top of at
areas or sitting on top of hundreds of billions of
dollars of investments, primarily private investments. What you know that
there there are some fractures that have shown up in
the market. They might be one offs, like what we
were just talking about. I think there's a sense that
there might be a little bit more going on, maybe
that there's you know, some negative trends developing in credit
(06:02):
after a long run up. What are the soundings from
sort of the overall area's portfolio, from your portfolio companies,
What are you hearing back from them?
Speaker 6 (06:12):
Sure, and it's probably worth you speaking to the portfolio.
We're not a lender to Tree Color and we're not
a lender to first brands, but if you look at it,
you know, I'd say I can speak a lot more
to the assa based finance or alternative credit group than
I can to direct lending and some of the others.
But you know, if you look at direct lending, they
are continuing to see EBITAG growth, they are continue to
(06:34):
see revenue growth. And it really speaks to things you
see across all markets, which is even when you see
some things that cause signals or cause concerns across markets,
you really have to kind of go into the individual cohorts.
We learn that a lot in asse based finance, You're
you're digging through a lot of pools of data and
(06:54):
millions of underlying loans often and you're looking at things
and it's really interesting when you do that from the
standpoint of I remember a student loan related transaction I
did fifteen years ago. Probably at this point, I'm going
to age myself. And if you look at that, what's interesting,
and this is true in most asset classes, ninety percent
(07:16):
of your defaults will be in one sub segment. You
can almost always go to a cohort within a large
portfolio and you can find where most of those defaults were.
And student loans this portfolio I'm speaking to were really
for profit schools. Most of it was in for profit schools.
And the other thing that's interesting when you think of
cohorts and digging into the details, most of the defaults
(07:39):
are in the first eighteen months. You know, it's really
frontloaded defaults that kind of occurred, and what does that
speak to They never graduated, you know, they never finished college,
they never got through. So their ability to kind of
be able to service schools as well as you guys
know very well the for profit schools were a lot
of marketing to create those and so not necessarily that
(08:01):
when we think of a college education, the same necessarily
level that you would have had, and there's been a
lot of reforms to that space since then. I think
the same can be set today, which is there's clearly
sub segments or cohorts that are they're experiencing more concerns.
Speaker 4 (08:15):
But if you look at it on a broad.
Speaker 6 (08:17):
Basis, you continue to see the private credit market, if
you speak of direct lending as continuing to kind of
grow on revenue dy. But if you look at across
asset based finance, we are always looking at that analysis.
And what I mean there is we're very big unrelative value.
There are areas that are very interesting that become uninteresting
(08:38):
because a lot of people will pile into them. We've
been one of the more active players and we were
very busy early on with significant risk transfers or SRTs.
That's an area that a lot of money piled into,
and there's been headlines and reports around that. Frankly, there
hasn't been as much to do because what's happened is
(08:59):
you're pricing down, your risk went up in many of
those areas, and so where we've been playing is a
tiny little cohort where there's still some stuff to do
that has great risk. I won't say it publicly here
because we like that cohort, but ninety five ninety nine
percent of what's going on in SRTs we found wholly
an interesting even though we are very active on it.
If you go back too plus years ago, yes.
Speaker 2 (09:21):
Maybe we should level set also because it seems like,
you know, private credit, it means a lot of different
things to a lot of different people because it's a
it's an enormously wide area that ranges all over the place.
So what does your overall Baileywick include when you're talking
about asset based private lending? What are you really looking at?
Speaker 3 (09:40):
Like?
Speaker 2 (09:40):
Where are you on that spectrum?
Speaker 6 (09:42):
Yeah, and everything we're talking about is obviously looking backwards
right now because we are in public and we can't
talk to the forward earnings. But you know, when we
look a relative value of the most interesting what's really
been interesting for us? And it is unique and maybe
to take a step back, David, just to set the
table on asset based finance, because I think there's a
lot of people to talk about it, but there's there's
two real big parts of the market. Part one is insurance,
(10:05):
you know, and most of the capital that spoke about.
If you think of the forty trillion dollars or so
in that market, thirty trillion plus of it is insurance
capital of some form or fashion. And when you think
of that insurance, there has been a number of players
that have entered that market, obviously in scale, and there
is deals that are done and that market if you
(10:28):
think of insurance as traditionally bought corporate IG as well
as ASBAC securitizations, so the liquid ABS market, what's changed
in the last five years or less is a lot
of private IG. And it's simple as basis, because I
think sometimes it gets spoken about like there's this you know,
mirage of all these things going on. It's an ABAC
(10:48):
security ABS deal that's getting done on a private basis.
Speaker 4 (10:51):
That's all that's happening.
Speaker 6 (10:52):
The exact same pool of collateral, the exact same rating,
the exact same lookthrough. What's really happening is in your
basic taking some of the excess points or fees that
you might pay and putting it into the spread. So
you are picking up excess spread. But all of that's
done for insurance. And what does insurance need in the
United States, whether an annuity provider or your life insurance
(11:14):
or other insurance, you need a rating ninety percent plus
normally ninety five percent needs to be investment grade rating
or above. And so when you talk about ABF, a
lot of that is fixed income or as I like
to call it, fixed income plus because it is corporate IG,
it is ass of execurization market and now it's private IG.
Speaker 4 (11:35):
That's the plus.
Speaker 6 (11:36):
You are picking up extra spread, but it's a minimal amount,
but it has a big impact on the earnings of
an insurance company. The non insurance market, the non rated
is an area where effectively you need flexible capital. You
need flexible capital in scale, and we believe we are
a leader there. We believe we have the largest fund
(11:56):
that's been raised. And when we look at that, what
we see is a market where you have the ability
the relative value has been less asset class driven, and
it's actually been more scale driven because there won't be
one winner there and there won't be ten winners. There's
going to be four or five winners because you have
to sit on a big platform, you need to have
(12:18):
big infrastructure.
Speaker 4 (12:19):
You have big scale.
Speaker 6 (12:20):
But what we've really seen in the last eighteen months
is this shift where that ability to bring capital and
scale has really driven transactions as much as the asset class.
As the other David maybe to talk through is fun finance.
I mean, we've definitely seen a lot across fund finance.
Speaker 1 (12:36):
Talk about asset based financer. Joe, what exactly are you
securitizing here? Is it car loans, students? What typically do
you repackage?
Speaker 4 (12:45):
Sure?
Speaker 6 (12:46):
I mean, at its simplest, there's the asset ex securitization market,
the liquid market everybody's familiar with, which includes consumer and
other things. But I always like to say everything's a portfolio.
Everything's loans, leases, and receivables, and it's financial receivables and
not commercial receivables. It can include royalties, and all of
them have contractual cash flows, So it's all the contractual
cash flows that are coming off these. There's a great
(13:08):
video we put together. It's a pretty abf one oh
one video, but there's a great video we put together
on LinkedIn and it's on our website. It's called a
Day in the Life. And the idea is you touch
our assets every day. Whether it's your auto, whether it's solar,
whether it's your credit cards, whether it's your residential mortgage,
whether it's your you know, buy now, pay later. All
(13:28):
of those areas drive into it. But it's even simpler
than that. It's really there's the ABS market and what
we do on the non insurance pool of capital is
everything we do. Everything that's in the ABS market done
on a private, direct basis. It's no different than fixed
income and leverage loans versus jrect lending. You're just doing
it on a direct basis with regards to those transactions.
Speaker 5 (13:49):
And the pickup in spread.
Speaker 1 (13:50):
We've had Blackstone on a recent show talking about one
hundred and fifty to two hundred basis points pick up
even for ig you said it's minimal.
Speaker 5 (13:59):
I mean, how does how does it compare to what
Blackstone is see?
Speaker 6 (14:02):
So yeah, So what you're talking about, James, is really
the insurance side. I was mentioning earlier, and that is
private IG. You are picking up one hundred and fifty
to two hundred. Part of that's, honestly, because corporate IG
is that tight right now. You're at thirty year tights
on corporate IG because you know there's nothing going on
in the world and everything's perfect. Obviously when you think
of thirty year tights on corporate IG, of course, of course,
(14:24):
I mean clearly. So you've seen that, You've seen that occur,
and part of that is, you know, we publish our
lessons learned in our newsletter in the gaps and we
have our top fifteen.
Speaker 4 (14:34):
One of them has watched the flows.
Speaker 6 (14:36):
There has been a lot of capital that has flown
into some of those areas, and that's driven down corporate
IG and it's driven down spreads into across the aspects
securitization market more so corporate I G.
Speaker 4 (14:48):
When we talk.
Speaker 6 (14:49):
About when you go away from that, you're talking more
opportunistic type returns, which would be more like credit opportunity
type funds or even on the lower end of private
equity funds as well as we kind of have in
the middle where you can play across that. But the
key is having all three buckets, whether it's insurance related
capital which we also manage, opportunistic or tactical on the side,
(15:11):
or the area in the middle that kind of sits
in between those.
Speaker 2 (15:16):
So when when we're talking about sort of IG asset
back finance or other forms of asset back finance, you know,
it's always sort of interesting to figure out where where
sort of the equity portion of the risk resides. You know,
if you're doing an IG deal, I assume that it's
it's the borrower who sort of holds onto that equity
(15:37):
stake of the of the risk, or maybe maybe they
transferred somewhere else. It's not the insurance company that's buying it.
Speaker 4 (15:45):
It can be both.
Speaker 6 (15:46):
Actually, David, it's interesting because we call it horizontal or vertical.
You know, Horizontal is you're just owning the bonds and
then somebody else owns the reson or the equity. Vertical
means you're owning the whole thing you are seeing. And
this has always happened in insurance capital. If you think
of residential mortgages, insurance has generally held those residential mortgages
(16:07):
is vertically, they've held the whole thing because of the
treatment they get from from insurance, regulatory capital. But what
you're starting to see is whether it's across consumer lending,
whether it's across you know, equipment leases, whether it's across autos,
you're starting to see more vertical, especially as you've seen
some more scaled players with the ability to take that down.
So often you actually are seeing them hold the whole thing.
(16:31):
The difference is if ninety five percent or so of
it needs to be ig they're holding that last piece
and kind of their what they call their alts bucket
on that board, a bottom piece. Other times you're right,
it's just horizontal.
Speaker 2 (16:44):
Yep.
Speaker 1 (16:44):
Okay, we see something grow very quickly, and we think,
you know, potentially that there's the there's the chance that
something might get done that maybe shouldn't get done, that
there's pressure to deploy, that there's people not maybe scrutinizing
the work as much they should, and that you know,
recent blow ups in the in the in the food
(17:05):
critic area, as you put it, Joel, signs that you
know this, these are good time deals going bad because
not enough attention was paid. Surely the same thing's happening
in private market, isn't it?
