December 11, 2025 • 44 mins
KKR is looking to Europe and Japan for yield as US debt spreads grind tighter. “Investors are very focused on relative value in a market where there’s not a lot,” Tal Reback, global investment strategist for the firm’s credit and markets business, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s David Havens in this episode of the Credit Edge podcast. “In general, investors are much more intrigued about how to diversify geographically,” she adds. They also discuss what KKR thinks could be a $1 trillion European asset-backed debt opportunity, private credit default risk, valuations of direct loans, sector bets and business development companies.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to the Credit Edge, a Wiki Monkey's podcasts.
My name is James Crumbie. I'm a senior at Bloomberg.
Speaker 2 (00:24):
And I'm David Haven's, a senior credit analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Tal Reback, global
investment strategists for kkar's three hundred and fifteen billion and
managed assets credit and markets business. Now correct me if
I'm wrong, but I think this segment of KKR includes
more than two hundred and sixty billion dollars of credit
(00:44):
assets with a balance between leveraged and private credit. Is
that right?
Speaker 3 (00:48):
Tal? That is correct? And thank you guys so much
for having me on today.
Speaker 2 (00:52):
Of course, Tal's been to KKAR for nearly a decade
and she has a wide remit spanning platform strategy as
well as engagement with investors, external stakeholders, and policy makers.
She's also a polymath with degrees in economics. In our history, we.
Speaker 1 (01:07):
All get to that, and we have loads of questions.
I just want to start with a big theme for
next year. Supply issuance of all kinds of debt will
probably grow substantially in twenty twenty six, fueled by massive
AI funding needs and a long awaited m and a comeback.
But for years, global investors in credit have been running
short of things to buy, though their appetite for yield
just keeps on growing. That's kept debt spreads very tight
(01:28):
and has meant that the credit cycle just keeps getting extended.
But there is so much complacency out there. Everyone just
assumes that debt demand will grow faster than supply. Bad
stuff happens when a lot of new debt supply gets
created very quickly. If the corporate credit drought ends next year,
will that cause a massive reprice?
Speaker 3 (01:45):
Oh?
Speaker 1 (01:45):
Your still view tell.
Speaker 3 (01:48):
So there's a lot of unpacked there. So maybe we'll
break it down a little bit. You're absolutely right. You know,
we've been in a supply demand pretty acute imbalance for
a while now. But I think on you know, just
in general, like we've already seen the you know, refine
and repricing wave hitting this year alone, so like we've
(02:08):
had a lot of issuance, but net new issuance is
still pretty anemic. And so you're absolutely right that like
everyone's looking to you know, high grade market, leverage, loan market,
high old market, what's going to come next. But the
reality is, and we've talked about this from a KKR perspective,
we need more M and A and I'm I'm happy
that we've seen a bit of a resurgence this year.
(02:30):
You know, in the third quarter alone, we saw almost
a trillion in M and A. A lot of this
has been triggered by strategics in corporates, which is a
big theme that we're watching, and some mega deals, as
you guys know, and they keep hitting the tape. But
until we get net new supply, which means continued increase
in M and A, that's really going to prevent spreads
(02:52):
from kind of normalizing, because right now we still have
a bit of that imbalance with you know, colo demand
eating up sixty plus percent of the left bridge loan market,
a lot of dry powder on the sidelines, you know.
Money markets are approaching almost eight trillion dollars, you know,
so investors are looking for places to park and a cruise,
(03:13):
just some safe in common yield. But the reality is
we're at the tights and we're grinding tighter, and markets
have been up into the left and it's been a
year of a lot of flavors too, So I do
think something's got to give, and as a credit person,
I suspect we may see some bumps in the road ahead,
(03:34):
and maybe that also catalyzes some additional deal making.
Speaker 2 (03:37):
Yeah, Talas, you hit on a couple of things I
was going to ask about. We do seem to be
living in interesting times like the misapplied Chinese curse. Credit
spreads are ridiculously tight, with the IG and High Yield
Index at seventy seven and two hundred and seventy two
basis points, respectively. This puts some probably two or more
(03:58):
standard deviations away for the mean. So trying to put
money to work in this environment, that might be the
curse here. But your firm and others have identified a
vast forty five trillion dollar addressable credit market with you know,
areas that are emerging that pay pay excess spreads. How
(04:18):
do you reconcile the two? How is this going to
work out in twenty twenty six?
Speaker 3 (04:22):
You think, Yeah, it's a great question, And I would
say the first thing is that there is a lot
of capital on the sidelines. While there is a lot
of opportunity. I do think it's really important to continue
to be really disciplined and patient. So that's something that's
really like a core principle of hours that patient capital
(04:44):
will find the right opportunities. And while it can be
frustrating and like you said, it's a blessing and a
curse in order to originate and find the opportunities where
you can source some excess spread. Typically we're going to
see those in the private markets can double click into that.
But that's not to say that they're abundant, right Like
(05:04):
those take time to source, their built on long lasting relationships.
We're seeing the market continue to evolve, and what I
think is really interesting is that you know, issuers and
sponsors alike are more open minded today on the type
of financing and the type of financing structure that they
could put in place depending on what their needs are.
(05:25):
And that's really what's going to create those opportunities where
you either have an i liquidity premium or some access
spread in your pricing, because those types of transactions or
investment opportunities are just not they just don't happen in
the transactional public markets. Now, with that being said, you know,
KKR has been I think, you know, one of the
(05:46):
first to really be in the camp of like public
and private will always coexist. You know, we saw the
headlines for a long time saying syndicated markets were dead.
You know, it's only about direct lending. And the reality
is what we've seen over the last couple of years
is as markets flow ebb and flow, as monetary policy changes,
as we see the macro landscape evolve and change as well,
(06:08):
having different sources and channels for capital is even more
valuable today and that's a global phenomenon. So to answer
your question on where we see opportunity across this forty
five trillion dollar TAM, a lot of that is in
the asset back market. A lot of that is also
transitioning into private investment create opportunities, and that goes back
(06:30):
to some of the themes we're seeing with corporates and issuers,
which we can talk about more. There's always going to
continue to be big LBOs that need to be financed.
Direct lenders are always going to participate in that, and
so are syndicated markets. And it's been really nice to
chart out the activity and see that there's really been
some equilibrium there after rates stopped rising, and so I
(06:53):
think now people look for efficiencies and markets are pretty
efficient too. So I think that really guides the investor
and where we are today is we're being very patient
or being very disciplined. We're lucky to be part of
a really diversified platform where we see a lot of
opportunities across corporate real assets in the credit markets in general.
(07:18):
And with that also we have the ability to kind
of pick and choose our spots and lean in where
we might think there's more of an imbalance and we
could be that liquidity provider.
Speaker 1 (07:27):
How much more can you get paid for going into
the private markets compared to public So we've had that
discussion over the course of this year in that you know,
it started at let's say two hundred basis points more
for ig private versus public. Then it got squeezed and
some people by media was saying it's nothing, not worth it,
And by the end of it we're hearing again that
(07:48):
there's this wider premium. I guess it just depends on
where you look. But I'm interested in your view of
what extra pickup you get for the illiquidity of going
into private markets.
Speaker 3 (07:58):
Sure it it's still around one hundred and fifty to
two hundred basis points. It is highly case and credit
dependent James, So I would say, you know, structure plays
a really big role. Something that I think is actually
even more important than all in price is making sure
your structure is really sound and you're downside protected. And
(08:21):
a lot of these deals and the private investment grade
markets have are very based on as you guys know,
like some type of contract or corporate guarantee. So structure
and call protection is in a way even more important
than your price and not being one or two basis
points smart. But you're still seeing a premium. I do
think you're absolutely correct. As we see more of these transactions,
(08:44):
you know, spread compression is definitely going to happen. The
good thing is these are large and chunky, and I
don't you know, the volume of these is not abundant,
so there takes a lot of work to get these
deals even into play, and that is really the price
and the premium for private market's origination, which I think
sometimes like we miss kind of like the message there.
(09:06):
You know, there's a lot of focus on okay, can
I how much more can I get today? And the
reality is like as we think about it and we
construct a broader portfolio, like we want to get you
a blended excess spread, you know, like that's our goal
is to have performing credits, to construct a highly diversified
portfolio that's income generative and like you know, obviously matches
(09:29):
the risk tolerance depending on what we're doing. But that's
that's the important point is you know, in credit my
the north star is never going to change in terms
of you know, get to principle back and get cube on.
But in the private market you can get some excess
premium in direct lending. You know, we've seen that compress
quite a bit. Again, I think that's a lot of
supply demand also factoring in to what we're seeing in
(09:54):
the broader loan market. So there's a technical aspect to
play a part of. But in the asset and I
would say in the private investment grade market, we're still
seeing that one fifty to two hundred over Yeah.
