March 6, 2025 • 44 mins
Private credit is getting squeezed by excess demand for limited deals, but AllianceBernstein says it will continue to pay more than publicly traded debt. “Even as base rates have come in, that premium remains fairly persistent,” said Matthew Bass, the firm’s head of private alternatives. “If the premium gets too small, then as an investor, you’re going to start to question: ‘Why am I locking my capital up?’,” Bass tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Tolu Alamutu in the latest Credit Edge podcast. Bass and Alamutu also discuss recovery in commercial real estate, asset-based finance opportunities by sector and the advent of exchange-traded funds for private debt.
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Episode Transcript
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Speaker 1 (00:18):
Hello, Welcome to the Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Totlu Alamutu as senior and list covering real
estate and some banks at Bloomberg Intelligence. This week, we
are very pleased to welcome Matthew Bass, who is the
head of Private Alternatives at Alliance Bernstein. How are you, Matt,
doing well?
Speaker 3 (00:40):
Totally? Thanks for having me joined today, James, Great to
see you again as well.
Speaker 2 (00:45):
Great to have you here, Matt. Matt is Alliance Bernstein's
head of Private Alternatives, overseeing assets under management of sixty
five billion dollars, part of the firm's total eight hundred
and nine billion dollars in aum. Private alternatives include corporate
direct lending, commercial real estate, asset based finance, and opportunistic investing.
Speaker 1 (01:11):
Great, so, Matt, thanks for coming on the show. Just
to set the scene a little bit here before we
start talking. Markets are getting whipswored by trade wars, inflation
and growth fears, as well as a whole load of
alarming developments on the geopolitical front. Companies have got used
to paying more for their debt, higher for longer is
assumed at this point, but credit markets are pricing in
very low odds of a US recession, which is being
talked about a lot more now that consumers seem to
(01:32):
be weakening. Corporate debt spreads have widened over the last week,
just by a little bit, but they're still very well
below long term averages. Market pricing still projects a fair
amount of calm. Nothing much to worry about here, but
news headlines show the exact opposite, from radical policy shifts
by the US government to ongoing military conflict, stubborn inflation,
(01:52):
and sliding consumer confidence, plus a ton of uncertainty about
what the FED does next on rates. In the face
of that growing wall of worry, there does seem to
be complacency in markets, and we continue to see robust
investor demand for corporate bonds and loans, especially in the US,
and not a lot of net new supply that more
than anything, I think, is keeping spreads quite tight. And
then on the sidelines or maybe the star of the show,
(02:15):
the private credit golden aze, just seems to go on.
So Matt, what is your take. Should we focus more
on the pro growth talk of the new administration, or
do we need to worry about the trade wars, about
the policy shifts, about the geopolitical headwinds, and should those
be more in the price.
Speaker 3 (02:30):
I think we've certainly got a lot in the press
now to talk about relating to the administration, tariffs, et cetera. Look,
I think there's a significant amount of uncertainty in the
market today. And look, you know, kind of stepping back,
you know, one of the you know, we've got a
business that we built at Alliance Bernstein really over the
past ten to fifteen years. It's kind of focused in
(02:52):
private credit across asset classes. You know, the reason we
built this. One of the main benefits of investing in
private credit, putting aside premium you could generate from a
yield perspective, is the direct origination and better risk control.
So even so, especially in environments like this, these are
situations where you want to be closer to the bar
(03:13):
or where you want to be able to conduct more
in depth due diligence, control your own destiny. Kind of
reasons to be investing in private markets right, speaking to
markets just like this.
Speaker 2 (03:23):
Today, Matt, one of the issues you were talking about,
you know, changing environments and regulation and so on. As
regulation is one of the issues I think that is
coming up. So last week we saw some headlines about
the SEC looking into private credit ETFs. There's obviously a
number of issues around disclosure and liquidity and so on.
(03:47):
What's your view on potential increase in regulatory's scrutiny And
do you think that the growth of private credit will
come from retail or do you think it's more the
institutions assigning more to this asset class that will drive
the next sort of stage for this part of the
(04:07):
of our industry.
Speaker 3 (04:09):
Yeah. Sure. Just to put in perspective, I think you've
got a longer broader secular trend in place, which is
really a share shift of how credit is provided in
the market globally between banks, capital markets, and private investors.
So what we've seen over time is an increased interest
(04:29):
behalf of private capital. So the reasons for that one
from a borrower perspective, You've got increased flexibility and certainty
of execution, and borrowers are willing to pay up for
access to that capital. So there's a real entrenched driver
in terms of the supply of private credit. The demand side,
(04:51):
as you asked about, you know, initially this was an
institutionally driven market. So let's put that in perspective. Pre
financial crisis, Global antil crisis, the market for corporate private
credit was about one hundred and fifty billion in size.
It's about a trillion and a half today, about the
same size as the high yield market and leverage loan market.
They're all about equal, so that that growth has largely
(05:15):
been driven by institutional investors and increasingly retail investors. So
as you look at the the ETF Private credit ETF
as an example, it's another vehicle to utilize to expand
private credit delivery into a broader retail investor base. Now
(05:35):
they're they're positives of that, they're negatives of that. You know,
I always kind of anchor back to major concern being
a potential mismatch and liquidity. Right, as a private credit investor,
you have the benefit of being able to go really
deep from a due diligence perspective, structure appropriate covenants, and
(05:56):
have control of a transaction should things go. A key
part of that risk mitigation is also the longer term
nature of the investors and having long term locked up capital.
So to extent we go away from that into retail
offering liquidity. It's just a concern that I think market
(06:18):
participants need to be mindful of in terms of that mismatch.
Speaker 2 (06:21):
Yeah, that was going to be my follow up question because,
as you mentioned, providing that liquidity at the retail level
might be an issue. But maybe we can talk about
the borrowers a little bit, because you've said that in
some cases they might want to go to the private
credit market and sort of shun all the scrutiny of
(06:43):
public credit markets. But one of the things that we've
seen in the last twelve to eighteen months is that
public markets have become much more receptive to even some
of the riskier borrowers. So we have a couple of
borrowers in European real estate, for instance, that wouldn't have
dreamt of coming back to the market eighteen months ago
because they are deeply high yield, highly levered, and so on.
(07:07):
But they've been able to come to the market this year.
So do you think that the demand from the borrowers
is still there even though public credit markets are less
strained than they were twelve eighteen months ago.