Speaker 6 (17:17):
Well, you know, look, I think there's always the risk
of watching the flows when the money flows out. It's
the old Warren Buffet comment of you know, when the
tide goes out, you see who's naked. So it's obviously
there's always questions when you see some nudity without the
tide going out. You know, I would say, you know,
the only thing that is more conservative than a credit
(17:39):
journalists a credit investor. I've been doing this for twenty
eight years, and you know it's a good thing. This
is a podcast because you know, as I often say,
I have a face for podcasts, but those who know
me though, I have a fully silver head of hair
and I just turned fifty. So you know that comes
from investing in credit for twenty eight years. You go
through cycles, you go through all these period and you
(18:00):
end up with scars, and it makes you a better
investor if you learn your lessons along the way. I
think it really kind of goes to you should always
in credit invest like the GFC or the recession that's
happening tomorrow, you have to go into an assumption that
everything is going to go bad, and can you protect
yourself through your structure, through your cash flows. We like
(18:23):
to go for front load to cash flows, which comes
off of portfolios. One of the advantage of ABF is
everything is a portfolio, and what happens in portfolios. If
you think of individual loans and say the broadly syndicated market,
you're getting interest inri centrist principle at the end. And
if you think of private equity, you're getting nothing maybe
a recap you sell the company, you go public, so
(18:45):
that most of the valuations coming from the terminal value,
it's not coming from the contractual cash flows. And we
do something that I highly recommend to any investor, which
is we have a page in our memos we had
in this about four years ago whereas a page of
visualizing the cash flows actually see how the cash flows
come in on individual deal, but then off to the
right as a pie chart or as my partner Keith
(19:07):
Ashton says, a donut because donuts are better than pie,
and the donut chart it shows basically how much is
contractual how much is terminal value. And we generally like
front load to cash flows and you can get them
in asset based finance. The reason the lost histories have
been so low historically across the industry is because you
are getting principal and interest off a diverse portfolio. You're
(19:29):
not just getting interest, You're getting those dollars and it's
de risking. So when things go wrong, you've generally returned
a lot or all of your capital and it's more
of a slightly lower return versus a loss. Why do
people care about rates and inflation so much?
Speaker 4 (19:44):
The V.
Speaker 6 (19:46):
When you're getting terminal value at the end of an investment,
you really care about the valuation. Why is private equity
you know not has disappointed or as I call it,
disappointed performance since influenza, you know where they haven't returned
the cap. It's created an opportunity for us in fun finance,
tons of opportunities coming out of it.
Speaker 4 (20:05):
But it's come.
Speaker 6 (20:06):
Because of the V, which is you are more dependent
on that exit, that IPO, that sale, that other portion
and that return of capital. And obviously rates and inflation
can have a big impact on what that drives. So
so we look at it as assume the recession, look
for frontload cash flows, do things. Our pattern recognition is simple,
(20:28):
it's lost. It's lost curves. You know where we see
loss curves. Can it get to two to three x
and we're still protected versus what we underwrote. Can you
get to a recessionary type case and you're still protected
on your return of capital? That's when you know you
move forward. That's when you know you've got a deal
that kind of holds up. And then you debate on
whether you're getting paid enough for it or how it
(20:48):
looks unrelative value versus something else you're doing.
Speaker 2 (20:51):
I've got sort of a two parter for you, which
I think a lot of you know, sort of casual
private credit observers might be trying to trying to get
their arms around. But what makes an asset back deal
or you know, an asset financing situation more applicable or
suitable to what you're doing versus a public market transaction.
(21:15):
And what safeguards or guardrails are you able to build
into the underwriting process. It may not be available in
sort of the more plain, vanilla part of the world.
Speaker 6 (21:24):
Sure, I'll break it down. I'll start with the latter
part and come back to the other. The first is
the asmatic securitization market. Is that come in a heavy world.
You know, if you think of eligibility criteria, if you
think of overclaudalization, ratios. If you think of all of
the tests that go into whether it's a CLO and
aspects securitization or other market, there's there's a lot of
covenants that are kind of structured into the deals, and
(21:47):
it's done on a bankruptcy remote basis and a special
perpoc entity, so you don't go into a bankruptcy. You're
not sitting there fighting over the areas. It's a waterfall.
Everything goes to a waterfall based on the structures and
then it comes down and pays off that for that
generally holds out true in the private markets. But as
you can imagine, if you're already getting covenants in the
public markets, you of course get that and more in
(22:09):
the private markets. So you're able to get covenants away
from that that bankrupt remote. You might even get covenants
at the OpCo, you know, where you would never get
that in an aspect securitization world. You just get it
on your pool of assets. So the real advantage is
one like all things in private markets. You know, it's
like a Colombo. This is truly aging myself, so I
(22:30):
apologize for this, but you know it's Columbo is an
old detective show. Hell probably back in the eighties, seventies,
Is it really seventies? Well, I watched it on reruns,
but I will say the Colombo had this famous, you know,
detective thing where you'd be coming back and be like, oh,
just one more question, Just one more question. You're never
(22:53):
done until you're done, until the meal is cooked. You
always get to come back and ask for one more question,
and you always get to get all of that information
and you get to do levels of diligence because you're
never done until you fund. And so from that situation,
that's the real advantage of private markets. And that's true
in private credit, on direct lending, it's true in asset
based finance versus other markets. But then also it's structure,
(23:17):
Like you know, the one of the other lessons learned
is alignment is key. Always putting yourself in the other
people's shoes and thinking through what they're trying to solve for,
and how can you build something that works for them
that also works really well for you. And if I
understand what you're trying to solve for, then generally it's
not just pricing on alignment, it's actually structure and downside
(23:38):
because if I understand good or bad intentions you may
have and what you're structuring for, I can then structure
it on the other side to offset that risk or
help to mitigate that risk in the future. So that's
the you know, there's a part of what we do
that's very much science there I have. You know, if
you look at our team, two thirds of them started
off as engineers and then change their majors or stat
(24:00):
as engineers, they're quants, they're others. We have a lot
of data analytics. We're doing all kinds of deep analysis.
That's the science. There's an art too. The art is
kind of how do you how do you figure out
the alignment? How do you structure your return? Especially when
you go away from the insurance side of the market,
that's where you start to see where the art come
(24:21):
in on how you're getting to return, whether it's contractual, upside, optionality,
or others.
Speaker 1 (24:26):
The problem for me with that, Joe, is that there
seems to be across the board and credit way more
demand than supply. So you know, you're not the only
one looking for the best deals, the safest deals, the
highest quality deals. Everyone else is filing and there's probably
a guy that's standing next to you willing to write
a check there and then if you don't, so you know,
pressure to deploy. You've got cash coming in, you need
to do something with it.
Speaker 5 (24:46):
What do you do? I mean, do you drop your standards?
Do you turn a blind? I mean? How do you
operate with all this pressure of demand?
Speaker 4 (24:54):
Yeah? One one has been our fun structures.
Speaker 6 (24:56):
We have specifically across what we've done, an alternative credit structure
that where we don't have the problem of money coming
in and we need to put it out right away.
Speaker 4 (25:05):
It's all draw down and close in in others.
Speaker 6 (25:08):
So that allows you to effectively to structure and manage
that so that you're not being a forced investor as
it goes. And there's no doubt we've seen pockets of
the world that have been frothy, where we've seen areas
and capital coming in. The real answer is relative value
and the relative value as well as tactical where are
you in this? Where are you in a cycle? Or
(25:29):
do you believe you're into cycle or not? We can
debate everything else. I think we can all agree we're
closer to the end of the cycle of the beginning, right,
We're at end of cycle with regards to behavior with
regards to credit markets, regards to others, and so you know,
when you're looking at that, you go in obviously rather
be under deployed than over risked. You want to make
sure that you're making good investments. Where we've really been
(25:52):
able to move on relative value is two simple things. One,
nothing stays interesting for five years in our space, always
pivoting more so than what you see in direct lending.
And so what I mean by that is we effectively
are able to whether it's three months or three years.
We kind of pivot in and out of some areas
(26:12):
at times as too much money comes into an area
and does exactly what you're concerned about, James, which is
kind of just makes it not interesting for that. So one,
you have that flexible capital that allows you to do
that you don't want to have, as I call them,
widget manufacturer funds.
Speaker 4 (26:26):
You don't want to have.
Speaker 6 (26:27):
All I do is X, and I'm going to manufacture
those widgets no matter what you put.
Speaker 4 (26:30):
In front of me.
Speaker 6 (26:31):
And honestly, in direct lending and private equity you do
the same thing. It's just called industries. You know, you
rotate on industries and other areas. The other part of
it is size. You know, one of the advantages of
sitting on a big platform is your ability to do
deals larger than almost anybody else can do. Does really
allow you to do some transactions that others can't, and
(26:52):
that in itself gets you out of the noise. You know,
a lot of the capital that's been raised is stararting
on the very small side. So for us on the
non insurance side, that'd be a fifty million dollar transaction.
Well that's kind of where we start, but we can
go up to a billion, and that allows you to
do transactions. What we are seeing for sure right now
is our most interesting transaction start at one hundred and
(27:15):
two hundred million in larger transactions where a lot of
them are proprietary and the ones that aren't proprietary are
limited process where they're going to two or three parties
and that's it. And we see that be a very
large percentage of what we do across the non insurance side,
because there's only a few people they can go to.
It's a very short list, and we believe we have
the largest capital on that space on the non insurance
(27:39):
which allows us to do some stuff no others can.
Speaker 2 (27:43):
Maybe you could clue the legion listening in on this
podcast on maybe some of the more interesting transactions you've
worked on recently. It as much as you can get
into specifics like what's cool, what's intellectually engaging that you've
looked at that you're like, you know, I just worked
on a really cool thing. Let me tell you about it.
Speaker 4 (28:02):
Well, I'd say two things.
Speaker 6 (28:03):
I mean, so one, you know, some of what we
do is less cool, it's more of the same, and
you know, and obviously it's incumbency and it's that ability
for people to come back and do transactions with them again.