Speaker 2 (10:05):
I get why investors in particular want that extra one
hundred and fifty to two hundred basis points, particularly if
you're an insurance company. And obviously you guys are are
hooked up with Global Atlantic and we get into that
a little bit more deeply. But I I a question
that a lot of people come to me with is
why are high grade you know, why is why is
(10:29):
power company xyz or consumer products company x y z
uh doing an asset back deal in the private markets
where they're paying this much of a spread premium with
the IG indexit at half of what the spread premium is.
Speaker 3 (10:48):
Fantastic question. And so the you know what we've seen is,
you know, issuers are doing those deals because they want
to work with partners like KKR. They're paying you know,
a little bit extra for the expertise. You know, in
a lot of cases, we think of this, you know,
as a longer term partnership. It's not just about transacting
(11:11):
and executing. This is about potentially playing a strategic role.
Sometimes we sit on the board, you know, there's elements
of governance that we have, you know, from our whole
portfolio private equity portfolio. And so what we've seen and
this this is I think this applies broadly both corporate
and asset back, is that issuers are looking for more
(11:33):
of a strategic capital provider in a partnership as opposed
to just a transactional capital provider. And that is what
distinguishes the deals from just tapping you know, the public
bond market versus you know, working with the likes of
us and thinking through how do I accomplish all these
goals and maybe what how does this play into my
(11:54):
future growth or cappex budgeting, et cetera. And it's a
little bit we take it as step further and that's
really where the premium comes from. And I think that's
that's different than just buying something that's just you know,
out there and available, for example, like in a traded
ETF and that's the premium.
Speaker 1 (12:14):
It sounds quite bespoke. Every transaction must require a lot
of work, though, I'm wondering how scalable it really.
Speaker 3 (12:19):
Is, great question it, you know, I think it's funny
that you phrase it or position it that way. You know,
credit is extremely scalable, and like we talked about the
forty five trillion figure earlier, and these deals have no
cap and no limit. And so while it might be
more efficient sometimes to go through the public markets. And
(12:43):
by the way, it really depends on what the goal
is of the company. No one is you know, pitching
that you should do things for the sake of just
doing them. It's contingent upon like what are we trying
to solve for but absent, you know, just getting you know,
more of a pure vanilla th nancing and you're looking
to do something strategic or maybe it's a spin out,
(13:03):
or maybe it's a corporate carve out. You know, the
addressable market remains quite scalable, and it's scalable because it's
scaled lick capital providers who can actually provide that capital
in scale. So you know, we did care a Doctor
Pepper that we announced not too long ago. That was
a seven billion dollar strategic investment. So these are these
(13:25):
are not small deals. These are sizable. Now, You're right,
it takes a lot of eloped go grease to get
through this. There's it's not it's not the click of
a button. And I'm not insinuating that that's what the
public markets do anyway, but it's a different type of transaction.
And so our job, and we have nearly fifty years
(13:46):
of experience, like working with companies, is really to understand
what are they solving for? And I think you know,
what we've really seen in the last eighteen months is
a higher percent of core of issuers really thinking through Okay,
you know, I need to maximize my margins or I
need to think through the pressure I'm getting from shareholders,
(14:07):
or I'm looking to do this divestiture and solving for
other problems that you know may impact their performance. Or
maybe they're getting shareholder pressure and they can partner with
the likes of people like us who can help them
think through all of that. And so if that's the case,
you know, it's all addressable market. But I think you're
(14:29):
going to see again, just like we saw with direct
lending and broadly syndicated, I think you're going to see
this continued like you know, EBB and flow between the
different financing channels because you don't have to go through
an exhaustive structured equity transaction, for example, if it's not necessary,
but sometimes it absolutely is, and that's the only way
to accomplish all the things you're looking to do. And
(14:52):
again that's super case dependent, and I think it's relevant
to your original question as we started talking about with
data centers in AI, just given the amount of cash
cappax that is needed, right, we've seen big, big numbers
quoted recently north of you know, five hundred billion for
this year and you know those exceeding five trillion by
(15:14):
twenty thirty. Someone's got to fill that gap. And that's
why the partnership between the public markets, the private markets,
the banks, the asset managers, the insurance like, that's where
all of this gets really interesting, and that's something we've
been writing about quite a bit recently.
Speaker 2 (15:31):
Yeah, so it sounds like there's a there's it's a
very wide web, right Like one of the themes that we
talk about with private credit is is just lines are
blurring and it's interconnected that and it's growing. You know,
those things aren't going to change, or at least I
don't think they are. But if I sort of boil
it down into some of the constituents that makes this
(15:51):
attractive to all parties. Is pretty obvious that the excess
spread is attractive to the end investor, whether it be
an insurance company, a pension fund it has, or a
fixed income investor that has a rating requirements. That's obvious
you get that excess spread for the borrower. It sounds
like there are a lot of things that can be
(16:12):
done in the private markets where the public markets are
simply too rigid, And maybe the private markets are more
attractive than the banking markets in some instances because again
there's a rigidity there's a you know, maybe there's a
a some tailoring capabilities that you have that maybe banks
don't have quite as much flexibility with. Oh and the
final thing I was going to say is that we
(16:32):
talk about these these vast capital investments that have to
be made, and it's got to be easier for the
for the corporations themselves to to sort of fund this
UH in a secured form where there's recourse, as opposed
to doing it on balance sheet where they might blow
up some of their credit ratios.
Speaker 3 (16:51):
Totally, I think that's completely spot on, and I think
you hit the nail on the head where you use
the word rigid. And you know, I've been at this
for a while now. I'm I'm not a total veteran,
but like as someone who came into the industry during
you know, after the aftermath of the GFC, like I've
seen things evolve in front of my own two wise
(17:12):
and like you know, more than a decade ago, Like
we're pret MNA fold like a super narrow template right
by with cash BYSTOC finance through the banks, aim fors energies.
What's so cool is like the market's tremendously involved, evolved
and I think that's where I mean, it's really been
a ton of that has been in credit, which you know,
for a credit junkie like me, has been really exciting.
(17:34):
And it's also like cool. You know, equity guys always
get all the attention, so it's kind of cool to
be in the spotlight recently. But you know, I joke
all jokes aside. You know, companies are adopting those new structures,
and like you said, there are things and characteristics that
you might not just be able to tick the box
on through a syndicated solution or you know, through just
(17:57):
going through the broader investment grade public marks and you're right,
recapitalizing balance sheets, thinking about how to structure things off
balance sheet, to optimize capex look through, to be able
to execute acquisition. That's all that's all on their list.
And what's really interesting is that some of the technology
being used, like a sale leads backstructure for example, Like
(18:19):
that's that's not totally new, right, It's just evolved and
now you know, we're more sophisticated and we can customize
it more. So that's what I think is really interesting.
And you know, going back also to what you said,
a big theme we've talked about at KKR here for
a while now is you know, asset heavy, capital heavy
to capital light, and that theme by itself is what's
(18:44):
catalyzing a lot of these investment opportunities and these financings
to happen in the private markets.
Speaker 1 (18:50):
So it's more complex, certainly than the public. Does that
necessarily imply more risk? We just had your co CEO,
Scott that we'll talk about how he expects more defaults
to crop up in private credit as the section normalizes
after a period of you know, quite small losses. Should
we worry about the likelihood of more defaults?
Speaker 3 (19:12):
So? I think James, there's two questions in your question,
if I may break them down, So I think you know,
Scott's absolutely right in highlighting that there will be more
default You know, we've been up until recently a very
benign rate environment, right, It's it's not unexpected that we
will see more challenging situations happen across the market. That
(19:35):
is actually normal. Like we are actually all in the
risk business because our job is to manage risk, and
you don't invest if you're not willing to take some risk. Now,
to address your question on is there more risk in
private markets, Again, it depends on what we're investing in.
Senior secured loans in direct lending is supposed to be
(19:58):
kind of as boring as it gets. It's a pretty
basic lending product. So you have to do you have
to get a lot of things wrong not to get
your money back. Now, that's not to say sometimes like
there's you know, adverse asset selection, things you can't foresee happening.
We've obviously seen everything in the press with first brands
and trycolor like that's that happens. Sometimes those are idiosyncratic,
(20:23):
but we will see dispersion in results. And we've seen
dispersion already in in corporate earnings. They've been you know,
for the most part, pretty fundamentally solid, but we've seen
different sectors go through you know, what we categorize as
these rolling recessions where there's been you know, like look
at retail, look at media, look at leisure, like you've
(20:46):
seen different parts of the economy slow for some time
and they've been working their way through the system, and
so that's going to impact performance. Now it's a I
think the dispersion will come twofold within sectors, within and
you know, credit quality. We've been really focused on making
being up and quality both in our public and private
(21:08):
portfolios to date, and it's going to come in also,
like what area of the market are you playing in
if we want to pick on direct lending. You know,
the middle market is big and so bigger than it
was ten years ago. But there's the upper part of
the middle market, and there's the lower part of the
middle market, and then there's the middle of the middle market.