Speaker 3 (07:21):
Sure, total, and you're talking to you know, their cyclical
and secular factors at play here. So from a cyclical perspective,
as public capital markets recover, as investor interest increases, right,
there will be kind of an ebb and flow there
on the public side, and public markets tend to get
more aggressive and more conservative, right, So you know that's
(07:43):
cyclical that that's going to remain kind of a key
component between what is the share shift between public and
private execution From from a secular perspective, you got to
anchor to, you know, what are the tangible benefits to
a borrower in diversifying its verses of financing. So you
take you look at what happened on the back of
(08:04):
the rapid rise in rates we saw a few years
ago and how that impacted various specially financed non bank
lenders that might have been really reliant on one source
of financing that is a securitization market. That market is fickle,
it shuts down, and they lose access to the lifeblood
of their business, which is capital. So from a you know,
(08:26):
from a secular long term perspective, that's one of the
roles private capital plays and allowing these borrowers to diversify
their sources of capital to become you know, again more
more steady access across across different parts of the market cycle.
Speaker 2 (08:41):
Yeah. So one of the issues that's also come up,
and you sort of alluded to it earlier, was banks
as providers of capital. So we've seen headlines saying that
JP Morgan is assigning tens of billions to direct lending.
How do you view banks increased interest? I guess in
this part of the market, do you view them as
(09:02):
competitors or as collaborators.
Speaker 3 (09:05):
It's a symbiotic relationship. So banks have been so what
you're talking about right now is specific to corporate private credits.
So banks have been lenders to corporates, you know, forever
now that that level of involvement started to decrease post
(09:25):
RTC and certainly post Financial Crisis, given the regulatory reform
that got put in place that led to the growth
of the corporate private credit market. That said, banks are
still active players in that market. In addition to providing loans,
they provide other variable, valuable ancillary services to these borrowers,
should be cash management, payroll, et cetera. I think what
(09:47):
you're seeing now is just an evolution of that relationship
where banks are increasingly partnering with private capital as a
way to diversify their source funding. Right, in addition to deposits,
let's partner with with private capital so we could provide
solutions to our borrowers. We might be able to provide
(10:08):
you know, public broadly syndicated loan execution on one hand,
let's let's also have a private solution as well, so
the partnership facilitates that.
Speaker 1 (10:17):
But all this is not terribly new, is it. I mean,
you know, for years, large investment films have been sort
of almost going direct to borrows and you know, lending
them money. I mean, it's it's sort of old school lending.
But what seems we knew is in term sort of
growth in some cases rebranding of parts of the market
is private. I'm wondering, you know, given the huge growth
(10:37):
some of the guests called it at a thirty to
forty trillion dollar market, what are the risks in that?
I mean, anything that grows that big that first seems
to have risk. Are we missing something there?
Speaker 3 (10:50):
Yes, large numbers have been have been cited, but let's
let's kind of step back right. First, it was the
corporate credit market, which was almost entirely bank intermediated, and
that market had a very small private footprint, you know,
pre financial crisis about one hundred and fifty billion. As
I mentioned, that's trullion and a half today. So that growth,
(11:13):
of course came with net new growth of debt capital,
but it was largely driven by a share shift from
bank and capital markets. That was you know, I think
of an initial phase of disintermediation and kind of rebalancing
of how companies finance themselves between bank capital markets and
private capital. It's only a small part of the overall economy. Right,
(11:35):
corporate credit, you're missing commercial real estate, residential real estate,
consumer finance. These are all asset classes that historically have
been financed by banks in the securitization market that's now
opening up to private capital. Right. Key driver of that
as well is insurance, and that many of these asset
(11:56):
classes are investment grade in nature and fit well on
insurance its balance sheet. So it's very natural for the
growth of the market to expand significantly because we're moving
beyond corporate private private credit. And whether it's forty billion,
twenty billion, the number is almost irrelevant. Trillion, it's forty trillion,
(12:19):
ten billion, the number is almost irrelevant. It's going to
it should be orders of magnitude larger than the corporate market,
which is consistent with its contribution to the overall economy.
Speaker 1 (12:28):
I guess my question should then be more focused on
just direct lending and the excess demand for limited number
of deals. We've had conversations along the lines of, yes,
you know, as long as you are pro as long
as you've got some experience, you know what you're doing,
you'll be fine. But all this new money, you know,
this potentially tourist money, may not be doing those those
great deals. They may be getting themselves into trouble. Risk
could be building because it's private, we can't see it.
(12:49):
Is that Is that a concern futile?
Speaker 3 (12:51):
There's definitely been significant flow of capital into the market
if you talk about corporate direct lending specifically, A lot
of that has gone into the upper part of the
middle market and issuers who have both public and private
execution alternatives. So I think you're going to see some
volatility of share shift between those markets based on how
(13:12):
open the public capital markets are. We're seeing that today
and a lot of deals that were done by private
credit over the past twelve months are being you know,
refinanced in the public market. So I think I think
you're gonna you're you're going to you're gonna see that
that's going to be relatively cyclical from a risk perspective. Look,
I think there are advantages that private capital has. One
(13:35):
locked up nature of the capital, right, the primary risk
outside of lending to good companies is effectively matching your
assets and liabilities private capital, given the structure of these funds,
even the retail funds having certain liquidity gates and tender mechanisms,
do pretty good job of matching assets and liabilities. If
(13:55):
you're able to do that, you could really focus on
making good loans to good companies. And another benefit in
that regard that that private credit investors have is is
just the the the fee structure, the incentive structure. Many
of these funds have incentive fees which naturally align compensation
(14:16):
and with performance and the underlying manager as well, which
you don't typically get at banks and or public market.
Speaker 1 (14:23):
Okay, you're also kind of, you know, having to take
a long term view on these on these borrowers, which
for macro reasons that we've discussed you know, earlier in
the podcast, are quite difficult because of you know, the
very turbulent policymaking and and all the other things that
are going on. Is that complicating your your investment decisions
(14:43):
and the process around it, Like, how can you see
very far into the future given all of the all
of the volatility.
Speaker 3 (14:50):
Yeah, we try to focus on on cash flows, fundamental
cash flows. So if that means on the corporate side,
focusing on companies that have very diversified revenue base, could
have long term contracts in place, high degree of recurring revenue,
predictable cost structures, less reliant on consumer spending, more reliant
(15:10):
on corporate op x as opposed to capex. So it
gets down to the nature of the cash flows that
we're underwriting outside of corporate. If you're looking at the
asset based space broadly, if that's residential, consumer, et cetera,
many of these cash flows are shorter duration in nature.