So the thing that's exciting often on that first part
is just growing with people. You know, they start off
on a smaller transaction and they're getting to scale, and
then you see them institutionalize an asset class that hadn't
(28:25):
really been fully institutionalized before. I'd say the others probably honestly,
fun finance. You know, what we've seen is, you know,
the pressure that that private equities having from LPs has
led to It started off in one area, which was
really navelending in Europe because banks and the Boslin game
(28:46):
kind of pushed that out of a lot of what
can get done on European banks a little less so
in the US. Frankly, so there's been more opportunity in
the Europe. There's still some opportunity and changes in the US,
and so that led to navelending, which then has led
to you know, you start to see rate and no
feeders and CFOs. You start to see things like GP
structure transactions. All of them are the same in different forms.
(29:09):
And what I mean by that is they're all basically
how do I return capital LPs or how do I
help with the next fundraise by writing a larger check
into it or increasing the size of the fund as
they're doing, and all of those kind of You get
to truly create your own weather. You get to sit there.
I know there's a Nor'eastern going through New York today,
(29:31):
but you know, you get to create your own weather
from the standpoint of you get to sit there and say, Okay,
what do we want to solve for? What are they
trying to solve for? Nothing's really been predetermined. Let's just
come up with a structure and let's go back and
forth and do something that's there that hasn't been necessarily
done before. Within this within the waterfall within the structure.
(29:53):
So I think that stuff is always interesting. The last part,
you know, and we can we can talk about it
near the end of wherever you want to is, frankly,
what we're doing on the fill philanthropy side of things.
Nothing gets me more excited and the fuel that goes
into my engine that keeps me doing what I do
every day. I love investing is you probably can hear.
But it's the ability to invest as well as our
(30:15):
charitable tie in which you hit up top. You know,
it's it's interesting you were quoting. I think an older
bio is twenty million dollars. It's over forty million dollars
we've already accrued. It happens pretty quickly. If you drive
great results for your investors, we're driving even better, better
dollars to philanthropy and charity, which is a pretty amazing
(30:35):
tool we have.
Speaker 1 (30:38):
I do want to come back to that, but I
do before that, we've talked for more than half now
without even saying the words AI, the letters AI, AI
and data centers.
Speaker 5 (30:47):
Everyone's very, very excited about funding those.
Speaker 1 (30:49):
We're talking you know, toens of billions, if not trillions
of dollars in terms of opportunity for investors.
Speaker 5 (30:55):
Where does that fit into what you're doing job well.
Speaker 6 (30:59):
I think the interesting side of data centers specifically an
AI and you could even go broader with power because
you can't have data centers without power. Is it's not
an asset based finance opportunity, it's not a real estate opportunity,
it's not an infrastructure opportunity. It's at everybody opportunity. The
scale of it, from the size of the projects, the
(31:19):
size of what's being done has impacts. And we collaborate,
partner across the organization and what you'll see is, you know,
you know as much as there can only be four
or five winners. I think one thing that is very
unique with areas is the collaboration. We're not siloed. We
are working with each other all the time on transactions,
either on just shared collaboration or IP or as well
(31:41):
as frankly large transactions where we can partner together in
pools of capital. And it's going to take everybody, you know,
it's going to take a village when it comes to
the size of it. What are we focused on? What's
our main focus at areas across data centers. It's simple
it's credit, you know, it's what we're core DNA is.
It's what we're known for. It's where we have the
largest pools of capital. And honestly, I think it's one
(32:02):
of the most interesting parts of data centers because when
you think of twelve or fifteen year leases from mag
seven and great counterparties, you know, taking five or seven
years against diversified portfolios of those, that's great risk, that's
great risk adjustion returns. There's other forms you can do
in partnering with banks and bank partnerships with regards to
risk retention and other things they're trying to do. There's
(32:25):
also some opportunities on the development side that is getting
done by our real estate in our data center group
that are separate and apart from that, to kind of
take advantage of you can still build these at cap
rates and sell them at lower cap rates in the future.
So there is that arbitrage that kind of exists across that.
I think that where it goes, we'll see. I think
(32:47):
it's why you have to go in with a credit mentality,
at least on the way we approach it. For ABF,
we only do it when it's a diversified portfolio. We're
not doing single name project finance assets. We're less equity
or unless it's a diverse portfolio of some form or fashion.
And we're taking that cautious piece because you know, the
thing that concerns me is two things. One, what's going
(33:11):
to power all of this from a growth standpoint and
the infrastructure that goes with it. And power projects take
decades not years to get going, and frankly, there's only
one reasonably clean way to do it, and it's nuclear,
and that in itself is hard because your base load
can't be all renewables and solar, right, You're going to
have to kind.
Speaker 4 (33:31):
Of supplement that.
Speaker 6 (33:33):
The second is making sure that the structure of the
leases and the credit lens occurs and that there isn't
too much capital chasing it where people are taking in
the lease risk, you know, and and I think actually,
as we see the structures change, you'll start to see
these leases get longer and longer, which is good they
need to be because I think that that more aligns
(33:55):
with what that risk is. But I think we're well
positioned as we have tools of capital across the firm
that can invest in it. We're well positioned because most
of what we're looking at is frankly on the credit side,
but there's still I think a lot to shake out
broadly as it relates to that and how that plays out.
Speaker 1 (34:12):
Are there risks of obsolescence or you know, any concerns
about how fast this is taking off because we really
are going, you know, without any roadmap. We don't know
where this should go, how big it should be, and
what the end result is.
Speaker 6 (34:24):
Yeah, I agree, I think that's the thing is that
you know, look when in the end I make the
comparison sometimes to lending on the data centers, similar to
net lease or sale lease backs. You know, if you
think of net lease, it's often misunderstood because people want
to say, is it a real estate asset or it
is it a corporate And the answer.
Speaker 4 (34:45):
Is no, it's neither. It's both. It's a hybrid. You know.
Speaker 6 (34:49):
I always use the analogy of if you and it's
perfect for data centers because it applies to that. On
the mag seven, if you have a copier and you
have an equipment lease on a copier to Apple, you
don't really care about the equipment, right, You don't care
how old the copier is because you've got Apple paining
you on that lease and you're gonna get payment on it.
On the other end of the spectrum, if David starts
(35:11):
a sandwich shop and he wants a copier, I want
to make sure I can sell that copier to somebody else,
just in case he's not a great chef and it
doesn't go very well.
Speaker 3 (35:21):
Hey hey, hey see now I'm going David. Now, now,
now you're getting a better rate. So you know, when
you think of that, that's that's that lease. And and
and honestly, I think a lot of data centers are
the same, which is what you don't want to do
is a lease is not a lease is a lease,
and the asset is an asset. That is an asset.
Speaker 6 (35:41):
Like when you think of some that are still proving
their profitability model and their revenue model versus Oracle, you know,
versus Google, those are very different risks. So one is
taking a lot of real estate and asset risk. One
is taking counterparty risk, where even if you're wrong, and
even and if you have obsolete sence, you still end
(36:02):
up in the situation where you have this counterparty and
you have those payments and you have that and especially
from a credit seat you're covered by that, you know,
that's what's ends up kind of driving.
Speaker 2 (36:11):
That and as a as a lender competing for that
sort of you know hot sector uh, those hot sector
assets with those you know, deep credit tenants. Size has
to make a big difference there, right, you know, I
think we talked a couple of times about about sort
(36:31):
of the market, this private asset back market will inevitably
be some people that specialize and could be smaller, but
scale has to play a huge role in this if
you're dealing with with you know, sort of tenants of
that stature.
Speaker 6 (36:45):
I agree, And look there we're in in in our
infraquity group to made in an investment in a platform
earlier this year and they'll continue to grow that we
have we have obviously with the acquisition in GCP earlier
this year, they have that There's going to be lots
of opportunities.
Speaker 4 (36:59):
That's what I mean.
Speaker 6 (36:59):
It's it's kind of across the firm from from our
seat and all credit. It's going to be credit, right,
that's where we're really going to be looking at. But
I do agree that it's a transformational area. On one side,
it's learning algorithms, so They've been around for a while
in other things, and I do think there's still this
push to where their revenue model drives from here. You know,
(37:21):
I think that in the end, Google wasn't Google Teley
found Ads, you know, like, in the end, all things
kind of change, and I think that's the part that
we'll kind of play itself out over time. But the
scale and the opportunity and the changes to everything we
do and we see it every day and you see
it every day, are happening at speeds that you know,
the only analogy I can really make is to dot
(37:43):
Com and what we went through in others. But that
means you need to make sure that you're making great
investments with good downside because there's going to be winners
and there will be losers, and making sure you're structuring
it that way.
Speaker 4 (37:54):
But I think we're well positioned across areas for that.
Speaker 1 (37:56):
Where is the best relative value right now in terms
of you know, whatever you you look across all of
the things that you could possibly invest in for let's
say the long horizon, you're talking about the three, five,
seven year horizon, where's the best relative value?
Speaker 6 (38:10):
So right now it's been more driven by size and
flexibility as I mentioned, and we've definitely seen it in
fun finance. We're definitely seeing even residential mortgage in the
United States is very healthy on all things across that
you've got you know, prime super prime type borrowers, home
appreciation that has continued to grow up despite even the
higher rates and things we've seen. We continue to see.
(38:34):
You know, it does go to my cohort common earlier,
which is you know, there's cohorts that are very very healthy,
most of that being your prime and super prime. Even
at the same time you're necessarily seeing other weakness. We
are seeing interesting opportunities in Europe. We are seeing interesting
opportunities in digital infra, as we mentioned, not just data centers,
(38:54):
but across self powers and others. The good side is,
you know, a finance, you know, it's a house with
many rooms. There's always something to do. It's just a
function of where you're kind of playing, and there's times
you're really busy and there's times you're slow. Honestly, the
thing that gets me excited, sadly is when you do
go through periods of dislocation, whether deserved or not deserved,
(39:17):
you end up doing the same healthy assets you were before,
sometimes from distressed sellers and sometimes in distressed situations. So
we don't do distressed We're not digging, you know, turning
around companies or other things. But it does create opportunities
because when the asset back securitization market shuts down, it
creates huge opportunities because all of that thirty trillion dollars
(39:37):
of the market starts to sprinkle a five or six trillion,
It might sprin clover into the ten trillion dollars non
insurance market, and that always creates an opportunity. And we
saw we saw that obviously in twenty ten through two
thousand and call it fifteen or so.
Speaker 2 (39:51):
Good.
Speaker 1 (39:52):
Interestingly, the stress we talked about at the top, Jill,
you know, the food critics got hurt. They lost their shirt.
Some of them are out of business. But you know,
we lost few generals. It doesn't matter the chefs, mean while,
they're okay, But how really is it affecting your business?
Speaker 2 (40:06):
This?