And so I think that's where we're also seeing results dispersion.
(21:30):
So from a credit perspective, the risks should not be
greater if you go public versus private. Now, if you're
investing in triple c's and the leverage low market versus
private investment grate, that's apples to oranges. But the reality
is this is a credit selection, you know, exercise, it's
a portfolio construction exercise. And then on the point of defaults,
(21:56):
you know, the environment has changed and it would be
unnatural not to see more default and I think that's
you know, that's what we're prepared for and that's our
job right to make sure that we are the preservation
of capital is our job, essentially. Does that answer that
was probably a long wooded answer for your question.
Speaker 1 (22:17):
James, Yeah, I mean that's good. I just talking of dispersion.
I mean there is dispersion in the marks, and that's
worrying people. I mean there's lots of issues people are
worried about in private credit. And I think there's this
sort of sense you know what you what you can't see,
you're immediately suspicious of, So you know there there is
still a lot of concerns, I think, but as you say,
(22:41):
there are many different ways of investing in private credit.
Speaker 3 (22:44):
And those concerns. Look, those concerns are valid. You know,
on on marks. Like many of our peers, we have
a third party valuation provider. We also mark our own books.
Dispersion and valuation typically comes when assets underperform. It's super
to have governance around these things and have a partnership
as you work with independent valuation providers. You need to
(23:06):
know what's happening in the credit. You need to actively
manage the asset. So there's a lot there. But you
know where we've seen things kind of come to a
head in the past is the velocity of price is
typically credit to pendant and it does sometimes move quickly
even to your point. In direct lending, you don't have
(23:27):
that marked market, so you're not seeing the whiplash that
you would that we saw on you know, in April
and the liquid markets after Liberation Day. But if you
hit a liquidity wall, you will see that. So it's
you can't hide, right like you can't ultimately hide in credit,
it's important the team you have, how you manage it,
(23:48):
and being like fully proactive and front footed on it.
And you know, private credit's funny. Private credits defined super broadly.
And so we can talk about direct lending right where
we've seen a lot to do commentary to date, and
then we've got the investment grade market continuing to develop,
and then we've got the ABF market, and so again
I think dispersion of results and also dispersion in valuation
(24:12):
comes a bit from that acid under performance or from
over concentration and overly reaching for risk.
Speaker 2 (24:19):
Right, maybe sticking with this dispersion issue and sort of
sticking with the direct lending in sort of traditional middle
market or non investment grade areas AI is obviously a
big issue. And as we look across some of these
direct loan portfolios at FSKKR and elsewhere, there's a high
proportion of tech loans, or of loans to tech companies,
(24:43):
software companies, service providers, things like that. Those have been
you know, sort of nice recession non cyclical businesses for
the most part. But AI certainly has potential to be
a disruptor. Seems like AI has tremendous potential for you
across us all facets of the credit business, but it
may also disrupt areas.
Speaker 3 (25:05):
It's funny that you mentioned that, you're right, but in reality,
we've been underwriting AI risk for almost six years at
this point. This is something that we've been really kicking
the tires in for a while. You know, I think
it's really in our faces today. But that's something that
again is not totally net new. The spotlights on it, certainly,
(25:28):
but this is something that even I can remember during
COVID we were double clicking and making sure and thinking
through all the permutations of how AI could affect the
business model or you know, earnings for specific credits in
our portfolio. And so you know, we are constantly refreshing
that I would say, as someone who is not a technologist,
(25:49):
we all continue to learn about the capabilities and see
in real time, right the sophistication of these technologies, which
is really cool to be a part of. But that's
something that's been you know, when we go through our
underwriting process like top of mind for some time, and
you know, we've just recently gone through the portfolio and
kind of re underwrote thinking through that lens. And we're
(26:11):
lucky to work with, you know, collaborate with our colleagues
and like our growth technology team to look through kind
of different angles that we might not see from a
credit perspective. And we're feeling like we're being very diligent
and we're doing everything that's in our control to you know,
select the right assets, if you will.
Speaker 1 (26:31):
Do you worry though that there are more deferred interest payments,
more pick, more amendments to existing credit agreements, you know,
that's certainly what we're hearing.
Speaker 3 (26:42):
I mean, yeah, there's we've seen a lot of that
in the markets for some time. And I think James,
you made the joke right, there's there's good pick, and
there's there's bad pick. There's so again there's a there's
different sides. There's two sides to every story, and so
bad pick, right, Like that's something you need to be
mindful of. But certainly good pick is something that we've
(27:04):
seen utilized in the toolkit for some time when we
see stress in general in the market, like that is
something that we've seen happen in prior cycles. And it
does feel like we're in the midst of the like
middle to end of cycle now, right. It's a little
bit I think about white noise versus being totally white knuckle,
(27:27):
Like you know, the market's up with S andp's up
to sixteen percent, NAVZAC up twenty two, Like, where are
we right? Like does that totally feel right? So I
do think it's important to watch all of those credit
indicators just broadly about where we are today across the market.
(27:47):
And it's going back to your original question of like
how do we think or what do we expect in
twenty twenty six, And I do think that is we've
seen a lot of exuberants and so that's something to
really monitor cautious.
Speaker 2 (28:00):
Yeah, exuberants or complacency, I guess, But I guess I
think that gets back to your point you were making
earlier about patient capital and and sort of putting money
to work judiciously.
Speaker 3 (28:11):
Yes, yes, I think that's really like right now, it's
more important than ever, just given where we are. And
sometimes that's that's hard because that means you need to
be hyper disciplined and not you know, succumb to just
deploying for the sake of that. And but that's that's
why I think we are all in the seats that
(28:33):
we're in to make those types of decisions. But I
do think it's a bit unusual, right if you think
about we started the year with like deep seek chaos
and like the market freaked out, and we then we
went through kind of like macro geopolitical liberation day, coming
off of Liberation Day, continued negotiation on tariffs, escalation geopolitic
(29:00):
coming back down. You know, rate cuts. A lot has happened,
you know in this year.
Speaker 1 (29:07):
Yeah, you obviously deal with investors. You talked to them directly,
and I'm wondering what kind of signs you're hearing from
them that they will, you know, continue to love credit
in twenty twenty six. Is there anything out there that
might change that equation.
Speaker 3 (29:22):
Yeah, I think people will continue to love credit, which
is exciting. Where I think investors are focused are continuing
to diversify their credit exposure. So you know, it also
is very thematic with our conversation today, Like once upon
a time, you had very binary allocations to a portfolio.
If you're an alligator, maybe it was just fixed income
(29:44):
and maybe it was public equities. But now you've got
a lot of options. And what we're seeing as a
trend is a lot of investors thinking through how to
conduct more of a multi asset credit portfolio because they
want exposure to corporates, they want exposure to ABFs, they
will on exposure to the financings of data centers, right,
maybe a smidge of real asset exposure. They're structured equity
(30:07):
and capital solutions. That has been really interesting for those
seeking a little more risk premium, and that is where
investors are really intrigued. The other planes, I would say,
in addition to constructing more of a customized credit portfolio,
is expanding exposure allocations to either Europe or Asia. You know,
(30:30):
what we have really seen, I would say twofold this
year is like Europe kind of having its renaissance, if
you will, and pending you know, certain securitization reform and
investments in their own jurisdiction and regions like we've seen
Germany announced like there could be some really interesting investment
opportunities in Europe. Leverage typically sometimes is lower on the
(30:56):
corporate side. We've seen the most active LBO year in
Europe since twenty twenty or in five years. I think
I have to check that step, but I'm pretty sure
this has been a record year for Europe. So a
lot more cross border transactions happening. But in general, investors
much more intrigued about how to diversify geographically, and that's
(31:18):
something that you know, I think is super cool and
definitely was a bit you know, Liberation Day was a
bit of a catalyst for that. But as more investors
learn about, oh I can get single a risk in Japan,
you know, and get a little bit of like a
yield premium there, that's interesting. And so again depends on
(31:40):
what you're looking for, but investors are very focused on
relative value in the market where there's not a lot
of obvious relative value, and so geographic diversification has played
a big role there. Asset type diversification has played a
big role there, being very judicious on how to construct
(32:01):
or balance the portfolio as well. Between Okay, maybe I
want you know, sixty percent direct lending, but I do
want a little bit of spice, and I want to
add some capital solutions or structured equity or some junior debt.