(15:31):
Their loan portfolios, they're amortizing rapidly, you're not depending on
sale of an asset to get your money back. So
I think these are these are benefits, the shorter duration,
the kind of nature of the revenue, the defense of
nature of the revenue.
Speaker 2 (15:47):
One of the issues that we're facing in the public
market is that yields have basically come down a lot,
what spreads have tightened a lot as well? In I
guess return in the private credit market aren't maybe as
significant as they were a couple of years ago. So
(16:07):
can you maybe talk about what type of returns you're
expecting this year? And so linked to that has been
the issue of a potential rise in defaults because rates
stay higher for longer. Is that a concern in the
issuers that you look at or does private credit allow
(16:28):
you to manage those potential defaults in a different way.
Speaker 3 (16:33):
Yeah? Sure, So let's hit the default credit quality point second.
But I want to address your question on spread. So
private market will follow public markets. So just that we've
seen significant spread compression in public markets, private markets are
not immune. You know, if you look at the corporate
middle market direct lending pricing there. I look at our business,
(16:57):
our portfolio, we're roughly one hundred base points inside of
of where we were at this time last year, just
looking at overall spread on new investments. Of course you
have SOFA coming down as well. You put the two together,
what might have been an unlevered twelve percent gross return
is probably closer to ten today, Still very attractive double
(17:19):
digit return profile relative to what you can get in
the public markets. Plus you have that the downside protection
from direct origination, ability to structure documents, get covenant protection,
et cetera. So you know, pricing pricings certainly come in
(17:39):
and you know there will be a floor in many
instances because not all of these borrowers have access to
the public markets. So I see, you know, you're seeing
probably more extreme spread compression at the larger end of
the middle market where many of these borrowers have access
open access to the broadly syndicated loan markets, so that
(18:00):
that will put more pressure on pricing.
Speaker 2 (18:03):
And then on defaults. You are going to talk about
those yep.
Speaker 3 (18:06):
Yeah, look from from a default perspective, I look at
the past five years, and it hasn't been an environment
without stress. Right. We went through COVID. We know what
what impact that had on commercial real estate, hospitality assets
as an example, and we went through, you know, an
extremely rapid rise in rates from zero to five hundred
(18:28):
basis points and the impact that had on you know,
cost of borrowing, cap rates, and valuations and commercial real
estate in particular. So you know, there have been pockets
of severe stress over the past five years. I think
it's tested the market. Look, look, ultimately you will have
issuers with with borrowers, and that's why you're set up
(18:50):
much more effectively to proactively manage those risks as a
private investor. So getting access one to information ahead of time,
so you can identify where stresses might be emerging or
could be emerging in the future. Right should that be
you know the impact of higher rates on companies borrowing costs.
Being able to use that information to engage with a
(19:14):
sponsor or owner in advance of of of really an
issue becoming to the point where there's a you know,
payment default as an example. So you know we're able
to get ahead of issues, right, you can't. You can't
necessarily avoid it. You try to make good credit decisions.
But if you're able to do that with good access
(19:35):
to information to get ahead of potential credit issues, engage
with the owner. And two very important is as I
mentioned earlier, the patience you have. You're not a forced seller,
So anything you do from a fun structure perspective that
could put you into a position where you might have
to sell assets to repay to source liquidity for redeeming
(20:00):
investors or repay leverage is what you need to avoid
in these situations. If you have the time and you've
made good credit decisions, you're going to be able to
work through assets, especially as a creditor with a you know,
significant equity cushion below you.
Speaker 1 (20:13):
So in direct lending right now to a US corporation,
how much more would you get by doing it private
as an investor compared to public markets.
Speaker 3 (20:21):
Yeah, Look, there's a pretty persistent illiquidity premium one hundred
and fifty two hundred basis points. And even as rates
both spreads base rates have come in that premiums remain
fairly persistent historically. Now, now that's just the gross premium
you're going to get, you know, I do want you've
got to focus on the downside protection as well. And look,
(20:46):
the data proves it out from a historical default perspective
and recoveries, defaults being low, recoveries being higher. Investing in
privately versus public markets. But intuitively that makes sense. You
are able to conduct much more robust diligence, You're able
to have much better access to management. Right you are
(21:07):
typically the only lender, if not member of a smaller
like minded club of lenders as opposed to a large syndicate. Right,
that all is very beneficial from us that.
Speaker 1 (21:17):
Some people would say that the default cycle hasn't really
you know, you haven't had one that hasn't been the test.
You haven't had a recession. So how can you prove
that data? I mean, are you going to find out
when when the economy turns down? Yeah?
Speaker 3 (21:28):
No, I mean it's back to my point. I think
the past five years you've had some real pockets of stress.
It hasn't been a traditional garden variety recession. You know,
we had COVID and we had a rapid rise in raids.
But you know what, what did the impact of those
two events had one? You know, the source of revenue
for many borrowers shut off overnight if you're you know
(21:49):
a hotel as an example, right, and you know cost
of borrowing cash flow, you know, massive impact given the
rise in rates. I think we've been through a pretty
stressful ironment.
Speaker 1 (22:00):
Okay, And so this one fifty to two hundred base
point premium for private against public do you think that
holds on the liquidity premium alone? Do you think we're
going to get squashed as everyone pals in more with
the private side.
Speaker 3 (22:13):
Look, I think there's an element of if that premium
gets too small, then as an investor, you're going to
start to question why am I locking my capital up?
So I think there's a self correcting mechanism.
Speaker 1 (22:28):
Yeah.
Speaker 3 (22:28):
Probably. One of the reasons it's been so historical, been
so you know, consistent historically, is.
Speaker 1 (22:34):
That one hundred basis points that's too low. I mean,
what's what's the level that people jump out to.
Speaker 3 (22:38):
Yeah, no, I think that one hundred and fifty to
two hundred basis point level is good. Now that that's
only for now. Private credit the universe and the definition
of what is private credit is expanding, you reference, you know,
some of those large numbers earlier. Key driver behind the
growth of the market is also the expansion of investment
(23:01):
great private credit, where in some instances you're getting a
fifty basis point pick up to what you can get
in the corporate high yield market and higher. So as
you move up quality, that that that premium that that
you need.
Speaker 1 (23:15):
Well, so sorry, this one fifty that applies to just
high yield, is it?
Speaker 3 (23:19):
I'm thinking of that as in the context of corporate
direct lend and what that spread premium has been historically interesting.