Speaker 1 (40:06):
You know, we are going through a kind of mini
storm in credit. How does it affect the olts?
Speaker 4 (40:13):
I It hasn't.
Speaker 6 (40:14):
I mean, look I think it just goes too You
have done to right assuming that so we've been doing
that for a long time. That's nothing new. Necessarily, you'll
go through periods where you know m and A activity
is slow and MINA activity is fast. In a space finance,
we get less directly impacted by MNA activity because the
creation of assets. You know, you're borrowing on your credit card,
you know, you're doing stuff with equipment, you're buying cars,
(40:37):
other things. They get impacted, but they don't get impacted
as large as wings as you do buy M and
A and other markets. So we continue to do what
we're doing. I think that us continuing to grow our
brand and grow our market share really happens with being
a preferred counterparty. You know, we want to partner with banks,
we want to partner with insurance, we want to partner
(40:58):
with originators. And if we do what we say we're
going to do and we show up and do that,
that in itself you win, you know, because if you
show yourself as a good counter party who kind of
follows through with it, you know there that in itself
kind of leads to in prese market share and continue
to grow. It's that there's a little bit of the
Warren buffet there also, which is why does he get
(41:20):
those calls. He gets those calls because he does it.
When he says he's going to do something, he follows
through with it. And we stress that to our team
every day to make sure that we're being a preferred
counter party party. But you have to find great risk,
you know, things have to go hand in hand.
Speaker 1 (41:34):
The end of cycle behavior you mentioned him. Does that
mean you're taking more calls from people that need to
liquidate and you know, taking those assets.
Speaker 4 (41:42):
Not as much?
Speaker 6 (41:43):
Again, I I'm I'm a natural perma bear, and I'm
always looking under the covers and trying to see if
there's something there. And if if you read our in
the Gaps newsletter, you'll go, wow, this guy's so barrassed
generally on things and across our.
Speaker 4 (41:55):
Team, you know.
Speaker 6 (41:56):
But then when you pull back and you look at
the data, you actually say, you know, actually things are
a lot more resilient than you would imagine, both on
the consumer or on the drag lending if you're looking
at the underlying revenue, but not on other trends looking backwards.
So I think that, you know, I think the question
really becomes, you know, making sure you're investing in great
companies and great portfolios of assets, no matter what lens
(42:19):
you're you're looking from, and.
Speaker 5 (42:21):
The current issues then the.
Speaker 2 (42:22):
Full classic classic classic credit best the.
Speaker 5 (42:25):
Current issues in that scenario, Shiblow.
Speaker 1 (42:28):
But you did use the word end of cycle, which
implies that you know, maybe there'll be some reckoning to come.
Speaker 2 (42:34):
Oh.
Speaker 6 (42:34):
Look, cycles are real, they happen, There is there is
no this time it's different. We always run into, obviously
periods of cycles and others.
Speaker 1 (42:43):
And you are also, as you mentioned earlier, having a
positive impact. Can you talk a bit about that, I mean,
what's the charity angle.
Speaker 6 (42:50):
Sure, I come from very humble beginning, some of poor
preacher's kid from Boise, Idaho, who did not know this
world existed in any form or fashion. And I've been
very lucky and very blessed to even get the job
at City. If you go back twenty eight years ago,
I kind of stumbled in backwards. I wasn't quite the
mail room, but I was pretty dang close to get
my opportunity, and I've been able to make the most
(43:11):
of the opportunity. But you're lying to yourself, anybody who invests,
anybody who does what we do for a living, if
you don't think luck had a large part of it.
Then you're lying to yourself. And so I think you
have an obligation to try to give back. And you know,
I've set that up my wife's family, her dad's originally
from Peru, was a first generation immigrant and it came
(43:34):
to here and served in the military to kind of
help get a citizenship and others, and so we both
believed in kind of giving back, and we set it
up that way from the beginning. And you know, about
eight years ago, I'd already been involved in charity for
seventeen eighteen years personally, I did a trip to India
(43:54):
on a board i'd recently joined, which was path Global Health,
one of the largest tied to INGOs, tied to back
nations in the Third World, and they do amazing work
seventy plus countries across that And I did this trip
and when you're sitting in Dravi, the largest slum in Mumbai,
working on a tuberculosis program, you get perspective in life
on how lucky you really are. And it was an amazing,
(44:19):
amazing experience. And I came back from that saying, what
else can we do? There's got to be more than
just me doing this on a personal basis, how do
we get others to do more?
Speaker 4 (44:29):
And it started with.
Speaker 6 (44:30):
That idea, it turned into an ask, So an idea
turned into an asked. The ask was I went to
Mike Arraghetti r CEO, and I said, you know, hey, look,
I want to have a charity tie in to this
whatever I do next, because I had resigned from prior
firm and came up with that idea of that ask
of doing something else. And what we came up with
our Pathfinder Family of Funds, which you mentioned at the top,
(44:54):
is at least five to ten percent of the of
the promote of those funds goes across health and education
to it's already accrued over forty million dollars to date.
But the impact and the potential of that is huge
if you just think of the math of that on
funds that you know, across the returns and others. And
we now have over eighteen billion dollars of funds that
(45:15):
are underneath the Pathfinder Family of Funds, and we've always
talked about that and that's been amazing for culture. It's
actually helped inspire a broader areas. Charitable foundation we launched
in twenty twenty one, we launched the first fund on
the other nineteen. I am co chair of the foundation
with Mike Kearragety. Michelle Armstrong helps run that day to
(45:36):
day and if you look at that, it's amazing stuff
we're doing, not just in health and education, but the
foundation is now made over seventy million dollars of grants
across career prep and reskilling, entrepreneurship, and personal finance, having
nothing to do with what we're doing in health and
education for the.
Speaker 4 (45:52):
Pathfinder family of funds.
Speaker 6 (45:54):
So about a year ago, to go to the next
generation of this, we said what else could we do do?
And somebody from our team, Patrick Hugh and Hockom came
to me and said, what what if we got others
to do it? And We've been talking about this for
a while and I've talked to other managers and I've
said you should do this. This is amazing. It totally
brings purpose to everything you're doing. It's amazing for culture
(46:17):
and the team. And I've talked to LPs and said
you should press other people to do this. This would
be really amazing if you could make this a thing.
And what they came up with is this simple idea
of what if it was similar to the giving pledge.
What if you made a pledge to effectively give at
least five percent of your promote on a family of
funds to charity, whether it be health, education, housing, climate,
(46:40):
or others. And over the last year we've been talking
to a whole bunch of other managers out there, and
we just launched. By the time this podcast actually airs,
we'll have launched October fifteenth, Promote Giving, with the double
meaning on the word promote, promote being the percentage of
profits coming out of our pocket, not come out of
investor's pockets that would go towards charity, but also just
(47:05):
the broad idea of promoting giving. How can we kind
of give back in a bigger way? And so we're
hoping we can make this a broader thing, you know,
with our initial our founding signatories that have been great
partners on this, but we hope to add more. We
hope to get more people to kind of do that
same kind of idea.
Speaker 1 (47:22):
Brilliant, very inspiring stuff. Joel Holsinger, co head of Alternative Credit,
thank you so much for joining us on the Credit Edge.
Speaker 4 (47:29):
Thank you for having me.
Speaker 1 (47:29):
I enjoyed this and of course very grateful to David
Havens from Bloomberg Intelligence.
Speaker 2 (47:33):
Cheers grip being with you.
Speaker 1 (47:35):
There are even more great credit market analysis and insight.
Read all of David Havens's great work on the Bloomberg Terminal.
Bloomberg Intelligence is part of our research department, with five
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Please do subscribe to the Credit Edge wherever you get
(47:57):
your podcasts. We're on Apple, Spotify, and all other good
podcast providers, including the Bloomberg Terminal at b Podgo. Give
us a review, tell your friends, or email me directly
at Jcrombie at Bloomberg dot net. I'm James Crombie. It's
been a pleasure having you joined us again next week
on the Credit Edge
Hello, Welcome to the Credit Edge, a Wiki markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm David Haven's, a senior analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Joel Holsinger, co
head of Arias Alternative Credit.
Speaker 3 (00:31):
Joel, how are you doing great today?
Speaker 4 (00:33):
Thank you?
Speaker 2 (00:34):
Good to hear. Joel is also a member of the
Areas Operating Committee. Areas Alternative Credit tactically invests in scale
across assets based finance, and he serves as a member
of Areas Credit Group's Alternative Credit Executive Committee and Alternative
Credit Pathfinder and Pathfinder Core Investment Committees. Pathlind Fun Family
promotes giving through a pre defined structure of social purpose,
(00:56):
pledging to donate five to ten percent of the carried
interest profits to global health educational charities, and I think
we might be up to about twenty million dollars or
so of charitable contributions in the works already. Joel joined
Areas in twenty nineteen Fortress Investment Group, reserved on the
management committee there and co edit its ill Liquid Credit Group.
Needless to say, Joel, you have a fascinating credit background,
(01:20):
and it's incredibly topical because private asset back credit is
exploding in a good way. Numbers may vary, but more
than five trillion dollars globally and likely to tack on
another fifty percent by twenty twenty nine based on number
of estimates that are out there. The address bold market
tens of trillions of dollars in scale, and we seem
to have a few things we're starting to worry about
(01:42):
in private credit. So let's get on with it.
Speaker 5 (01:45):
Thanks David.
Speaker 1 (01:45):
I know we all want to talk about private markets
and asset based finance, but I do want to start
with a more broad question about corporate credit. After months
of very bullish sentiment and record type spreads, we are
starting to see some trouble, triggered by the collapse of
first brands and associated losses or some fairly large financial
institutions and investors have been quick to blame the tariffs.
Speaker 5 (02:05):
There were other blow.
Speaker 1 (02:06):
Ups in the auto sector, which is very exposed to
the trade wars. Most have dismissed the problem as idiosyncratic,
name specific, and unlikely to affect others, but we are
now seeing spreads widened significantly across the board, there's a
lot more scrutiny of weak companies that raise a lot
of debt during the good times. Third quarter earnings will
be the next big test, and some are even calling
(02:27):
it a wily coyote moment for credit. But what's your take, Joel,
How worried should we be about the outlook from here?
Speaker 4 (02:34):
We're jumping right into it. Huh.