And so again it's like solving for backing into what
you're trying to solve for. But I think the demand
is there. The bigger risk is the supply there, and
(32:24):
can we originate everything that we need to and then
just generally bring it in, bringing it all together and
managing that effectively. That is our that's our job. And
so that's where I kind of see investors really intrigued
and really wanting to learn more and to understand where
they could possibly stay in the same risk bucket, but
(32:48):
diversify where they hadn't done previously.
Speaker 1 (32:51):
And you expect a big revival in European asset backed
markets that's been kind of flat for years. It's really
very very active in the US to accept that, you know,
people are signed to worry about how active it is,
but why Europe abs? Why no?
Speaker 3 (33:06):
So in Europe there is pending EU securitization reform, and
if that reform, which looks like it's trending in the
right direction, happens, that can open up what we estimate
as close to a trillion dollars of high grade ABF
opportunities because insurers today are essentially are penalized from a
(33:27):
capital charge perspective to hold that type of exposure. So
European life insurers only they hold less than one percent
of investments in securitizations versus it's around seventeen percent for
US life insures, despite like the industry size or adjacencies,
and so that's something that is largely on tap today.
(33:48):
The most significant barrier is insolvency to do capital framework
for insurance companies specifically, so pending that reform and if
those rules become less unitive and allow insurance capital to participate,
which from what we're seeing in the financing needs across
the EU, and Drahi had put out a report earlier
(34:11):
talking about the renewed investment in the region right for
large scale projects. Some of that is digital infrastructure and
renewables like we've seen in the US that would be huge,
and so we're watching that really closely. We think that
can be very interesting because it is a little peculiar, right,
like you should be having those types of deals happening
in Europe as well, and so that's where in a
(34:34):
way they're kind of they haven't been open for business yet,
So if we see that all take place, that could
be a very interesting opportunity to lean.
Speaker 1 (34:43):
In autos, is it consumer, is it whole business? What
kind of deals are you expecting?
Speaker 3 (34:49):
I think it's all of the above, plus power solar infrastructure.
That's where I think, you know, we would be circling.
Speaker 1 (34:58):
Also interested in your vis of sectors right now. I
mean you get to see a lot of different things
from you know, industrials, utilities, infrastructure to sports, you know,
the one of so called hottest frontiers for private equity.
I'm interested in where you see relative value. You know,
what kind of you know, products are you're looking at
that that really jump out as opportunities for next year.
Speaker 3 (35:20):
Yeah, so on on the relative value again hard because
it's been it's not been obvious relative value. But we've
we've been leaning into securitized products such as clos looking
to shorter duration credit. Recently, you know, we've seen a
modish we've been doing a modest shift, but really shorter
(35:42):
duration credit. Some of that has really been in high
yield where you know, we are managing a bucket of
credits and there could be you know, an early takeout opportunity,
i e. They pull forward the maturity. And so we've
seen some catalyst type trades and those have been in
like building products and industrial and very blue chip names
(36:05):
essentially where those have come to fruition, which has been
really cool. You know. I think a good example is,
you know, earlier this year, we were invested in energy
producer and it was a yield tours of around seven
and a half percent at the time, and then the
issue where refinanced and they tendered the bonds at one
(36:26):
oh one five ahead of the first call date, and
so that ended up being north of you know, a
ten percent yield. So we've been looking at catalyst type
of event driven trades within specific sectors or credits that
we like and that we've been tracking for a long time.
You know, we tend to avoid secular decliners and and
very cyclical businesses. That's something that you know, that's not
(36:49):
that's not new per se. We've obviously seen weakness and
in autos recently in chemicals you've seen the market react
and you know, in mentally incrementally you know, go wider
on some of these consumer services names and retail. We've
always been pretty light in those areas. So it's really
about for us, we've been adding where we have conviction.
(37:13):
We've been again very patient too, so you know, there's
things are tight, and so like we you have to be,
we're being a bit prudent as well and picking and
choosing our spots. But that's a bit of like a
flavoring across you know, the public markets. And for a
time there was a bit more premium on European leverage
(37:34):
credit where you can have you could get a little
bit of a yield pick up. That's kind of disappeared
at this point, but that's really where you know, for
the most part we've been hanging out these days.
Speaker 1 (37:46):
You mentioned colos, so you like them because you have
a COLO platform, but there is you know, a massive
you know, excitement about them. Generally there's a lot of issuance,
and yet there is concern about the underlying leverage loans,
whether the default rates are higher or so floating rate
assets may not be quite as attractive if the Fed
gets really really dubvish. So I'm wondering if there are
any potential risks in clos that you would you would flag.
Speaker 3 (38:10):
Not really I mean clos you know, post crisis, clos
have been a great place to be. Clos are you know,
north of sixty consumed north of sixty percent of the
leverage loan market. As you know, they've got you know,
really stringent rules this you know, stringent triple C seven
percent basket and so where you could see disbursion again
(38:30):
back in depending on on COLO performances, really on what
Triple c's are those clos invested in, and so that
that's again that's going to be super manager dependent. But
clos are fairly resilient vehicles and they're an important part
of the ecosystem. You know, people have liked being invested
in COLO equity and in triple a's. That's been a
(38:52):
really strong spot to be in. Obviously Triple a's are
at the tights too, So nothing particular that we would
call out. I think it really comes down again to
like the asset selection within the portfolio.
Speaker 1 (39:03):
What positive credit markets globally the most excited about for
next year?
Speaker 3 (39:07):
Oh, I would say, I'm really I'm excited about Asia
investment grade in the liquid markets. I'm excited about high
grade ABF in the European market. If everything we talked
about comes to fruition or starts to trend and accelerate.
I continue to be excited about the growth of capital solutions,
(39:31):
both in sub investment grade and investment grade opportunities, because
I do think corporates are leaning into partnering with investors
who can help them be strategic and thinking through what
they can accomplish through the right structure and right capital provider.
(39:53):
And that to me is really exciting because we see
a lot of that at KKR, and I think that's
where you're real strives an evolution in the market, and
that provides an opportunity to be really creative and to
really provide value and help create value in a way
that goes beyond just writing a check. And so that
(40:15):
makes me really excited.
Speaker 1 (40:17):
Is there a product or an act class or a
region do you think that you are very positive on
and the rest of the market isn't, or another contrarian
view that you highlight.
Speaker 3 (40:26):
I think the I think the broader market is underestimating
Asia liquid markets and the you know, I think that's
one misnomer where you think Asia means emerging market and
it means risk, or it means property development and it
means distress, debt but I think there's actually a lot
(40:47):
of very high quality and I mentioned Japan earlier, like
japan Japanese financials for example, Like I think there's that's
an area where if you are willing to go under
the hood and you want to find some relative value
and not take a lot of incremental risk, like that
could be really interesting. Like you know, high yield and
(41:08):
investment great performance in the region has been really outperformed
this year, and so that's an area that I think
is kind of overlooked. And then again I would say
just the continued you know what private origination could potentially
provide in the US because it's it's not an OTC product,
and so that to me are those would be my
(41:29):
two areas.
Speaker 1 (41:30):
And what gives you pause, where's the where's the frost
or where's the worry in danger for next year?
Speaker 3 (41:36):
So if we stranger danger to really round out the
credit and be true to our personalities, yere is, it
does feel exuberant out there, you know, I think it
doesn't totally feel right that, like, you know, there's there's
a lot of things still happening on the micro level
(41:57):
that don't feel like they're reflected in the broader in
disease or just in the sentiment. And so I think
it's easy to get caught up in like big headlines
and kind of miss the forest through the trees. And
so I go back to kind of being like, we
should scrutinize everything, right because markets are terribly efficient, but
(42:20):
nothing is. Nothing is that easy. So it does feel
a little peculiar to me, and we still have a
supply demand problem. Spreads are really tight, but it's you
know that that feels a little unnatural. So that's where
you know, if I had a crystal ball, I would
be I'd probably be off on a private beach somewhere
(42:42):
because I would know everything. So it just that's my
gut feeling. But obviously, you know, time will.
Speaker 1 (42:48):
Tell that with late cycle and potentially something bad happens.
Speaker 3 (42:51):
Sounded maybe not, Yeah, we're late cycle. I don't want
to like be alarmist and bad happens, But I think
you have to be super aware and alert, and I
think you have to kick the tires. I think you
have to go deeper. I think you have to be
more selective and more patient. And I would argue that
you should probably be higher in quality right now. Versus
(43:13):
the opposite, and and be patient. That's what I would say.
Speaker 1 (43:19):
Great stuff. I'll readback Global Investment Strateges at KKR. Thank
you so much for being on the Credit Edge. Thank you,
and of course very grateful to David Havens from Bloomberg Intelligence.
Cheers for even more 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
(43:40):
over two thousand equities and credits and outlooks on more
than ninety industries and one hundred market indices, currencies and commodities.