Speaker 2 (23:26):
Okay, Matt, you mentioned the pandemic, and definitely it did
lead to some almost shocking or valuations in real estate
in particular, which you've also mentioned, not just hotels or offices,
but even residential even though we stay safe as houses
(23:46):
and so when we've seen some residential landlords come under
very significant strain. Looking at the real estate sector now
at Alion Spernstein, do you still see opportunity given how
much of a recovery we've seen, at least in the
public market, or do you think that it's run its
course and it's time to be looking at other sectors.
(24:08):
Now that's for real estate in general, and I have
another question on offices after maybe.
Speaker 3 (24:13):
Yeah. So commercial real estate is a global markets, very
local market, so you really can't paint it with one
broad brush. So, plus, there are differences in investment opportunities,
ranging from on the credit side, on the dead side,
financing cash flowing stabilized core properties, all through investing in
(24:35):
opportunistic assets, buying assets at a discount, et cetera. So
from a market perspective, we're certainly a bottoming in a recovery.
Right you look at how open. The capital markets are
for financing commercial real estate, in particular high quality assets.
You look at transaction volume, you look at property valuations.
(24:56):
Really across asset classes where we're seeing a recovery, you
kind of step back and look under the hood. There.
You take office as an example, there still is a
bifurcation in terms of in that asset class. You have
high quality, new vintage, highly immanetized buildings, which are highly
(25:19):
financible capital markets today, public and private. You compare that
with with older office buildings, which still might be in
a challenging situation from a leasing current future leasing perspective,
that will continue to have challenges.
Speaker 2 (25:34):
You basically sound quite positive on the outlook for select
office real estate, if I can say that. But one
of the issues I guess with those high quality, super
efficient newer buildings is that everyone seems to be looking
at them. So the margins, I guess might be squeezed,
(25:56):
the returns might be much lower. So at what point
do you think people will start to look at those
sort of see lower tier offices and other real estate
because the returns on the top tier are so squeezed.
Speaker 3 (26:14):
Yeah, I mean, look from our perspective, We've got a
global strategy. We've got a footprint in the US and Europe,
so we finance across property types, and we also have
the flexibility to provide both on the performing, high quality
(26:35):
you know, core core plus type of financing all the
way through opportunistic. So I think important in the market
particular today is having a broad strategy. You're not focused
on one particular asset class, where you could really pivot
to where where the opportunity is and where you see
the best relative value for your investors.
Speaker 2 (26:54):
Another question, also focused on real estate. You mentioned obviously
you are a truly global player, but a lot of
the comparison this day these days has been US versus
the rest of the world. So considering the real estate sector,
where do you think the greater opportunity is within the
US or maybe there are other geographies where people should
(27:17):
be looking at private credit real estate.
Speaker 3 (27:20):
Yes, so on the real estate side, again, I would
anchor back to the markets being extremely local. Local location matters,
But I think Europe is an interesting place to be
right now from a commercial real estate debt perspective. It
is a market that is less efficient than the US
in terms of providers of capital right, So you get
(27:43):
a benefit there. Now, I think you've still given that
smaller you know, kind of universe of private capital suppliers
you can you know, on the margin those transactions, you know,
get get better structure, get better terms, better covenants in place.
Again a supply demand dynamic which makes you know you're
(28:03):
particularly attractive. You know that that's that that's that's one.
That's one perspective.
Speaker 2 (28:07):
And just within Europe, are there specific countries that ALIGNE
spent ting has been looking at or sub sectors maybe.
I mean we've seen quite a significant recovery in the
more sector in shopping for instance, and we even had
one issue where upgraded recently. Is that an area that
you're looking at or is it more at the offices
(28:30):
that we mentioned.
Speaker 3 (28:31):
Yeah, I would say, just stepping back, we we do
have a broad mandate in terms of end market. It's
one of the areas that we we have found attractive
continue to find attractive. You know, speaking of Europe, is
is in multifamily particular assisted living. So you've got real
benefit you know, tailwind aging population as individuals move from
(28:57):
single family homes, uh and and progress. Right, there's there's
an attractive supply demand imbalance and the assisted living side.
We think that's an interesting space from a commercial real
estate perspective.
Speaker 2 (29:09):
And within assisted living, are there specific countries that you
think offer greater opportunity than others. The other issue with
assisted living is the amount of regulation of course, so
there are standard of course in terms of the type
of facility and so on, and sometimes I guess that
can affect your margins. Is that a concern when you're
(29:30):
looking at these social housing? Were those types of housing provided?
Speaker 3 (29:34):
Yeah, all all concerns. Look in terms of all things
we focus on. In terms of the markets, I would say,
you know, UK is the largest, but we gotta we
have a full European footprint. We actively look at opportunities
in the continent as well.
Speaker 1 (29:51):
How do you stay ahead of the competition? What's your
edge in terms of you know, private alternatives because everyone
wants to be there. I think Globin Lusty said that
there's any going to be ten players left. After all
it gets shaken out and everybody's acquiring and everybody's you know,
trying to scale up.
Speaker 3 (30:10):
What do you do and look, it starts with the
experience we have in the market, so you know our business,
you know We largely built that from scratch over a
period of fifteen years through a combination of team liftouts,
build outs, main acquisition. About two years ago, Carballe Investors
(30:31):
rebranded ab Carbal Investors. So it starts with having kind
of the quality of the team investment process, your ability
to source differentiated transactions and kind of execute them on
a consistent basis. So, you know, having that team focus
and that that coverage across markets, right, that allows us
(30:52):
to you know, grow our relationship with borrowers, execute on
repeat business and grow the business. Right the reality is over.
You know, from time to time transactions we're looking at
will will rhyme. We'll see similar types of companies, issuers, industries, controversies,
(31:13):
and our experience gives us an edge in the market,
right in terms of past transactions.
Speaker 2 (31:20):
In that context, do you still think that there's room
for so called niche or small players, because I guess
one of the issues with being an asset manager of
your size approaching a trillion a UM, potentially one of
the issues might be that you can't be as nimble
as some others, and perhaps in terms of the size
(31:45):
of the opportunity for an opportunity to really make a
difference to your overall return, it has to be quite
a significant one. So do you think there's there's still
a room for these niche asset manager or do you
think we'll continue to see consolidation in the sector.
Speaker 3 (32:04):
I always think that. I think you're always going to
have certain asset classes that are more niche, more limited
capacity in nature that you know, warrant smaller specialist firms.