Speaker 6 (02:35):
Look, I think it's There's been obviously a lot of
news and a lot of headlines around both First Brands
as well as treet Color, and I think that, you know,
there's a couple of things that are interesting if you
take a step back from that, and I think one
of my partners, Jenna, got quoted on something she spoke
at a conference recently, which is ironically, if you let's
(02:57):
take them each deal by deal. If you look at
First Brands, you know twelve billion dollars or so of
reported liabilities. Three billion or so of that is across
the broadly syndicated loan market, nine billion of that is
across kind of the trade, finance and other portions. And
if you look at that, most of that exposure is banks.
Most of that is kind of in traditional markets and
(03:18):
so the headlines have really been more towards the private
markets or private credit. The reality is is that you know,
in many ways, if it had been across the private market,
there probably would have been more ability to do some
of the work to unearth some of the stuff that
has been just that has been alleged, as well as
obviously you know, more extensive covenant packages and other things.
(03:41):
I mean, I always like to use the analogy if
you think of the liquid markets versus the private credit
markets is basically the difference between being a chef and
being a food critic. You know, when you're play in
the liquid markets, you can look at the meal, you
can decide if you're going to eat the meal, you
can take the meal, you can write about the meal.
(04:02):
But you're not a chef, and the reality is you're
limited on how many questions you can even ask and
how much work can be done. When you're a chef,
you're sitting there, you're buying the groceries, you're putting together
the menu, you're testing it out, you're rolling it out,
and you're dealing with it from beginning to end. And
it's really true in all private markets, whether it be
private equity, whether it be private credit or others. The
(04:24):
level and amount of work you can do from a
diligent standpoint is dramatically more extensive than what you can
in the liquid markets. And so the headlines have really
tried to speak about treek lore as well as first
brands as a private credit issue, but ninety five percent
or more of the exposure will effectively is being held
(04:45):
by banks and kind of liquid credit markets in some
form or fashion. And so, you know, I think from
our standpoint, look, we're constantly partnering with banks, We're constantly
working across what we do. But I look at it
from the standpoint of know the exposures and where the
exposures have actually been have been a little misreported with
(05:06):
regards to where that is held today. And you know,
if you spoke about earlier James about asset based finance,
trade finance has never really been part of asset based finance.
That's really if you think of asset based lending, which
is always inventory or commercial receivables. And I don't want
to geek out too much as it relates to this,
that's really its own separate world and has always played
(05:28):
and that is always played in a very different portion
of that. In ninety nine percent of trade finance is
a bank world, and it's normally done with IG counterparties
or others.
Speaker 2 (05:38):
So, Jill, you guys are sitting on top of at
areas or sitting on top of hundreds of billions of
dollars of investments, primarily private investments. What you know that
there there are some fractures that have shown up in
the market. They might be one offs, like what we
were just talking about. I think there's a sense that
there might be a little bit more going on, maybe
that there's you know, some negative trends developing in credit
(06:02):
after a long run up. What are the soundings from
sort of the overall area's portfolio, from your portfolio companies,
What are you hearing back from them?
Speaker 6 (06:12):
Sure, and it's probably worth you speaking to the portfolio.
We're not a lender to Tree Color and we're not
a lender to first brands, but if you look at it,
you know, I'd say I can speak a lot more
to the assa based finance or alternative credit group than
I can to direct lending and some of the others.
But you know, if you look at direct lending, they
are continuing to see EBITAG growth, they are continue to
(06:34):
see revenue growth. And it really speaks to things you
see across all markets, which is even when you see
some things that cause signals or cause concerns across markets,
you really have to kind of go into the individual cohorts.
We learn that a lot in asse based finance, You're
you're digging through a lot of pools of data and
(06:54):
millions of underlying loans often and you're looking at things
and it's really interesting when you do that from the
standpoint of I remember a student loan related transaction I
did fifteen years ago. Probably at this point, I'm going
to age myself. And if you look at that, what's interesting,
and this is true in most asset classes, ninety percent
(07:16):
of your defaults will be in one sub segment. You
can almost always go to a cohort within a large
portfolio and you can find where most of those defaults were.
And student loans this portfolio I'm speaking to were really
for profit schools. Most of it was in for profit schools.
And the other thing that's interesting when you think of
cohorts and digging into the details, most of the defaults
(07:39):
are in the first eighteen months. You know, it's really
frontloaded defaults that kind of occurred, and what does that
speak to They never graduated, you know, they never finished college,
they never got through. So their ability to kind of
be able to service schools as well as you guys
know very well the for profit schools were a lot
of marketing to create those and so not necessarily that
(08:01):
when we think of a college education, the same necessarily
level that you would have had, and there's been a
lot of reforms to that space since then. I think
the same can be set today, which is there's clearly
sub segments or cohorts that are they're experiencing more concerns.
Speaker 4 (08:15):
But if you look at it on a broad.
Speaker 6 (08:17):
Basis, you continue to see the private credit market, if
you speak of direct lending as continuing to kind of
grow on revenue dy. But if you look at across
asset based finance, we are always looking at that analysis.
And what I mean there is we're very big unrelative value.
There are areas that are very interesting that become uninteresting
(08:38):
because a lot of people will pile into them. We've
been one of the more active players and we were
very busy early on with significant risk transfers or SRTs.
That's an area that a lot of money piled into,
and there's been headlines and reports around that. Frankly, there
hasn't been as much to do because what's happened is
(08:59):
you're pricing down, your risk went up in many of
those areas, and so where we've been playing is a
tiny little cohort where there's still some stuff to do
that has great risk. I won't say it publicly here
because we like that cohort, but ninety five ninety nine
percent of what's going on in SRTs we found wholly
an interesting even though we are very active on it.
If you go back too plus years ago, yes.
Speaker 2 (09:21):
Maybe we should level set also because it seems like,
you know, private credit, it means a lot of different
things to a lot of different people because it's a
it's an enormously wide area that ranges all over the place.
So what does your overall Baileywick include when you're talking
about asset based private lending? What are you really looking at?
Speaker 3 (09:40):
Like?
Speaker 2 (09:40):
Where are you on that spectrum?
Speaker 6 (09:42):
Yeah, and everything we're talking about is obviously looking backwards
right now because we are in public and we can't
talk to the forward earnings. But you know, when we
look a relative value of the most interesting what's really
been interesting for us? And it is unique and maybe
to take a step back, David, just to set the
table on asset based finance, because I think there's a
lot of people to talk about it, but there's there's
two real big parts of the market. Part one is insurance,
(10:05):
you know, and most of the capital that spoke about.
If you think of the forty trillion dollars or so
in that market, thirty trillion plus of it is insurance
capital of some form or fashion. And when you think
of that insurance, there has been a number of players
that have entered that market, obviously in scale, and there
is deals that are done and that market if you
(10:28):
think of insurance as traditionally bought corporate IG as well
as ASBAC securitizations, so the liquid ABS market, what's changed
in the last five years or less is a lot
of private IG. And it's simple as basis, because I
think sometimes it gets spoken about like there's this you know,
mirage of all these things going on. It's an ABAC
(10:48):
security ABS deal that's getting done on a private basis.
Speaker 4 (10:51):
That's all that's happening.
Speaker 6 (10:52):
The exact same pool of collateral, the exact same rating,
the exact same lookthrough. What's really happening is in your
basic taking some of the excess points or fees that
you might pay and putting it into the spread. So
you are picking up excess spread. But all of that's
done for insurance. And what does insurance need in the
United States, whether an annuity provider or your life insurance
(11:14):
or other insurance, you need a rating ninety percent plus
normally ninety five percent needs to be investment grade rating
or above. And so when you talk about ABF, a
lot of that is fixed income or as I like
to call it, fixed income plus because it is corporate IG,
it is ass of execurization market and now it's private IG.
Speaker 4 (11:35):
That's the plus.
Speaker 6 (11:36):
You are picking up extra spread, but it's a minimal amount,
but it has a big impact on the earnings of
an insurance company. The non insurance market, the non rated
is an area where effectively you need flexible capital. You
need flexible capital in scale, and we believe we are
a leader there. We believe we have the largest fund
(11:56):
that's been raised. And when we look at that, what
we see is a market where you have the ability
the relative value has been less asset class driven, and
it's actually been more scale driven because there won't be
one winner there and there won't be ten winners. There's
going to be four or five winners because you have
to sit on a big platform, you need to have
(12:18):
big infrastructure.
Speaker 4 (12:19):
You have big scale.
Speaker 6 (12:20):
But what we've really seen in the last eighteen months
is this shift where that ability to bring capital and
scale has really driven transactions as much as the asset class.
As the other David maybe to talk through is fun finance.
I mean, we've definitely seen a lot across fund finance.
Speaker 1 (12:36):
Talk about asset based financer. Joe, what exactly are you
securitizing here? Is it car loans, students? What typically do
you repackage?
Speaker 4 (12:45):
Sure?
Speaker 6 (12:46):
I mean, at its simplest, there's the asset ex securitization market,
the liquid market everybody's familiar with, which includes consumer and
other things. But I always like to say everything's a portfolio.
Everything's loans, leases, and receivables, and it's financial receivables and
not commercial receivables. It can include royalties, and all of
them have contractual cash flows, So it's all the contractual
cash flows that are coming off these. There's a great
(13:08):
video we put together. It's a pretty abf one oh
one video, but there's a great video we put together
on LinkedIn and it's on our website. It's called a
Day in the Life. And the idea is you touch
our assets every day. Whether it's your auto, whether it's solar,
whether it's your credit cards, whether it's your residential mortgage,
whether it's your you know, buy now, pay later. All
(13:28):
of those areas drive into it. But it's even simpler
than that. It's really there's the ABS market and what
we do on the non insurance pool of capital is
everything we do. Everything that's in the ABS market done
on a private, direct basis. It's no different than fixed
income and leverage loans versus jrect lending. You're just doing
it on a direct basis with regards to those transactions.
Speaker 5 (13:49):
And the pickup in spread.
Speaker 1 (13:50):
We've had Blackstone on a recent show talking about one
hundred and fifty to two hundred basis points pick up
even for ig you said it's minimal.
Speaker 5 (13:59):
I mean, how does how does it compare to what
Blackstone is see?
Speaker 6 (14:02):
So yeah, So what you're talking about, James, is really
the insurance side. I was mentioning earlier, and that is
private IG. You are picking up one hundred and fifty
to two hundred. Part of that's, honestly, because corporate IG
is that tight right now. You're at thirty year tights
on corporate IG because you know there's nothing going on
in the world and everything's perfect. Obviously when you think
of thirty year tights on corporate IG, of course, of course,
(14:24):
I mean clearly. So you've seen that, You've seen that occur,
and part of that is, you know, we publish our
lessons learned in our newsletter in the gaps and we
have our top fifteen.