Please do subscribe to the Credit Edge wherever you get
your podcasts. We're on Apple, Spotify and all other good
podcast providers, including the Bloomberg Terminal at bpod Go. Give
us a review, tell your friends, or email me directly
at j crumby eight at Bloomberg dot nets. I'm James Crombie.
(44:02):
It's been a pleasure having you join us again next
week on the Credit Edge.
Hello, and welcome to the Credit Edge, a Wiki Monkey's podcasts.
My name is James Crumbie. I'm a senior at Bloomberg.
Speaker 2 (00:24):
And I'm David Haven's, a senior credit analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Tal Reback, global
investment strategists for kkar's three hundred and fifteen billion and
managed assets credit and markets business. Now correct me if
I'm wrong, but I think this segment of KKR includes
more than two hundred and sixty billion dollars of credit
(00:44):
assets with a balance between leveraged and private credit. Is
that right?
Speaker 3 (00:48):
Tal? That is correct? And thank you guys so much
for having me on today.
Speaker 2 (00:52):
Of course, Tal's been to KKAR for nearly a decade
and she has a wide remit spanning platform strategy as
well as engagement with investors, external stakeholders, and policy makers.
She's also a polymath with degrees in economics. In our history, we.
Speaker 1 (01:07):
All get to that, and we have loads of questions.
I just want to start with a big theme for
next year. Supply issuance of all kinds of debt will
probably grow substantially in twenty twenty six, fueled by massive
AI funding needs and a long awaited m and a comeback.
But for years, global investors in credit have been running
short of things to buy, though their appetite for yield
just keeps on growing. That's kept debt spreads very tight
(01:28):
and has meant that the credit cycle just keeps getting extended.
But there is so much complacency out there. Everyone just
assumes that debt demand will grow faster than supply. Bad
stuff happens when a lot of new debt supply gets
created very quickly. If the corporate credit drought ends next year,
will that cause a massive reprice?
Speaker 3 (01:45):
Oh?
Speaker 1 (01:45):
Your still view tell.
Speaker 3 (01:48):
So there's a lot of unpacked there. So maybe we'll
break it down a little bit. You're absolutely right. You know,
we've been in a supply demand pretty acute imbalance for
a while now. But I think on you know, just
in general, like we've already seen the you know, refine
and repricing wave hitting this year alone, so like we've
(02:08):
had a lot of issuance, but net new issuance is
still pretty anemic. And so you're absolutely right that like
everyone's looking to you know, high grade market, leverage, loan market,
high old market, what's going to come next. But the
reality is, and we've talked about this from a KKR perspective,
we need more M and A and I'm I'm happy
that we've seen a bit of a resurgence this year.
(02:30):
You know, in the third quarter alone, we saw almost
a trillion in M and A. A lot of this
has been triggered by strategics in corporates, which is a
big theme that we're watching, and some mega deals, as
you guys know, and they keep hitting the tape. But
until we get net new supply, which means continued increase
in M and A, that's really going to prevent spreads
(02:52):
from kind of normalizing, because right now we still have
a bit of that imbalance with you know, colo demand
eating up sixty plus percent of the left bridge loan market,
a lot of dry powder on the sidelines, you know.
Money markets are approaching almost eight trillion dollars, you know,
so investors are looking for places to park and a cruise,
(03:13):
just some safe in common yield. But the reality is
we're at the tights and we're grinding tighter, and markets
have been up into the left and it's been a
year of a lot of flavors too, So I do
think something's got to give, and as a credit person,
I suspect we may see some bumps in the road ahead,
(03:34):
and maybe that also catalyzes some additional deal making.
Speaker 2 (03:37):
Yeah, Talas, you hit on a couple of things I
was going to ask about. We do seem to be
living in interesting times like the misapplied Chinese curse. Credit
spreads are ridiculously tight, with the IG and High Yield
Index at seventy seven and two hundred and seventy two
basis points, respectively. This puts some probably two or more
(03:58):
standard deviations away for the mean. So trying to put
money to work in this environment, that might be the
curse here. But your firm and others have identified a
vast forty five trillion dollar addressable credit market with you know,
areas that are emerging that pay pay excess spreads. How
(04:18):
do you reconcile the two? How is this going to
work out in twenty twenty six?
Speaker 3 (04:22):
You think, Yeah, it's a great question, And I would
say the first thing is that there is a lot
of capital on the sidelines. While there is a lot
of opportunity. I do think it's really important to continue
to be really disciplined and patient. So that's something that's
really like a core principle of hours that patient capital
(04:44):
will find the right opportunities. And while it can be
frustrating and like you said, it's a blessing and a
curse in order to originate and find the opportunities where
you can source some excess spread. Typically we're going to
see those in the private markets can double click into that.
But that's not to say that they're abundant, right Like
(05:04):
those take time to source, their built on long lasting relationships.
We're seeing the market continue to evolve, and what I
think is really interesting is that you know, issuers and
sponsors alike are more open minded today on the type
of financing and the type of financing structure that they
could put in place depending on what their needs are.
(05:25):
And that's really what's going to create those opportunities where
you either have an i liquidity premium or some access
spread in your pricing, because those types of transactions or
investment opportunities are just not they just don't happen in
the transactional public markets. Now, with that being said, you know,
KKR has been I think, you know, one of the
(05:46):
first to really be in the camp of like public
and private will always coexist. You know, we saw the
headlines for a long time saying syndicated markets were dead.
You know, it's only about direct lending. And the reality
is what we've seen over the last couple of years
is as markets flow ebb and flow, as monetary policy changes,
as we see the macro landscape evolve and change as well,
(06:08):
having different sources and channels for capital is even more
valuable today and that's a global phenomenon. So to answer
your question on where we see opportunity across this forty
five trillion dollar TAM, a lot of that is in
the asset back market. A lot of that is also
transitioning into private investment create opportunities, and that goes back
(06:30):
to some of the themes we're seeing with corporates and issuers,
which we can talk about more. There's always going to
continue to be big LBOs that need to be financed.
Direct lenders are always going to participate in that, and
so are syndicated markets. And it's been really nice to
chart out the activity and see that there's really been
some equilibrium there after rates stopped rising, and so I
(06:53):
think now people look for efficiencies and markets are pretty
efficient too. So I think that really guides the investor
and where we are today is we're being very patient
or being very disciplined. We're lucky to be part of
a really diversified platform where we see a lot of
opportunities across corporate real assets in the credit markets in general.
(07:18):
And with that also we have the ability to kind
of pick and choose our spots and lean in where
we might think there's more of an imbalance and we
could be that liquidity provider.
Speaker 1 (07:27):
How much more can you get paid for going into
the private markets compared to public So we've had that
discussion over the course of this year in that you know,
it started at let's say two hundred basis points more
for ig private versus public. Then it got squeezed and
some people by media was saying it's nothing, not worth it,
And by the end of it we're hearing again that
(07:48):
there's this wider premium. I guess it just depends on
where you look. But I'm interested in your view of
what extra pickup you get for the illiquidity of going
into private markets.
Speaker 3 (07:58):
Sure it it's still around one hundred and fifty to
two hundred basis points. It is highly case and credit
dependent James, So I would say, you know, structure plays
a really big role. Something that I think is actually
even more important than all in price is making sure
your structure is really sound and you're downside protected. And
(08:21):
a lot of these deals and the private investment grade
markets have are very based on as you guys know,
like some type of contract or corporate guarantee. So structure
and call protection is in a way even more important
than your price and not being one or two basis
points smart. But you're still seeing a premium. I do
think you're absolutely correct. As we see more of these transactions,
(08:44):
you know, spread compression is definitely going to happen. The
good thing is these are large and chunky, and I
don't you know, the volume of these is not abundant,
so there takes a lot of work to get these
deals even into play, and that is really the price
and the premium for private market's origination, which I think
sometimes like we miss kind of like the message there.
(09:06):
You know, there's a lot of focus on okay, can
I how much more can I get today? And the
reality is like as we think about it and we
construct a broader portfolio, like we want to get you
a blended excess spread, you know, like that's our goal
is to have performing credits, to construct a highly diversified
portfolio that's income generative and like you know, obviously matches
(09:29):
the risk tolerance depending on what we're doing. But that's
that's the important point is you know, in credit my
the north star is never going to change in terms
of you know, get to principle back and get cube on.
But in the private market you can get some excess
premium in direct lending. You know, we've seen that compress
quite a bit. Again, I think that's a lot of
supply demand also factoring in to what we're seeing in
(09:54):
the broader loan market. So there's a technical aspect to
play a part of. But in the asset and I
would say in the private investment grade market, we're still
seeing that one fifty to two hundred over Yeah.
Speaker 2 (10:05):
I get why investors in particular want that extra one
hundred and fifty to two hundred basis points, particularly if
you're an insurance company. And obviously you guys are are
hooked up with Global Atlantic and we get into that
a little bit more deeply. But I I a question
that a lot of people come to me with is
why are high grade you know, why is why is
(10:29):
power company xyz or consumer products company x y z
uh doing an asset back deal in the private markets
where they're paying this much of a spread premium with
the IG indexit at half of what the spread premium is.