I think that's going to remain true. I think the
other trend that you have in the market is, you know,
as we talked about, one of the key drivers of
(32:24):
the growth in private credit broadly and the growth of
corporate private credit, the expansion beyond corporate private credit to
asset based finance is you know, growth in retail and
particular growth in uh A insurance capital. So the insurance
side in particular, given that you're focused on investment grade
(32:45):
private credit and it's a larger part of the overall
capital structure, leads to larger scale and to be a
relevant provider of capital in that market. I do think
you need you need to be larger. Right You're providing
solutions to borrowers that include everything from investment grade execution
through opportunistic, and I think that that does lead to
(33:07):
needing a larger platform to stay competitive. So I think
you can have both trends, Like you're still going to
have very successful specialist niche firms that stick to their
domain focus manage capacity effectively, and on the other end,
you're going to have growth of larger private credit firms
(33:28):
across asset classes with the client base from you know,
insurance through through institutional and investment grade through opportunistic, which
necessitates I think the larger scale to compete effectively.
Speaker 1 (33:43):
Then going back to where we started about ETFs, do
they really make sense for this? I mean there's no liquidity, really,
no daily liquidity, So how can an ETF work in
private credit?
Speaker 3 (33:52):
The ETF rapper has various advantages, Now, how successful will
it be in private credit? I think that's an open question.
One concern I have as you start to introduce more
and more liquidity to private credit, to illiquid investments, and
(34:13):
the provider of that liquidity is going to need to
be compensated, how much of that illiquidity premium gets eroded?
And then just from an investor's perspective, are you better
off in that vehicle or are you better off taking
public exposure in a pure form. So we talked about
what is the right Where does the illiquidity premium settle out?
(34:37):
I think it's going to be determined by the end investor,
and what extra form of compensation in terms of yielder
return you need to generate for locking your capital up.
Speaker 2 (34:48):
I think there's a view I guess that the lines
might become increasingly bled between public and private, which goes
to your point about being adequately compensated to go from
one to the other. So maybe maybe that's sort of
one of the risks. But what would you say keeps
(35:09):
you up at night most looking at alternative credit? Would
it be that, as in bloodlines between private and public
or are there other risks that you think that one
should be aware of.
Speaker 3 (35:23):
Yes, so we talk a lot. There is a lot
of talk about the blurring line between public and private.
That the reality for issuers of a certain size, you
always had that alternative right to choose between public execution
and private execution. So what we've seen over the past
(35:45):
three or so years at the large end of the
corporate private credit market is an example of that. Issuers
have access to both broadly syndicated markets, private markets, and
you know, while there are benefit fits to private execution
in terms of speed, certainty, structural flexibility, when the public
(36:06):
capital markets are open, the investor demand is there and
the pricing makes sense, those issuers will make logical economic decisions.
So I think that that blur, that that gray space continues,
in particular for larger issuers. We saw it in corporate,
You're going to see it in other forms of asset
(36:29):
that asset based finance. You know, if it's a non bank,
specially finance company looking to finance its origination, do you
focus on the capital markets, curitization markets, private financing, bank financing,
It's probably a combination of all three different percentages based
on where you are in the cycle. So I think
(36:49):
that I think that continues.
Speaker 1 (36:52):
What kind of questions your clients ask you when you're fundraising?
I mean, what do they do they get private credit? Now?
Is it so well known that I mean, I still
get a lot of confusion, and so what kind of
questions are they asking you?
Speaker 3 (37:02):
Yeah, no, look to to the to the earlier point.
We do get the question what what keeps you up
at nights? A natural question, I think, you know, for
for me, it gets back to UH, liquidity and ensuring
that you know, we as private investors are effectively matching
(37:22):
assets and liability. That the beauty of this asset class
is the time it gives you right to work out
of issues should should should they come to should should
you have them on the credit side. So as as
we're growing in retail, look, by the way, there there
the retail vehicles that we have today, the interval funds,
(37:44):
public non traded BDCs. They have the structural features in place,
if it's maximum percentage of shares that could be tendered,
or quarterly gates that are designed to protect existing investors.
And if we if we look at what happened with
b read as an example, you know, the the vehicle
(38:06):
kind of proved its efficacy. Now uh, you know, the
vehicle proved its efficacy and in terms of protecting and
the current investors and and gating at the appropriate level
in terms of other themes as we engage with clients
that there's definitely uh, there has been a shift in
(38:27):
focus on liquidity, right that that's not new, what's been
with us for some time and and and really focusing
on distributions or or dp I. In addition, to I
r R as a return metric. So in addition the
I r R this investment is generated, which may not
be realized. What are the cash distributions relative to the
(38:50):
capital I've paid in that I'm seeing? So, uh, we're
you know, institutional investors are a lot more focused on
liquidity as transaction volumes have slowed down, repaid inments have
slowed down, realizations have slowed down. So that's a big,
a large area of focus. The other the other area
in private credit broadly would be, you know, one, as
(39:13):
institutions look to grow their core corporate private credit allocation,
how do I continue to grow that allocation and do
in a way that's diversifying. This is where asset based
finance comes into play, where you can generate comparable returns,
but generate those returns by taking totally different risks consumer
versus corporate as an example, do it on a shorter
(39:36):
duration as well. So you know, the notion of asset
based finances diversifier a corporate private credit is coming through
a lot of client conversations as well.
Speaker 1 (39:48):
Can I ask you, Matt, why you think the best
relative value is right now? In terms of you know,
everything you look at there's a ton of stuff. It's
a huge question. But and with near the end of
the podcast, but where is the relative value?
Speaker 2 (39:59):
What?
Speaker 1 (39:59):
What do people where should they go?
Speaker 3 (40:01):
Yeah, so I'll answer that question first the kind of
preface of you know, our strategies we're typically deploying over
a two to three year period, so given that we're
not making a specific relative value call at the moment,
we're looking for good companies, good borrowers, good industries, good
(40:23):
stable cash flow profiles, and we get our arms around.
So with that as kind of a background to how
we're operating and how we're investing. Look, I think parts
of the private credit market are interesting now in asset
based finance where we have there there are still you know,
(40:43):
if it is banks, you know, even an environment where
regulations will probably become more less restrictive, not more restrictive
in the US certainly, maybe less so in Europe. Banks
are increasingly looking for partners that their model is continuing
to transition to a more capital light originate and distribution
(41:06):
originate to distribute models. So that's creating interesting opportunities in
asset based finance for lenders who have a long standing
footprint in the market. Who understand the underlying asset classes.