Speaker 4 (14:34):
One of them has watched the flows.
Speaker 6 (14:36):
There has been a lot of capital that has flown
into some of those areas, and that's driven down corporate
IG and it's driven down spreads into across the aspects
securitization market more so corporate I G.
Speaker 4 (14:48):
When we talk.
Speaker 6 (14:49):
About when you go away from that, you're talking more
opportunistic type returns, which would be more like credit opportunity
type funds or even on the lower end of private
equity funds as well as we kind of have in
the middle where you can play across that. But the
key is having all three buckets, whether it's insurance related
capital which we also manage, opportunistic or tactical on the side,
(15:11):
or the area in the middle that kind of sits
in between those.
Speaker 2 (15:16):
So when when we're talking about sort of IG asset
back finance or other forms of asset back finance, you know,
it's always sort of interesting to figure out where where
sort of the equity portion of the risk resides. You know,
if you're doing an IG deal, I assume that it's
it's the borrower who sort of holds onto that equity
(15:37):
stake of the of the risk, or maybe maybe they
transferred somewhere else. It's not the insurance company that's buying it.
Speaker 4 (15:45):
It can be both.
Speaker 6 (15:46):
Actually, David, it's interesting because we call it horizontal or vertical.
You know, Horizontal is you're just owning the bonds and
then somebody else owns the reson or the equity. Vertical
means you're owning the whole thing you are seeing. And
this has always happened in insurance capital. If you think
of residential mortgages, insurance has generally held those residential mortgages
(16:07):
is vertically, they've held the whole thing because of the
treatment they get from from insurance, regulatory capital. But what
you're starting to see is whether it's across consumer lending,
whether it's across you know, equipment leases, whether it's across autos,
you're starting to see more vertical, especially as you've seen
some more scaled players with the ability to take that down.
So often you actually are seeing them hold the whole thing.
(16:31):
The difference is if ninety five percent or so of
it needs to be ig they're holding that last piece
and kind of their what they call their alts bucket
on that board, a bottom piece. Other times you're right,
it's just horizontal.
Speaker 2 (16:44):
Yep.
Speaker 1 (16:44):
Okay, we see something grow very quickly, and we think,
you know, potentially that there's the there's the chance that
something might get done that maybe shouldn't get done, that
there's pressure to deploy, that there's people not maybe scrutinizing
the work as much they should, and that you know,
recent blow ups in the in the in the food
(17:05):
critic area, as you put it, Joel, signs that you
know this, these are good time deals going bad because
not enough attention was paid. Surely the same thing's happening
in private market, isn't it?
Speaker 6 (17:17):
Well, you know, look, I think there's always the risk
of watching the flows when the money flows out. It's
the old Warren Buffet comment of you know, when the
tide goes out, you see who's naked. So it's obviously
there's always questions when you see some nudity without the
tide going out. You know, I would say, you know,
the only thing that is more conservative than a credit
(17:39):
journalists a credit investor. I've been doing this for twenty
eight years, and you know it's a good thing. This
is a podcast because you know, as I often say,
I have a face for podcasts, but those who know
me though, I have a fully silver head of hair
and I just turned fifty. So you know that comes
from investing in credit for twenty eight years. You go
through cycles, you go through all these period and you
(18:00):
end up with scars, and it makes you a better
investor if you learn your lessons along the way. I
think it really kind of goes to you should always
in credit invest like the GFC or the recession that's
happening tomorrow, you have to go into an assumption that
everything is going to go bad, and can you protect
yourself through your structure, through your cash flows. We like
(18:23):
to go for front load to cash flows, which comes
off of portfolios. One of the advantage of ABF is
everything is a portfolio, and what happens in portfolios. If
you think of individual loans and say the broadly syndicated market,
you're getting interest inri centrist principle at the end. And
if you think of private equity, you're getting nothing maybe
a recap you sell the company, you go public, so
(18:45):
that most of the valuations coming from the terminal value,
it's not coming from the contractual cash flows. And we
do something that I highly recommend to any investor, which
is we have a page in our memos we had
in this about four years ago whereas a page of
visualizing the cash flows actually see how the cash flows
come in on individual deal, but then off to the
right as a pie chart or as my partner Keith
(19:07):
Ashton says, a donut because donuts are better than pie,
and the donut chart it shows basically how much is
contractual how much is terminal value. And we generally like
front load to cash flows and you can get them
in asset based finance. The reason the lost histories have
been so low historically across the industry is because you
are getting principal and interest off a diverse portfolio. You're
(19:29):
not just getting interest, You're getting those dollars and it's
de risking. So when things go wrong, you've generally returned
a lot or all of your capital and it's more
of a slightly lower return versus a loss. Why do
people care about rates and inflation so much?
Speaker 4 (19:44):
The V.
Speaker 6 (19:46):
When you're getting terminal value at the end of an investment,
you really care about the valuation. Why is private equity
you know not has disappointed or as I call it,
disappointed performance since influenza, you know where they haven't returned
the cap. It's created an opportunity for us in fun finance,
tons of opportunities coming out of it.
Speaker 4 (20:05):
But it's come.
Speaker 6 (20:06):
Because of the V, which is you are more dependent
on that exit, that IPO, that sale, that other portion
and that return of capital. And obviously rates and inflation
can have a big impact on what that drives. So
so we look at it as assume the recession, look
for frontload cash flows, do things. Our pattern recognition is simple,
(20:28):
it's lost. It's lost curves. You know where we see
loss curves. Can it get to two to three x
and we're still protected versus what we underwrote. Can you
get to a recessionary type case and you're still protected
on your return of capital? That's when you know you
move forward. That's when you know you've got a deal
that kind of holds up. And then you debate on
whether you're getting paid enough for it or how it
(20:48):
looks unrelative value versus something else you're doing.
Speaker 2 (20:51):
I've got sort of a two parter for you, which
I think a lot of you know, sort of casual
private credit observers might be trying to trying to get
their arms around. But what makes an asset back deal
or you know, an asset financing situation more applicable or
suitable to what you're doing versus a public market transaction.
(21:15):
And what safeguards or guardrails are you able to build
into the underwriting process. It may not be available in
sort of the more plain, vanilla part of the world.
Speaker 6 (21:24):
Sure, I'll break it down. I'll start with the latter
part and come back to the other. The first is
the asmatic securitization market. Is that come in a heavy world.
You know, if you think of eligibility criteria, if you
think of overclaudalization, ratios. If you think of all of
the tests that go into whether it's a CLO and
aspects securitization or other market, there's there's a lot of
covenants that are kind of structured into the deals, and
(21:47):
it's done on a bankruptcy remote basis and a special
perpoc entity, so you don't go into a bankruptcy. You're
not sitting there fighting over the areas. It's a waterfall.
Everything goes to a waterfall based on the structures and
then it comes down and pays off that for that
generally holds out true in the private markets. But as
you can imagine, if you're already getting covenants in the
public markets, you of course get that and more in
(22:09):
the private markets. So you're able to get covenants away
from that that bankrupt remote. You might even get covenants
at the OpCo, you know, where you would never get
that in an aspect securitization world. You just get it
on your pool of assets. So the real advantage is
one like all things in private markets. You know, it's
like a Colombo. This is truly aging myself, so I
(22:30):
apologize for this, but you know it's Columbo is an
old detective show. Hell probably back in the eighties, seventies,
Is it really seventies? Well, I watched it on reruns,
but I will say the Colombo had this famous, you know,
detective thing where you'd be coming back and be like, oh,
just one more question, Just one more question. You're never
(22:53):
done until you're done, until the meal is cooked. You
always get to come back and ask for one more question,
and you always get to get all of that information
and you get to do levels of diligence because you're
never done until you fund. And so from that situation,
that's the real advantage of private markets. And that's true
in private credit, on direct lending, it's true in asset
based finance versus other markets. But then also it's structure,
(23:17):
Like you know, the one of the other lessons learned
is alignment is key. Always putting yourself in the other
people's shoes and thinking through what they're trying to solve for,
and how can you build something that works for them
that also works really well for you. And if I
understand what you're trying to solve for, then generally it's
not just pricing on alignment, it's actually structure and downside
(23:38):
because if I understand good or bad intentions you may
have and what you're structuring for, I can then structure
it on the other side to offset that risk or
help to mitigate that risk in the future. So that's
the you know, there's a part of what we do
that's very much science there I have. You know, if
you look at our team, two thirds of them started
off as engineers and then change their majors or stat
(24:00):
as engineers, they're quants, they're others. We have a lot
of data analytics. We're doing all kinds of deep analysis.
That's the science. There's an art too. The art is
kind of how do you how do you figure out
the alignment? How do you structure your return? Especially when
you go away from the insurance side of the market,
that's where you start to see where the art come
(24:21):
in on how you're getting to return, whether it's contractual, upside, optionality,
or others.
Speaker 1 (24:26):
The problem for me with that, Joe, is that there
seems to be across the board and credit way more
demand than supply. So you know, you're not the only
one looking for the best deals, the safest deals, the
highest quality deals. Everyone else is filing and there's probably
a guy that's standing next to you willing to write
a check there and then if you don't, so you know,
pressure to deploy. You've got cash coming in, you need
to do something with it.
Speaker 5 (24:46):
What do you do? I mean, do you drop your standards?
Do you turn a blind? I mean? How do you
operate with all this pressure of demand?
Speaker 4 (24:54):
Yeah? One one has been our fun structures.
Speaker 6 (24:56):
We have specifically across what we've done, an alternative credit structure
that where we don't have the problem of money coming
in and we need to put it out right away.
Speaker 4 (25:05):
It's all draw down and close in in others.
Speaker 6 (25:08):
So that allows you to effectively to structure and manage
that so that you're not being a forced investor as
it goes. And there's no doubt we've seen pockets of
the world that have been frothy, where we've seen areas
and capital coming in. The real answer is relative value
and the relative value as well as tactical where are
you in this? Where are you in a cycle? Or
(25:29):
do you believe you're into cycle or not? We can
debate everything else. I think we can all agree we're
closer to the end of the cycle of the beginning, right,
We're at end of cycle with regards to behavior with
regards to credit markets, regards to others, and so you know,
when you're looking at that, you go in obviously rather
be under deployed than over risked. You want to make
sure that you're making good investments. Where we've really been
(25:52):
able to move on relative value is two simple things. One,
nothing stays interesting for five years in our space, always
pivoting more so than what you see in direct lending.