Speaker 3 (10:48):
Fantastic question. And so the you know what we've seen is,
you know, issuers are doing those deals because they want
to work with partners like KKR. They're paying you know,
a little bit extra for the expertise. You know, in
a lot of cases, we think of this, you know,
as a longer term partnership. It's not just about transacting
(11:11):
and executing. This is about potentially playing a strategic role.
Sometimes we sit on the board, you know, there's elements
of governance that we have, you know, from our whole
portfolio private equity portfolio. And so what we've seen and
this this is I think this applies broadly both corporate
and asset back, is that issuers are looking for more
(11:33):
of a strategic capital provider in a partnership as opposed
to just a transactional capital provider. And that is what
distinguishes the deals from just tapping you know, the public
bond market versus you know, working with the likes of
us and thinking through how do I accomplish all these
goals and maybe what how does this play into my
(11:54):
future growth or cappex budgeting, et cetera. And it's a
little bit we take it as step further and that's
really where the premium comes from. And I think that's
that's different than just buying something that's just you know,
out there and available, for example, like in a traded
ETF and that's the premium.
Speaker 1 (12:14):
It sounds quite bespoke. Every transaction must require a lot
of work, though, I'm wondering how scalable it really.
Speaker 3 (12:19):
Is, great question it, you know, I think it's funny
that you phrase it or position it that way. You know,
credit is extremely scalable, and like we talked about the
forty five trillion figure earlier, and these deals have no
cap and no limit. And so while it might be
more efficient sometimes to go through the public markets. And
(12:43):
by the way, it really depends on what the goal
is of the company. No one is you know, pitching
that you should do things for the sake of just
doing them. It's contingent upon like what are we trying
to solve for but absent, you know, just getting you know,
more of a pure vanilla th nancing and you're looking
to do something strategic or maybe it's a spin out,
(13:03):
or maybe it's a corporate carve out. You know, the
addressable market remains quite scalable, and it's scalable because it's
scaled lick capital providers who can actually provide that capital
in scale. So you know, we did care a Doctor
Pepper that we announced not too long ago. That was
a seven billion dollar strategic investment. So these are these
(13:25):
are not small deals. These are sizable. Now, You're right,
it takes a lot of eloped go grease to get
through this. There's it's not it's not the click of
a button. And I'm not insinuating that that's what the
public markets do anyway, but it's a different type of transaction.
And so our job, and we have nearly fifty years
(13:46):
of experience, like working with companies, is really to understand
what are they solving for? And I think you know,
what we've really seen in the last eighteen months is
a higher percent of core of issuers really thinking through Okay,
you know, I need to maximize my margins or I
need to think through the pressure I'm getting from shareholders,
(14:07):
or I'm looking to do this divestiture and solving for
other problems that you know may impact their performance. Or
maybe they're getting shareholder pressure and they can partner with
the likes of people like us who can help them
think through all of that. And so if that's the case,
you know, it's all addressable market. But I think you're
(14:29):
going to see again, just like we saw with direct
lending and broadly syndicated, I think you're going to see
this continued like you know, EBB and flow between the
different financing channels because you don't have to go through
an exhaustive structured equity transaction, for example, if it's not necessary,
but sometimes it absolutely is, and that's the only way
to accomplish all the things you're looking to do. And
(14:52):
again that's super case dependent, and I think it's relevant
to your original question as we started talking about with
data centers in AI, just given the amount of cash
cappax that is needed, right, we've seen big, big numbers
quoted recently north of you know, five hundred billion for
this year and you know those exceeding five trillion by
(15:14):
twenty thirty. Someone's got to fill that gap. And that's
why the partnership between the public markets, the private markets,
the banks, the asset managers, the insurance like, that's where
all of this gets really interesting, and that's something we've
been writing about quite a bit recently.
Speaker 2 (15:31):
Yeah, so it sounds like there's a there's it's a
very wide web, right Like one of the themes that we
talk about with private credit is is just lines are
blurring and it's interconnected that and it's growing. You know,
those things aren't going to change, or at least I
don't think they are. But if I sort of boil
it down into some of the constituents that makes this
(15:51):
attractive to all parties. Is pretty obvious that the excess
spread is attractive to the end investor, whether it be
an insurance company, a pension fund it has, or a
fixed income investor that has a rating requirements. That's obvious
you get that excess spread for the borrower. It sounds
like there are a lot of things that can be
(16:12):
done in the private markets where the public markets are
simply too rigid, And maybe the private markets are more
attractive than the banking markets in some instances because again
there's a rigidity there's a you know, maybe there's a
a some tailoring capabilities that you have that maybe banks
don't have quite as much flexibility with. Oh and the
final thing I was going to say is that we
(16:32):
talk about these these vast capital investments that have to
be made, and it's got to be easier for the
for the corporations themselves to to sort of fund this
UH in a secured form where there's recourse, as opposed
to doing it on balance sheet where they might blow
up some of their credit ratios.
Speaker 3 (16:51):
Totally, I think that's completely spot on, and I think
you hit the nail on the head where you use
the word rigid. And you know, I've been at this
for a while now. I'm I'm not a total veteran,
but like as someone who came into the industry during
you know, after the aftermath of the GFC, like I've
seen things evolve in front of my own two wise
(17:12):
and like you know, more than a decade ago, Like
we're pret MNA fold like a super narrow template right
by with cash BYSTOC finance through the banks, aim fors energies.
What's so cool is like the market's tremendously involved, evolved
and I think that's where I mean, it's really been
a ton of that has been in credit, which you know,
for a credit junkie like me, has been really exciting.
(17:34):
And it's also like cool. You know, equity guys always
get all the attention, so it's kind of cool to
be in the spotlight recently. But you know, I joke
all jokes aside. You know, companies are adopting those new structures,
and like you said, there are things and characteristics that
you might not just be able to tick the box
on through a syndicated solution or you know, through just
(17:57):
going through the broader investment grade public marks and you're right,
recapitalizing balance sheets, thinking about how to structure things off
balance sheet, to optimize capex look through, to be able
to execute acquisition. That's all that's all on their list.
And what's really interesting is that some of the technology
being used, like a sale leads backstructure for example, Like
(18:19):
that's that's not totally new, right, It's just evolved and
now you know, we're more sophisticated and we can customize
it more. So that's what I think is really interesting.
And you know, going back also to what you said,
a big theme we've talked about at KKR here for
a while now is you know, asset heavy, capital heavy
to capital light, and that theme by itself is what's
(18:44):
catalyzing a lot of these investment opportunities and these financings
to happen in the private markets.
Speaker 1 (18:50):
So it's more complex, certainly than the public. Does that
necessarily imply more risk? We just had your co CEO,
Scott that we'll talk about how he expects more defaults
to crop up in private credit as the section normalizes
after a period of you know, quite small losses. Should
we worry about the likelihood of more defaults?
Speaker 3 (19:12):
So? I think James, there's two questions in your question,
if I may break them down, So I think you know,
Scott's absolutely right in highlighting that there will be more
default You know, we've been up until recently a very
benign rate environment, right, It's it's not unexpected that we
will see more challenging situations happen across the market. That
(19:35):
is actually normal. Like we are actually all in the
risk business because our job is to manage risk, and
you don't invest if you're not willing to take some risk. Now,
to address your question on is there more risk in
private markets, Again, it depends on what we're investing in.
Senior secured loans in direct lending is supposed to be
(19:58):
kind of as boring as it gets. It's a pretty
basic lending product. So you have to do you have
to get a lot of things wrong not to get
your money back. Now, that's not to say sometimes like
there's you know, adverse asset selection, things you can't foresee happening.
We've obviously seen everything in the press with first brands
and trycolor like that's that happens. Sometimes those are idiosyncratic,
(20:23):
but we will see dispersion in results. And we've seen
dispersion already in in corporate earnings. They've been you know,
for the most part, pretty fundamentally solid, but we've seen
different sectors go through you know, what we categorize as
these rolling recessions where there's been you know, like look
at retail, look at media, look at leisure, like you've
(20:46):
seen different parts of the economy slow for some time
and they've been working their way through the system, and
so that's going to impact performance. Now it's a I
think the dispersion will come twofold within sectors, within and
you know, credit quality. We've been really focused on making
being up and quality both in our public and private
(21:08):
portfolios to date, and it's going to come in also,
like what area of the market are you playing in
if we want to pick on direct lending. You know,
the middle market is big and so bigger than it
was ten years ago. But there's the upper part of
the middle market, and there's the lower part of the
middle market, and then there's the middle of the middle market.