So I think that's a that's a space that we're
focused on broadly, if it's residential, mortgage, consumer transportation SLTS
(41:29):
as well, you know SRTs, you know, is we think
of that as a tool, right, and you know, various
tools we have to craft a solution for a bank
or a non bank financial institution. Could be acquiring an
existing portfolio, could be partnering on future forward flow. It
(41:50):
could be you know, significant risk transfer SRT. It could
be you know, executing on a cash basis a securitization
that allows the bank to to kind of deconsolidate the position.
So there are a lot of tools not uh, you
know what you know, our role is is to figure
out what tool is right to use at at the
(42:13):
current time.
Speaker 1 (42:14):
Right Where do you think you're being contrarian? Right now?
Speaker 3 (42:16):
Where do I think I'm being contrarian? I don't know
if it's a contrarian view at at the moment certainly now,
but you know we are you know, positioning for a
higher for longer environment from a rate perspective. Now, certainly,
what what the market has been, you know, pricing in
(42:37):
has has decreased over time, compared to where we were
six months ago. But you know, as we look at
our existing portfolio new investments, we're certainly uh, you know,
preparing for you know, an environment where rates you know,
continue to be relatively high for the foreseeable future.
Speaker 1 (42:55):
Do you expect any cuts this year?
Speaker 3 (42:57):
You know, I think, you know, we we we look
at what the markets implying, it looks pretty modest at
this point.
Speaker 1 (43:04):
Chance for hike potentially a.
Speaker 3 (43:06):
Hike that would certainly be a surprise and could have
impacts on the market from a liquidity perspective.
Speaker 1 (43:13):
Great Steff Matt Bess, head of Private Alternatives at Alliance Bernstein.
It's been a pleasure having you on the credit edge.
Speaker 3 (43:18):
Many thanks great, thank you for having me.
Speaker 1 (43:20):
And of course we're very grateful to Tolu ala Mutu
from Bloomberg Intelligence. Thanks for joining us again.
Speaker 2 (43:24):
Thank you James, and thank you Matt as well.
Speaker 1 (43:26):
Thanks Toler for more credit analysis. Read all of Tolu'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. We're on all good podcast providers, Apple,
(43:48):
Spotify and all the others. Give us a review, tell
your friends, or email me directly at jcrombe eight at
Bloomberg dot net. I'm James Cromby. It's been a pleasure
having you join us again next week on the Credit Edge.
Hello, Welcome to the Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Totlu Alamutu as senior and list covering real
estate and some banks at Bloomberg Intelligence. This week, we
are very pleased to welcome Matthew Bass, who is the
head of Private Alternatives at Alliance Bernstein. How are you, Matt,
doing well?
Speaker 3 (00:40):
Totally? Thanks for having me joined today, James, Great to
see you again as well.
Speaker 2 (00:45):
Great to have you here, Matt. Matt is Alliance Bernstein's
head of Private Alternatives, overseeing assets under management of sixty
five billion dollars, part of the firm's total eight hundred
and nine billion dollars in aum. Private alternatives include corporate
direct lending, commercial real estate, asset based finance, and opportunistic investing.
Speaker 1 (01:11):
Great, so, Matt, thanks for coming on the show. Just
to set the scene a little bit here before we
start talking. Markets are getting whipswored by trade wars, inflation
and growth fears, as well as a whole load of
alarming developments on the geopolitical front. Companies have got used
to paying more for their debt, higher for longer is
assumed at this point, but credit markets are pricing in
very low odds of a US recession, which is being
talked about a lot more now that consumers seem to
(01:32):
be weakening. Corporate debt spreads have widened over the last week,
just by a little bit, but they're still very well
below long term averages. Market pricing still projects a fair
amount of calm. Nothing much to worry about here, but
news headlines show the exact opposite, from radical policy shifts
by the US government to ongoing military conflict, stubborn inflation,
(01:52):
and sliding consumer confidence, plus a ton of uncertainty about
what the FED does next on rates. In the face
of that growing wall of worry, there does seem to
be complacency in markets, and we continue to see robust
investor demand for corporate bonds and loans, especially in the US,
and not a lot of net new supply that more
than anything, I think, is keeping spreads quite tight. And
then on the sidelines or maybe the star of the show,
(02:15):
the private credit golden aze, just seems to go on.
So Matt, what is your take. Should we focus more
on the pro growth talk of the new administration, or
do we need to worry about the trade wars, about
the policy shifts, about the geopolitical headwinds, and should those
be more in the price.
Speaker 3 (02:30):
I think we've certainly got a lot in the press
now to talk about relating to the administration, tariffs, et cetera. Look,
I think there's a significant amount of uncertainty in the
market today. And look, you know, kind of stepping back,
you know, one of the you know, we've got a
business that we built at Alliance Bernstein really over the
past ten to fifteen years. It's kind of focused in
(02:52):
private credit across asset classes. You know, the reason we
built this. One of the main benefits of investing in
private credit, putting aside premium you could generate from a
yield perspective, is the direct origination and better risk control.
So even so, especially in environments like this, these are
situations where you want to be closer to the bar
(03:13):
or where you want to be able to conduct more
in depth due diligence, control your own destiny. Kind of
reasons to be investing in private markets right, speaking to
markets just like this.
Speaker 2 (03:23):
Today, Matt, one of the issues you were talking about,
you know, changing environments and regulation and so on. As
regulation is one of the issues I think that is
coming up. So last week we saw some headlines about
the SEC looking into private credit ETFs. There's obviously a
number of issues around disclosure and liquidity and so on.
(03:47):
What's your view on potential increase in regulatory's scrutiny And
do you think that the growth of private credit will
come from retail or do you think it's more the
institutions assigning more to this asset class that will drive
the next sort of stage for this part of the
(04:07):
of our industry.
Speaker 3 (04:09):
Yeah. Sure. Just to put in perspective, I think you've
got a longer broader secular trend in place, which is
really a share shift of how credit is provided in
the market globally between banks, capital markets, and private investors.
So what we've seen over time is an increased interest
(04:29):
behalf of private capital. So the reasons for that one
from a borrower perspective, You've got increased flexibility and certainty
of execution, and borrowers are willing to pay up for
access to that capital. So there's a real entrenched driver
in terms of the supply of private credit. The demand side,
(04:51):
as you asked about, you know, initially this was an
institutionally driven market. So let's put that in perspective. Pre
financial crisis, Global antil crisis, the market for corporate private
credit was about one hundred and fifty billion in size.
It's about a trillion and a half today, about the
same size as the high yield market and leverage loan market.