And so what I mean by that is we effectively
are able to whether it's three months or three years.
We kind of pivot in and out of some areas
(26:12):
at times as too much money comes into an area
and does exactly what you're concerned about, James, which is
kind of just makes it not interesting for that. So one,
you have that flexible capital that allows you to do
that you don't want to have, as I call them,
widget manufacturer funds.
Speaker 4 (26:26):
You don't want to have.
Speaker 6 (26:27):
All I do is X, and I'm going to manufacture
those widgets no matter what you put.
Speaker 4 (26:30):
In front of me.
Speaker 6 (26:31):
And honestly, in direct lending and private equity you do
the same thing. It's just called industries. You know, you
rotate on industries and other areas. The other part of
it is size. You know, one of the advantages of
sitting on a big platform is your ability to do
deals larger than almost anybody else can do. Does really
allow you to do some transactions that others can't, and
(26:52):
that in itself gets you out of the noise. You know,
a lot of the capital that's been raised is stararting
on the very small side. So for us on the
non insurance side, that'd be a fifty million dollar transaction.
Well that's kind of where we start, but we can
go up to a billion, and that allows you to
do transactions. What we are seeing for sure right now
is our most interesting transaction start at one hundred and
(27:15):
two hundred million in larger transactions where a lot of
them are proprietary and the ones that aren't proprietary are
limited process where they're going to two or three parties
and that's it. And we see that be a very
large percentage of what we do across the non insurance side,
because there's only a few people they can go to.
It's a very short list, and we believe we have
the largest capital on that space on the non insurance
(27:39):
which allows us to do some stuff no others can.
Speaker 2 (27:43):
Maybe you could clue the legion listening in on this
podcast on maybe some of the more interesting transactions you've
worked on recently. It as much as you can get
into specifics like what's cool, what's intellectually engaging that you've
looked at that you're like, you know, I just worked
on a really cool thing. Let me tell you about it.
Speaker 4 (28:02):
Well, I'd say two things.
Speaker 6 (28:03):
I mean, so one, you know, some of what we
do is less cool, it's more of the same, and
you know, and obviously it's incumbency and it's that ability
for people to come back and do transactions with them again.
So the thing that's exciting often on that first part
is just growing with people. You know, they start off
on a smaller transaction and they're getting to scale, and
then you see them institutionalize an asset class that hadn't
(28:25):
really been fully institutionalized before. I'd say the others probably honestly,
fun finance. You know, what we've seen is, you know,
the pressure that that private equities having from LPs has
led to It started off in one area, which was
really navelending in Europe because banks and the Boslin game
(28:46):
kind of pushed that out of a lot of what
can get done on European banks a little less so
in the US. Frankly, so there's been more opportunity in
the Europe. There's still some opportunity and changes in the US,
and so that led to navelending, which then has led
to you know, you start to see rate and no
feeders and CFOs. You start to see things like GP
structure transactions. All of them are the same in different forms.
(29:09):
And what I mean by that is they're all basically
how do I return capital LPs or how do I
help with the next fundraise by writing a larger check
into it or increasing the size of the fund as
they're doing, and all of those kind of You get
to truly create your own weather. You get to sit there.
I know there's a Nor'eastern going through New York today,
(29:31):
but you know, you get to create your own weather
from the standpoint of you get to sit there and say, Okay,
what do we want to solve for? What are they
trying to solve for? Nothing's really been predetermined. Let's just
come up with a structure and let's go back and
forth and do something that's there that hasn't been necessarily
done before. Within this within the waterfall within the structure.
(29:53):
So I think that stuff is always interesting. The last part,
you know, and we can we can talk about it
near the end of wherever you want to is, frankly,
what we're doing on the fill philanthropy side of things.
Nothing gets me more excited and the fuel that goes
into my engine that keeps me doing what I do
every day. I love investing is you probably can hear.
But it's the ability to invest as well as our
(30:15):
charitable tie in which you hit up top. You know,
it's it's interesting you were quoting. I think an older
bio is twenty million dollars. It's over forty million dollars
we've already accrued. It happens pretty quickly. If you drive
great results for your investors, we're driving even better, better
dollars to philanthropy and charity, which is a pretty amazing
(30:35):
tool we have.
Speaker 1 (30:38):
I do want to come back to that, but I
do before that, we've talked for more than half now
without even saying the words AI, the letters AI, AI
and data centers.
Speaker 5 (30:47):
Everyone's very, very excited about funding those.
Speaker 1 (30:49):
We're talking you know, toens of billions, if not trillions
of dollars in terms of opportunity for investors.
Speaker 5 (30:55):
Where does that fit into what you're doing job well.
Speaker 6 (30:59):
I think the interesting side of data centers specifically an
AI and you could even go broader with power because
you can't have data centers without power. Is it's not
an asset based finance opportunity, it's not a real estate opportunity,
it's not an infrastructure opportunity. It's at everybody opportunity. The
scale of it, from the size of the projects, the
(31:19):
size of what's being done has impacts. And we collaborate,
partner across the organization and what you'll see is, you know,
you know as much as there can only be four
or five winners. I think one thing that is very
unique with areas is the collaboration. We're not siloed. We
are working with each other all the time on transactions,
either on just shared collaboration or IP or as well
(31:41):
as frankly large transactions where we can partner together in
pools of capital. And it's going to take everybody, you know,
it's going to take a village when it comes to
the size of it. What are we focused on? What's
our main focus at areas across data centers. It's simple
it's credit, you know, it's what we're core DNA is.
It's what we're known for. It's where we have the
largest pools of capital. And honestly, I think it's one
(32:02):
of the most interesting parts of data centers because when
you think of twelve or fifteen year leases from mag
seven and great counterparties, you know, taking five or seven
years against diversified portfolios of those, that's great risk, that's
great risk adjustion returns. There's other forms you can do
in partnering with banks and bank partnerships with regards to
risk retention and other things they're trying to do. There's
(32:25):
also some opportunities on the development side that is getting
done by our real estate in our data center group
that are separate and apart from that, to kind of
take advantage of you can still build these at cap
rates and sell them at lower cap rates in the future.
So there is that arbitrage that kind of exists across that.
I think that where it goes, we'll see. I think
(32:47):
it's why you have to go in with a credit mentality,
at least on the way we approach it. For ABF,
we only do it when it's a diversified portfolio. We're
not doing single name project finance assets. We're less equity
or unless it's a diverse portfolio of some form or fashion.
And we're taking that cautious piece because you know, the
thing that concerns me is two things. One, what's going
(33:11):
to power all of this from a growth standpoint and
the infrastructure that goes with it. And power projects take
decades not years to get going, and frankly, there's only
one reasonably clean way to do it, and it's nuclear,
and that in itself is hard because your base load
can't be all renewables and solar, right, You're going to
have to kind.
Speaker 4 (33:31):
Of supplement that.
Speaker 6 (33:33):
The second is making sure that the structure of the
leases and the credit lens occurs and that there isn't
too much capital chasing it where people are taking in
the lease risk, you know, and and I think actually,
as we see the structures change, you'll start to see
these leases get longer and longer, which is good they
need to be because I think that that more aligns
(33:55):
with what that risk is. But I think we're well
positioned as we have tools of capital across the firm
that can invest in it. We're well positioned because most
of what we're looking at is frankly on the credit side,
but there's still I think a lot to shake out
broadly as it relates to that and how that plays out.
Speaker 1 (34:12):
Are there risks of obsolescence or you know, any concerns
about how fast this is taking off because we really
are going, you know, without any roadmap. We don't know
where this should go, how big it should be, and
what the end result is.
Speaker 6 (34:24):
Yeah, I agree, I think that's the thing is that
you know, look when in the end I make the
comparison sometimes to lending on the data centers, similar to
net lease or sale lease backs. You know, if you
think of net lease, it's often misunderstood because people want
to say, is it a real estate asset or it
is it a corporate And the answer.
Speaker 4 (34:45):
Is no, it's neither. It's both. It's a hybrid. You know.
Speaker 6 (34:49):
I always use the analogy of if you and it's
perfect for data centers because it applies to that. On
the mag seven, if you have a copier and you
have an equipment lease on a copier to Apple, you
don't really care about the equipment, right, You don't care
how old the copier is because you've got Apple paining
you on that lease and you're gonna get payment on it.
On the other end of the spectrum, if David starts
(35:11):
a sandwich shop and he wants a copier, I want
to make sure I can sell that copier to somebody else,
just in case he's not a great chef and it
doesn't go very well.
Speaker 3 (35:21):
Hey hey, hey see now I'm going David. Now, now,
now you're getting a better rate. So you know, when
you think of that, that's that's that lease. And and
and honestly, I think a lot of data centers are
the same, which is what you don't want to do
is a lease is not a lease is a lease,
and the asset is an asset. That is an asset.
Speaker 6 (35:41):
Like when you think of some that are still proving
their profitability model and their revenue model versus Oracle, you know,
versus Google, those are very different risks. So one is
taking a lot of real estate and asset risk. One
is taking counterparty risk, where even if you're wrong, and
even and if you have obsolete sence, you still end
(36:02):
up in the situation where you have this counterparty and
you have those payments and you have that and especially
from a credit seat you're covered by that, you know,
that's what's ends up kind of driving.
Speaker 2 (36:11):
That and as a as a lender competing for that
sort of you know hot sector uh, those hot sector
assets with those you know, deep credit tenants. Size has
to make a big difference there, right, you know, I
think we talked a couple of times about about sort
(36:31):
of the market, this private asset back market will inevitably
be some people that specialize and could be smaller, but
scale has to play a huge role in this if
you're dealing with with you know, sort of tenants of
that stature.
Speaker 6 (36:45):
I agree, And look there we're in in in our
infraquity group to made in an investment in a platform
earlier this year and they'll continue to grow that we
have we have obviously with the acquisition in GCP earlier
this year, they have that There's going to be lots
of opportunities.
Speaker 4 (36:59):
That's what I mean.
Speaker 6 (36:59):
It's it's kind of across the firm from from our
seat and all credit. It's going to be credit, right,
that's where we're really going to be looking at. But
I do agree that it's a transformational area. On one side,
it's learning algorithms, so They've been around for a while
in other things, and I do think there's still this
push to where their revenue model drives from here. You know,
(37:21):
I think that in the end, Google wasn't Google Teley
found Ads, you know, like, in the end, all things
kind of change, and I think that's the part that
we'll kind of play itself out over time. But the
scale and the opportunity and the changes to everything we
do and we see it every day and you see
it every day, are happening at speeds that you know,
the only analogy I can really make is to dot
(37:43):
Com and what we went through in others. But that
means you need to make sure that you're making great
investments with good downside because there's going to be winners
and there will be losers, and making sure you're structuring
it that way.