And so I think that's where we're also seeing results dispersion.
(21:30):
So from a credit perspective, the risks should not be
greater if you go public versus private. Now, if you're
investing in triple c's and the leverage low market versus
private investment grate, that's apples to oranges. But the reality
is this is a credit selection, you know, exercise, it's
a portfolio construction exercise. And then on the point of defaults,
(21:56):
you know, the environment has changed and it would be
unnatural not to see more default and I think that's
you know, that's what we're prepared for and that's our
job right to make sure that we are the preservation
of capital is our job, essentially. Does that answer that
was probably a long wooded answer for your question.
Speaker 1 (22:17):
James, Yeah, I mean that's good. I just talking of dispersion.
I mean there is dispersion in the marks, and that's
worrying people. I mean there's lots of issues people are
worried about in private credit. And I think there's this
sort of sense you know what you what you can't see,
you're immediately suspicious of, So you know there there is
still a lot of concerns, I think, but as you say,
(22:41):
there are many different ways of investing in private credit.
Speaker 3 (22:44):
And those concerns. Look, those concerns are valid. You know,
on on marks. Like many of our peers, we have
a third party valuation provider. We also mark our own books.
Dispersion and valuation typically comes when assets underperform. It's super
to have governance around these things and have a partnership
as you work with independent valuation providers. You need to
(23:06):
know what's happening in the credit. You need to actively
manage the asset. So there's a lot there. But you
know where we've seen things kind of come to a
head in the past is the velocity of price is
typically credit to pendant and it does sometimes move quickly
even to your point. In direct lending, you don't have
(23:27):
that marked market, so you're not seeing the whiplash that
you would that we saw on you know, in April
and the liquid markets after Liberation Day. But if you
hit a liquidity wall, you will see that. So it's
you can't hide, right like you can't ultimately hide in credit,
it's important the team you have, how you manage it,
(23:48):
and being like fully proactive and front footed on it.
And you know, private credit's funny. Private credits defined super broadly.
And so we can talk about direct lending right where
we've seen a lot to do commentary to date, and
then we've got the investment grade market continuing to develop,
and then we've got the ABF market, and so again
I think dispersion of results and also dispersion in valuation
(24:12):
comes a bit from that acid under performance or from
over concentration and overly reaching for risk.
Speaker 2 (24:19):
Right, maybe sticking with this dispersion issue and sort of
sticking with the direct lending in sort of traditional middle
market or non investment grade areas AI is obviously a
big issue. And as we look across some of these
direct loan portfolios at FSKKR and elsewhere, there's a high
proportion of tech loans, or of loans to tech companies,
(24:43):
software companies, service providers, things like that. Those have been
you know, sort of nice recession non cyclical businesses for
the most part. But AI certainly has potential to be
a disruptor. Seems like AI has tremendous potential for you
across us all facets of the credit business, but it
may also disrupt areas.
Speaker 3 (25:05):
It's funny that you mentioned that, you're right, but in reality,
we've been underwriting AI risk for almost six years at
this point. This is something that we've been really kicking
the tires in for a while. You know, I think
it's really in our faces today. But that's something that
again is not totally net new. The spotlights on it, certainly,
(25:28):
but this is something that even I can remember during
COVID we were double clicking and making sure and thinking
through all the permutations of how AI could affect the
business model or you know, earnings for specific credits in
our portfolio. And so you know, we are constantly refreshing
that I would say, as someone who is not a technologist,
(25:49):
we all continue to learn about the capabilities and see
in real time, right the sophistication of these technologies, which
is really cool to be a part of. But that's
something that's been you know, when we go through our
underwriting process like top of mind for some time, and
you know, we've just recently gone through the portfolio and
kind of re underwrote thinking through that lens. And we're
(26:11):
lucky to work with, you know, collaborate with our colleagues
and like our growth technology team to look through kind
of different angles that we might not see from a
credit perspective. And we're feeling like we're being very diligent
and we're doing everything that's in our control to you know,
select the right assets, if you will.
Speaker 1 (26:31):
Do you worry though that there are more deferred interest payments,
more pick, more amendments to existing credit agreements, you know,
that's certainly what we're hearing.
Speaker 3 (26:42):
I mean, yeah, there's we've seen a lot of that
in the markets for some time. And I think James,
you made the joke right, there's there's good pick, and
there's there's bad pick. There's so again there's a there's
different sides. There's two sides to every story, and so
bad pick, right, Like that's something you need to be
mindful of. But certainly good pick is something that we've
(27:04):
seen utilized in the toolkit for some time when we
see stress in general in the market, like that is
something that we've seen happen in prior cycles. And it
does feel like we're in the midst of the like
middle to end of cycle now, right. It's a little
bit I think about white noise versus being totally white knuckle,
(27:27):
Like you know, the market's up with S andp's up
to sixteen percent, NAVZAC up twenty two, Like, where are
we right? Like does that totally feel right? So I
do think it's important to watch all of those credit
indicators just broadly about where we are today across the market.
(27:47):
And it's going back to your original question of like
how do we think or what do we expect in
twenty twenty six, And I do think that is we've
seen a lot of exuberants and so that's something to
really monitor cautious.
Speaker 2 (28:00):
Yeah, exuberants or complacency, I guess, But I guess I
think that gets back to your point you were making
earlier about patient capital and and sort of putting money
to work judiciously.
Speaker 3 (28:11):
Yes, yes, I think that's really like right now, it's
more important than ever, just given where we are. And
sometimes that's that's hard because that means you need to
be hyper disciplined and not you know, succumb to just
deploying for the sake of that. And but that's that's
why I think we are all in the seats that
(28:33):
we're in to make those types of decisions. But I
do think it's a bit unusual, right if you think
about we started the year with like deep seek chaos
and like the market freaked out, and we then we
went through kind of like macro geopolitical liberation day, coming
off of Liberation Day, continued negotiation on tariffs, escalation geopolitic
(29:00):
coming back down. You know, rate cuts. A lot has happened,
you know in this year.
Speaker 1 (29:07):
Yeah, you obviously deal with investors. You talked to them directly,
and I'm wondering what kind of signs you're hearing from
them that they will, you know, continue to love credit
in twenty twenty six. Is there anything out there that
might change that equation.
Speaker 3 (29:22):
Yeah, I think people will continue to love credit, which
is exciting. Where I think investors are focused are continuing
to diversify their credit exposure. So you know, it also
is very thematic with our conversation today, Like once upon
a time, you had very binary allocations to a portfolio.
If you're an alligator, maybe it was just fixed income
(29:44):
and maybe it was public equities. But now you've got
a lot of options. And what we're seeing as a
trend is a lot of investors thinking through how to
conduct more of a multi asset credit portfolio because they
want exposure to corporates, they want exposure to ABFs, they
will on exposure to the financings of data centers, right,
maybe a smidge of real asset exposure. They're structured equity
(30:07):
and capital solutions. That has been really interesting for those
seeking a little more risk premium, and that is where
investors are really intrigued. The other planes, I would say,
in addition to constructing more of a customized credit portfolio,
is expanding exposure allocations to either Europe or Asia. You know,
(30:30):
what we have really seen, I would say twofold this
year is like Europe kind of having its renaissance, if
you will, and pending you know, certain securitization reform and
investments in their own jurisdiction and regions like we've seen
Germany announced like there could be some really interesting investment
opportunities in Europe. Leverage typically sometimes is lower on the
(30:56):
corporate side. We've seen the most active LBO year in
Europe since twenty twenty or in five years. I think
I have to check that step, but I'm pretty sure
this has been a record year for Europe. So a
lot more cross border transactions happening. But in general, investors
much more intrigued about how to diversify geographically, and that's
(31:18):
something that you know, I think is super cool and
definitely was a bit you know, Liberation Day was a
bit of a catalyst for that. But as more investors
learn about, oh I can get single a risk in Japan,
you know, and get a little bit of like a
yield premium there, that's interesting. And so again depends on
(31:40):
what you're looking for, but investors are very focused on
relative value in the market where there's not a lot
of obvious relative value, and so geographic diversification has played
a big role there. Asset type diversification has played a
big role there, being very judicious on how to construct
(32:01):
or balance the portfolio as well. Between Okay, maybe I
want you know, sixty percent direct lending, but I do
want a little bit of spice, and I want to
add some capital solutions or structured equity or some junior debt.
And so again it's like solving for backing into what
you're trying to solve for. But I think the demand
is there. The bigger risk is the supply there, and
(32:24):
can we originate everything that we need to and then
just generally bring it in, bringing it all together and
managing that effectively. That is our that's our job. And
so that's where I kind of see investors really intrigued
and really wanting to learn more and to understand where
they could possibly stay in the same risk bucket, but
(32:48):
diversify where they hadn't done previously.