They're all about equal, so that that growth has largely
(05:15):
been driven by institutional investors and increasingly retail investors. So
as you look at the the ETF Private credit ETF
as an example, it's another vehicle to utilize to expand
private credit delivery into a broader retail investor base. Now
(05:35):
they're they're positives of that, they're negatives of that. You know,
I always kind of anchor back to major concern being
a potential mismatch and liquidity. Right, as a private credit investor,
you have the benefit of being able to go really
deep from a due diligence perspective, structure appropriate covenants, and
(05:56):
have control of a transaction should things go. A key
part of that risk mitigation is also the longer term
nature of the investors and having long term locked up capital.
So to extent we go away from that into retail
offering liquidity. It's just a concern that I think market
(06:18):
participants need to be mindful of in terms of that mismatch.
Speaker 2 (06:21):
Yeah, that was going to be my follow up question because,
as you mentioned, providing that liquidity at the retail level
might be an issue. But maybe we can talk about
the borrowers a little bit, because you've said that in
some cases they might want to go to the private
credit market and sort of shun all the scrutiny of
(06:43):
public credit markets. But one of the things that we've
seen in the last twelve to eighteen months is that
public markets have become much more receptive to even some
of the riskier borrowers. So we have a couple of
borrowers in European real estate, for instance, that wouldn't have
dreamt of coming back to the market eighteen months ago
because they are deeply high yield, highly levered, and so on.
(07:07):
But they've been able to come to the market this year.
So do you think that the demand from the borrowers
is still there even though public credit markets are less
strained than they were twelve eighteen months ago.
Speaker 3 (07:21):
Sure, total, and you're talking to you know, their cyclical
and secular factors at play here. So from a cyclical perspective,
as public capital markets recover, as investor interest increases, right,
there will be kind of an ebb and flow there
on the public side, and public markets tend to get
more aggressive and more conservative, right, So you know that's
(07:43):
cyclical that that's going to remain kind of a key
component between what is the share shift between public and
private execution From from a secular perspective, you got to
anchor to, you know, what are the tangible benefits to
a borrower in diversifying its verses of financing. So you
take you look at what happened on the back of
(08:04):
the rapid rise in rates we saw a few years
ago and how that impacted various specially financed non bank
lenders that might have been really reliant on one source
of financing that is a securitization market. That market is fickle,
it shuts down, and they lose access to the lifeblood
of their business, which is capital. So from a you know,
(08:26):
from a secular long term perspective, that's one of the
roles private capital plays and allowing these borrowers to diversify
their sources of capital to become you know, again more
more steady access across across different parts of the market cycle.
Speaker 2 (08:41):
Yeah. So one of the issues that's also come up,
and you sort of alluded to it earlier, was banks
as providers of capital. So we've seen headlines saying that
JP Morgan is assigning tens of billions to direct lending.
How do you view banks increased interest? I guess in
this part of the market, do you view them as
(09:02):
competitors or as collaborators.
Speaker 3 (09:05):
It's a symbiotic relationship. So banks have been so what
you're talking about right now is specific to corporate private credits.
So banks have been lenders to corporates, you know, forever
now that that level of involvement started to decrease post
(09:25):
RTC and certainly post Financial Crisis, given the regulatory reform
that got put in place that led to the growth
of the corporate private credit market. That said, banks are
still active players in that market. In addition to providing loans,
they provide other variable, valuable ancillary services to these borrowers,
should be cash management, payroll, et cetera. I think what
(09:47):
you're seeing now is just an evolution of that relationship
where banks are increasingly partnering with private capital as a
way to diversify their source funding. Right, in addition to deposits,
let's partner with with private capital so we could provide
solutions to our borrowers. We might be able to provide
(10:08):
you know, public broadly syndicated loan execution on one hand,
let's let's also have a private solution as well, so
the partnership facilitates that.
Speaker 1 (10:17):
But all this is not terribly new, is it. I mean,
you know, for years, large investment films have been sort
of almost going direct to borrows and you know, lending
them money. I mean, it's it's sort of old school lending.
But what seems we knew is in term sort of
growth in some cases rebranding of parts of the market
is private. I'm wondering, you know, given the huge growth
(10:37):
some of the guests called it at a thirty to
forty trillion dollar market, what are the risks in that?
I mean, anything that grows that big that first seems
to have risk. Are we missing something there?
Speaker 3 (10:50):
Yes, large numbers have been have been cited, but let's
let's kind of step back right. First, it was the
corporate credit market, which was almost entirely bank intermediated, and
that market had a very small private footprint, you know,
pre financial crisis about one hundred and fifty billion. As
I mentioned, that's trullion and a half today. So that growth,
(11:13):
of course came with net new growth of debt capital,
but it was largely driven by a share shift from
bank and capital markets. That was you know, I think
of an initial phase of disintermediation and kind of rebalancing
of how companies finance themselves between bank capital markets and
private capital. It's only a small part of the overall economy. Right,
(11:35):
corporate credit, you're missing commercial real estate, residential real estate,
consumer finance. These are all asset classes that historically have
been financed by banks in the securitization market that's now
opening up to private capital. Right. Key driver of that
as well is insurance, and that many of these asset
(11:56):
classes are investment grade in nature and fit well on
insurance its balance sheet. So it's very natural for the
growth of the market to expand significantly because we're moving
beyond corporate private private credit. And whether it's forty billion,
twenty billion, the number is almost irrelevant. Trillion, it's forty trillion,
(12:19):
ten billion, the number is almost irrelevant. It's going to
it should be orders of magnitude larger than the corporate market,
which is consistent with its contribution to the overall economy.
Speaker 1 (12:28):
I guess my question should then be more focused on
just direct lending and the excess demand for limited number
of deals. We've had conversations along the lines of, yes,
you know, as long as you are pro as long
as you've got some experience, you know what you're doing,
you'll be fine. But all this new money, you know,
this potentially tourist money, may not be doing those those
great deals. They may be getting themselves into trouble. Risk
could be building because it's private, we can't see it.
(12:49):
Is that Is that a concern futile?