Speaker 4 (37:54):
But I think we're well positioned across areas for that.
Speaker 1 (37:56):
Where is the best relative value right now in terms
of you know, whatever you you look across all of
the things that you could possibly invest in for let's
say the long horizon, you're talking about the three, five,
seven year horizon, where's the best relative value?
Speaker 6 (38:10):
So right now it's been more driven by size and
flexibility as I mentioned, and we've definitely seen it in
fun finance. We're definitely seeing even residential mortgage in the
United States is very healthy on all things across that
you've got you know, prime super prime type borrowers, home
appreciation that has continued to grow up despite even the
higher rates and things we've seen. We continue to see.
(38:34):
You know, it does go to my cohort common earlier,
which is you know, there's cohorts that are very very healthy,
most of that being your prime and super prime. Even
at the same time you're necessarily seeing other weakness. We
are seeing interesting opportunities in Europe. We are seeing interesting
opportunities in digital infra, as we mentioned, not just data centers,
(38:54):
but across self powers and others. The good side is,
you know, a finance, you know, it's a house with
many rooms. There's always something to do. It's just a
function of where you're kind of playing, and there's times
you're really busy and there's times you're slow. Honestly, the
thing that gets me excited, sadly is when you do
go through periods of dislocation, whether deserved or not deserved,
(39:17):
you end up doing the same healthy assets you were before,
sometimes from distressed sellers and sometimes in distressed situations. So
we don't do distressed We're not digging, you know, turning
around companies or other things. But it does create opportunities
because when the asset back securitization market shuts down, it
creates huge opportunities because all of that thirty trillion dollars
(39:37):
of the market starts to sprinkle a five or six trillion,
It might sprin clover into the ten trillion dollars non
insurance market, and that always creates an opportunity. And we
saw we saw that obviously in twenty ten through two
thousand and call it fifteen or so.
Speaker 2 (39:51):
Good.
Speaker 1 (39:52):
Interestingly, the stress we talked about at the top, Jill,
you know, the food critics got hurt. They lost their shirt.
Some of them are out of business. But you know,
we lost few generals. It doesn't matter the chefs, mean while,
they're okay, But how really is it affecting your business?
Speaker 2 (40:06):
This?
Speaker 1 (40:06):
You know, we are going through a kind of mini
storm in credit. How does it affect the olts?
Speaker 4 (40:13):
I It hasn't.
Speaker 6 (40:14):
I mean, look I think it just goes too You
have done to right assuming that so we've been doing
that for a long time. That's nothing new. Necessarily, you'll
go through periods where you know m and A activity
is slow and MINA activity is fast. In a space finance,
we get less directly impacted by MNA activity because the
creation of assets. You know, you're borrowing on your credit card,
you know, you're doing stuff with equipment, you're buying cars,
(40:37):
other things. They get impacted, but they don't get impacted
as large as wings as you do buy M and
A and other markets. So we continue to do what
we're doing. I think that us continuing to grow our
brand and grow our market share really happens with being
a preferred counterparty. You know, we want to partner with banks,
we want to partner with insurance, we want to partner
(40:58):
with originators. And if we do what we say we're
going to do and we show up and do that,
that in itself you win, you know, because if you
show yourself as a good counter party who kind of
follows through with it, you know there that in itself
kind of leads to in prese market share and continue
to grow. It's that there's a little bit of the
Warren buffet there also, which is why does he get
(41:20):
those calls. He gets those calls because he does it.
When he says he's going to do something, he follows
through with it. And we stress that to our team
every day to make sure that we're being a preferred
counter party party. But you have to find great risk,
you know, things have to go hand in hand.
Speaker 1 (41:34):
The end of cycle behavior you mentioned him. Does that
mean you're taking more calls from people that need to
liquidate and you know, taking those assets.
Speaker 4 (41:42):
Not as much?
Speaker 6 (41:43):
Again, I I'm I'm a natural perma bear, and I'm
always looking under the covers and trying to see if
there's something there. And if if you read our in
the Gaps newsletter, you'll go, wow, this guy's so barrassed
generally on things and across our.
Speaker 4 (41:55):
Team, you know.
Speaker 6 (41:56):
But then when you pull back and you look at
the data, you actually say, you know, actually things are
a lot more resilient than you would imagine, both on
the consumer or on the drag lending if you're looking
at the underlying revenue, but not on other trends looking backwards.
So I think that, you know, I think the question
really becomes, you know, making sure you're investing in great
companies and great portfolios of assets, no matter what lens
(42:19):
you're you're looking from, and.
Speaker 5 (42:21):
The current issues then the.
Speaker 2 (42:22):
Full classic classic classic credit best the.
Speaker 5 (42:25):
Current issues in that scenario, Shiblow.
Speaker 1 (42:28):
But you did use the word end of cycle, which
implies that you know, maybe there'll be some reckoning to come.
Speaker 2 (42:34):
Oh.
Speaker 6 (42:34):
Look, cycles are real, they happen, There is there is
no this time it's different. We always run into, obviously
periods of cycles and others.
Speaker 1 (42:43):
And you are also, as you mentioned earlier, having a
positive impact. Can you talk a bit about that, I mean,
what's the charity angle.
Speaker 6 (42:50):
Sure, I come from very humble beginning, some of poor
preacher's kid from Boise, Idaho, who did not know this
world existed in any form or fashion. And I've been
very lucky and very blessed to even get the job
at City. If you go back twenty eight years ago,
I kind of stumbled in backwards. I wasn't quite the
mail room, but I was pretty dang close to get
my opportunity, and I've been able to make the most
(43:11):
of the opportunity. But you're lying to yourself, anybody who invests,
anybody who does what we do for a living, if
you don't think luck had a large part of it.
Then you're lying to yourself. And so I think you
have an obligation to try to give back. And you know,
I've set that up my wife's family, her dad's originally
from Peru, was a first generation immigrant and it came
(43:34):
to here and served in the military to kind of
help get a citizenship and others, and so we both
believed in kind of giving back, and we set it
up that way from the beginning. And you know, about
eight years ago, I'd already been involved in charity for
seventeen eighteen years personally, I did a trip to India
(43:54):
on a board i'd recently joined, which was path Global Health,
one of the largest tied to INGOs, tied to back
nations in the Third World, and they do amazing work
seventy plus countries across that And I did this trip
and when you're sitting in Dravi, the largest slum in Mumbai,
working on a tuberculosis program, you get perspective in life
on how lucky you really are. And it was an amazing,
(44:19):
amazing experience. And I came back from that saying, what
else can we do? There's got to be more than
just me doing this on a personal basis, how do
we get others to do more?
Speaker 4 (44:29):
And it started with.
Speaker 6 (44:30):
That idea, it turned into an ask, So an idea
turned into an asked. The ask was I went to
Mike Arraghetti r CEO, and I said, you know, hey, look,
I want to have a charity tie in to this
whatever I do next, because I had resigned from prior
firm and came up with that idea of that ask
of doing something else. And what we came up with
our Pathfinder Family of Funds, which you mentioned at the top,
(44:54):
is at least five to ten percent of the of
the promote of those funds goes across health and education
to it's already accrued over forty million dollars to date.
But the impact and the potential of that is huge
if you just think of the math of that on
funds that you know, across the returns and others. And
we now have over eighteen billion dollars of funds that
(45:15):
are underneath the Pathfinder Family of Funds, and we've always
talked about that and that's been amazing for culture. It's
actually helped inspire a broader areas. Charitable foundation we launched
in twenty twenty one, we launched the first fund on
the other nineteen. I am co chair of the foundation
with Mike Kearragety. Michelle Armstrong helps run that day to
(45:36):
day and if you look at that, it's amazing stuff
we're doing, not just in health and education, but the
foundation is now made over seventy million dollars of grants
across career prep and reskilling, entrepreneurship, and personal finance, having
nothing to do with what we're doing in health and
education for the.
Speaker 4 (45:52):
Pathfinder family of funds.
Speaker 6 (45:54):
So about a year ago, to go to the next
generation of this, we said what else could we do do?
And somebody from our team, Patrick Hugh and Hockom came
to me and said, what what if we got others
to do it? And We've been talking about this for
a while and I've talked to other managers and I've
said you should do this. This is amazing. It totally
brings purpose to everything you're doing. It's amazing for culture
(46:17):
and the team. And I've talked to LPs and said
you should press other people to do this. This would
be really amazing if you could make this a thing.
And what they came up with is this simple idea
of what if it was similar to the giving pledge.
What if you made a pledge to effectively give at
least five percent of your promote on a family of
funds to charity, whether it be health, education, housing, climate,
(46:40):
or others. And over the last year we've been talking
to a whole bunch of other managers out there, and
we just launched. By the time this podcast actually airs,
we'll have launched October fifteenth, Promote Giving, with the double
meaning on the word promote, promote being the percentage of
profits coming out of our pocket, not come out of
investor's pockets that would go towards charity, but also just
(47:05):
the broad idea of promoting giving. How can we kind
of give back in a bigger way? And so we're
hoping we can make this a broader thing, you know,
with our initial our founding signatories that have been great
partners on this, but we hope to add more. We
hope to get more people to kind of do that
same kind of idea.
Speaker 1 (47:22):
Brilliant, very inspiring stuff. Joel Holsinger, co head of Alternative Credit,
thank you so much for joining us on the Credit Edge.
Speaker 4 (47:29):
Thank you for having me.
Speaker 1 (47:29):
I enjoyed this and of course very grateful to David
Havens from Bloomberg Intelligence.
Speaker 2 (47:33):
Cheers grip being with you.
Speaker 1 (47:35):
There are even more great credit market analysis and insight.
Read all of David Havens's great work on the Bloomberg Terminal.
Bloomberg Intelligence is part of our research department, with five
hundred analysts and strategists working across all markets. Coverage includes
over two thousand equities and credits and outlooks on more
than ninety industries and one hundred market industries, currencies and commodities.
Please do subscribe to the Credit Edge wherever you get
(47:57):
your podcasts. We're on Apple, Spotify, and all other good
podcast providers, including the Bloomberg Terminal at b Podgo. Give
us a review, tell your friends, or email me directly
at Jcrombie at Bloomberg dot net. I'm James Crombie. It's
been a pleasure having you joined us again next week
on the Credit Edge
Host
James Crombie
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