Speaker 1 (32:51):
And you expect a big revival in European asset backed
markets that's been kind of flat for years. It's really
very very active in the US to accept that, you know,
people are signed to worry about how active it is,
but why Europe abs? Why no?
Speaker 3 (33:06):
So in Europe there is pending EU securitization reform, and
if that reform, which looks like it's trending in the
right direction, happens, that can open up what we estimate
as close to a trillion dollars of high grade ABF
opportunities because insurers today are essentially are penalized from a
(33:27):
capital charge perspective to hold that type of exposure. So
European life insurers only they hold less than one percent
of investments in securitizations versus it's around seventeen percent for
US life insures, despite like the industry size or adjacencies,
and so that's something that is largely on tap today.
(33:48):
The most significant barrier is insolvency to do capital framework
for insurance companies specifically, so pending that reform and if
those rules become less unitive and allow insurance capital to participate,
which from what we're seeing in the financing needs across
the EU, and Drahi had put out a report earlier
(34:11):
talking about the renewed investment in the region right for
large scale projects. Some of that is digital infrastructure and
renewables like we've seen in the US that would be huge,
and so we're watching that really closely. We think that
can be very interesting because it is a little peculiar, right,
like you should be having those types of deals happening
in Europe as well, and so that's where in a
(34:34):
way they're kind of they haven't been open for business yet,
So if we see that all take place, that could
be a very interesting opportunity to lean.
Speaker 1 (34:43):
In autos, is it consumer, is it whole business? What
kind of deals are you expecting?
Speaker 3 (34:49):
I think it's all of the above, plus power solar infrastructure.
That's where I think, you know, we would be circling.
Speaker 1 (34:58):
Also interested in your vis of sectors right now. I
mean you get to see a lot of different things
from you know, industrials, utilities, infrastructure to sports, you know,
the one of so called hottest frontiers for private equity.
I'm interested in where you see relative value. You know,
what kind of you know, products are you're looking at
that that really jump out as opportunities for next year.
Speaker 3 (35:20):
Yeah, so on on the relative value again hard because
it's been it's not been obvious relative value. But we've
we've been leaning into securitized products such as clos looking
to shorter duration credit. Recently, you know, we've seen a
modish we've been doing a modest shift, but really shorter
(35:42):
duration credit. Some of that has really been in high
yield where you know, we are managing a bucket of
credits and there could be you know, an early takeout opportunity,
i e. They pull forward the maturity. And so we've
seen some catalyst type trades and those have been in
like building products and industrial and very blue chip names
(36:05):
essentially where those have come to fruition, which has been
really cool. You know. I think a good example is,
you know, earlier this year, we were invested in energy
producer and it was a yield tours of around seven
and a half percent at the time, and then the
issue where refinanced and they tendered the bonds at one
(36:26):
oh one five ahead of the first call date, and
so that ended up being north of you know, a
ten percent yield. So we've been looking at catalyst type
of event driven trades within specific sectors or credits that
we like and that we've been tracking for a long time.
You know, we tend to avoid secular decliners and and
very cyclical businesses. That's something that you know, that's not
(36:49):
that's not new per se. We've obviously seen weakness and
in autos recently in chemicals you've seen the market react
and you know, in mentally incrementally you know, go wider
on some of these consumer services names and retail. We've
always been pretty light in those areas. So it's really
about for us, we've been adding where we have conviction.
(37:13):
We've been again very patient too, so you know, there's
things are tight, and so like we you have to be,
we're being a bit prudent as well and picking and
choosing our spots. But that's a bit of like a
flavoring across you know, the public markets. And for a
time there was a bit more premium on European leverage
(37:34):
credit where you can have you could get a little
bit of a yield pick up. That's kind of disappeared
at this point, but that's really where you know, for
the most part we've been hanging out these days.
Speaker 1 (37:46):
You mentioned colos, so you like them because you have
a COLO platform, but there is you know, a massive
you know, excitement about them. Generally there's a lot of issuance,
and yet there is concern about the underlying leverage loans,
whether the default rates are higher or so floating rate
assets may not be quite as attractive if the Fed
gets really really dubvish. So I'm wondering if there are
any potential risks in clos that you would you would flag.
Speaker 3 (38:10):
Not really I mean clos you know, post crisis, clos
have been a great place to be. Clos are you know,
north of sixty consumed north of sixty percent of the
leverage loan market. As you know, they've got you know,
really stringent rules this you know, stringent triple C seven
percent basket and so where you could see disbursion again
(38:30):
back in depending on on COLO performances, really on what
Triple c's are those clos invested in, and so that
that's again that's going to be super manager dependent. But
clos are fairly resilient vehicles and they're an important part
of the ecosystem. You know, people have liked being invested
in COLO equity and in triple a's. That's been a
(38:52):
really strong spot to be in. Obviously Triple a's are
at the tights too, So nothing particular that we would
call out. I think it really comes down again to
like the asset selection within the portfolio.
Speaker 1 (39:03):
What positive credit markets globally the most excited about for
next year?
Speaker 3 (39:07):
Oh, I would say, I'm really I'm excited about Asia
investment grade in the liquid markets. I'm excited about high
grade ABF in the European market. If everything we talked
about comes to fruition or starts to trend and accelerate.
I continue to be excited about the growth of capital solutions,
(39:31):
both in sub investment grade and investment grade opportunities, because
I do think corporates are leaning into partnering with investors
who can help them be strategic and thinking through what
they can accomplish through the right structure and right capital provider.
(39:53):
And that to me is really exciting because we see
a lot of that at KKR, and I think that's
where you're real strives an evolution in the market, and
that provides an opportunity to be really creative and to
really provide value and help create value in a way
that goes beyond just writing a check. And so that
(40:15):
makes me really excited.
Speaker 1 (40:17):
Is there a product or an act class or a
region do you think that you are very positive on
and the rest of the market isn't, or another contrarian
view that you highlight.
Speaker 3 (40:26):
I think the I think the broader market is underestimating
Asia liquid markets and the you know, I think that's
one misnomer where you think Asia means emerging market and
it means risk, or it means property development and it
means distress, debt but I think there's actually a lot
(40:47):
of very high quality and I mentioned Japan earlier, like
japan Japanese financials for example, Like I think there's that's
an area where if you are willing to go under
the hood and you want to find some relative value
and not take a lot of incremental risk, like that
could be really interesting. Like you know, high yield and
(41:08):
investment great performance in the region has been really outperformed
this year, and so that's an area that I think
is kind of overlooked. And then again I would say
just the continued you know what private origination could potentially
provide in the US because it's it's not an OTC product,
and so that to me are those would be my
(41:29):
two areas.
Speaker 1 (41:30):
And what gives you pause, where's the where's the frost
or where's the worry in danger for next year?
Speaker 3 (41:36):
So if we stranger danger to really round out the
credit and be true to our personalities, yere is, it
does feel exuberant out there, you know, I think it
doesn't totally feel right that, like, you know, there's there's
a lot of things still happening on the micro level
(41:57):
that don't feel like they're reflected in the broader in
disease or just in the sentiment. And so I think
it's easy to get caught up in like big headlines
and kind of miss the forest through the trees. And
so I go back to kind of being like, we
should scrutinize everything, right because markets are terribly efficient, but
(42:20):
nothing is. Nothing is that easy. So it does feel
a little peculiar to me, and we still have a
supply demand problem. Spreads are really tight, but it's you
know that that feels a little unnatural. So that's where
you know, if I had a crystal ball, I would
be I'd probably be off on a private beach somewhere
(42:42):
because I would know everything. So it just that's my
gut feeling. But obviously, you know, time will.
Speaker 1 (42:48):
Tell that with late cycle and potentially something bad happens.
Speaker 3 (42:51):
Sounded maybe not, Yeah, we're late cycle. I don't want
to like be alarmist and bad happens, But I think
you have to be super aware and alert, and I
think you have to kick the tires. I think you
have to go deeper. I think you have to be
more selective and more patient. And I would argue that
you should probably be higher in quality right now. Versus
(43:13):
the opposite, and and be patient. That's what I would say.
Speaker 1 (43:19):
Great stuff. I'll readback Global Investment Strateges at KKR. Thank
you so much for being on the Credit Edge. Thank you,
and of course very grateful to David Havens from Bloomberg Intelligence.
Cheers for even more 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
(43:40):
over two thousand equities and credits and outlooks on more
than ninety industries and one hundred market indices, currencies and commodities.
Please do subscribe to the Credit Edge wherever you get
your podcasts. We're on Apple, Spotify and all other good
podcast providers, including the Bloomberg Terminal at bpod Go. Give
us a review, tell your friends, or email me directly
at j crumby eight at Bloomberg dot nets. I'm James Crombie.
(44:02):
It's been a pleasure having you join us again next
week on the Credit Edge.
Host
James Crombie
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