Speaker 3 (12:51):
There's definitely been significant flow of capital into the market
if you talk about corporate direct lending specifically, A lot
of that has gone into the upper part of the
middle market and issuers who have both public and private
execution alternatives. So I think you're going to see some
volatility of share shift between those markets based on how
(13:12):
open the public capital markets are. We're seeing that today
and a lot of deals that were done by private
credit over the past twelve months are being you know,
refinanced in the public market. So I think I think
you're gonna you're you're going to you're gonna see that
that's going to be relatively cyclical from a risk perspective. Look,
I think there are advantages that private capital has. One
(13:35):
locked up nature of the capital, right, the primary risk
outside of lending to good companies is effectively matching your
assets and liabilities private capital, given the structure of these funds,
even the retail funds having certain liquidity gates and tender mechanisms,
do pretty good job of matching assets and liabilities. If
(13:55):
you're able to do that, you could really focus on
making good loans to good companies. And another benefit in
that regard that that private credit investors have is is
just the the the fee structure, the incentive structure. Many
of these funds have incentive fees which naturally align compensation
(14:16):
and with performance and the underlying manager as well, which
you don't typically get at banks and or public market.
Speaker 1 (14:23):
Okay, you're also kind of, you know, having to take
a long term view on these on these borrowers, which
for macro reasons that we've discussed you know, earlier in
the podcast, are quite difficult because of you know, the
very turbulent policymaking and and all the other things that
are going on. Is that complicating your your investment decisions
(14:43):
and the process around it, Like, how can you see
very far into the future given all of the all
of the volatility.
Speaker 3 (14:50):
Yeah, we try to focus on on cash flows, fundamental
cash flows. So if that means on the corporate side,
focusing on companies that have very diversified revenue base, could
have long term contracts in place, high degree of recurring revenue,
predictable cost structures, less reliant on consumer spending, more reliant
(15:10):
on corporate op x as opposed to capex. So it
gets down to the nature of the cash flows that
we're underwriting outside of corporate. If you're looking at the
asset based space broadly, if that's residential, consumer, et cetera,
many of these cash flows are shorter duration in nature.
(15:31):
Their loan portfolios, they're amortizing rapidly, you're not depending on
sale of an asset to get your money back. So
I think these are these are benefits, the shorter duration,
the kind of nature of the revenue, the defense of
nature of the revenue.
Speaker 2 (15:47):
One of the issues that we're facing in the public
market is that yields have basically come down a lot,
what spreads have tightened a lot as well? In I
guess return in the private credit market aren't maybe as
significant as they were a couple of years ago. So
(16:07):
can you maybe talk about what type of returns you're
expecting this year? And so linked to that has been
the issue of a potential rise in defaults because rates
stay higher for longer. Is that a concern in the
issuers that you look at or does private credit allow
(16:28):
you to manage those potential defaults in a different way.
Speaker 3 (16:33):
Yeah? Sure, So let's hit the default credit quality point second.
But I want to address your question on spread. So
private market will follow public markets. So just that we've
seen significant spread compression in public markets, private markets are
not immune. You know, if you look at the corporate
middle market direct lending pricing there. I look at our business,
(16:57):
our portfolio, we're roughly one hundred base points inside of
of where we were at this time last year, just
looking at overall spread on new investments. Of course you
have SOFA coming down as well. You put the two together,
what might have been an unlevered twelve percent gross return
is probably closer to ten today, Still very attractive double
(17:19):
digit return profile relative to what you can get in
the public markets. Plus you have that the downside protection
from direct origination, ability to structure documents, get covenant protection,
et cetera. So you know, pricing pricings certainly come in
(17:39):
and you know there will be a floor in many
instances because not all of these borrowers have access to
the public markets. So I see, you know, you're seeing
probably more extreme spread compression at the larger end of
the middle market where many of these borrowers have access
open access to the broadly syndicated loan markets, so that
(18:00):
that will put more pressure on pricing.
Speaker 2 (18:03):
And then on defaults. You are going to talk about
those yep.
Speaker 3 (18:06):
Yeah, look from from a default perspective, I look at
the past five years, and it hasn't been an environment
without stress. Right. We went through COVID. We know what
what impact that had on commercial real estate, hospitality assets
as an example, and we went through, you know, an
extremely rapid rise in rates from zero to five hundred
(18:28):
basis points and the impact that had on you know,
cost of borrowing, cap rates, and valuations and commercial real
estate in particular. So you know, there have been pockets
of severe stress over the past five years. I think
it's tested the market. Look, look, ultimately you will have
issuers with with borrowers, and that's why you're set up
(18:50):
much more effectively to proactively manage those risks as a
private investor. So getting access one to information ahead of time,
so you can identify where stresses might be emerging or
could be emerging in the future. Right should that be
you know the impact of higher rates on companies borrowing costs.
Being able to use that information to engage with a
(19:14):
sponsor or owner in advance of of of really an
issue becoming to the point where there's a you know,
payment default as an example. So you know we're able
to get ahead of issues, right, you can't. You can't
necessarily avoid it. You try to make good credit decisions.
But if you're able to do that with good access
(19:35):
to information to get ahead of potential credit issues, engage
with the owner. And two very important is as I
mentioned earlier, the patience you have. You're not a forced seller,
So anything you do from a fun structure perspective that
could put you into a position where you might have
to sell assets to repay to source liquidity for redeeming
(20:00):
investors or repay leverage is what you need to avoid
in these situations. If you have the time and you've
made good credit decisions, you're going to be able to
work through assets, especially as a creditor with a you know,
significant equity cushion below you.
Speaker 1 (20:13):
So in direct lending right now to a US corporation,
how much more would you get by doing it private
as an investor compared to public markets.
Speaker 3 (20:21):
Yeah, Look, there's a pretty persistent illiquidity premium one hundred
and fifty two hundred basis points. And even as rates
both spreads base rates have come in that premiums remain
fairly persistent historically. Now, now that's just the gross premium
you're going to get, you know, I do want you've
got to focus on the downside protection as well. And look,
(20:46):
the data proves it out from a historical default perspective
and recoveries, defaults being low, recoveries being higher. Investing in
privately versus public markets. But intuitively that makes sense. You
are able to conduct much more robust diligence, You're able
to have much better access to management. Right you are
(21:07):
typically the only lender, if not member of a smaller
like minded club of lenders as opposed to a large syndicate. Right,
that all is very beneficial from us that.
Speaker 1 (21:17):
Some people would say that the default cycle hasn't really
you know, you haven't had one that hasn't been the test.
You haven't had a recession. So how can you prove
that data? I mean, are you going to find out
when when the economy turns down? Yeah?
Speaker 3 (21:28):
No, I mean it's back to my point. I think
the past five years you've had some real pockets of stress.
It hasn't been a traditional garden variety recession. You know,
we had COVID and we had a rapid rise in raids.
But you know what, what did the impact of those
two events had one? You know, the source of revenue
for many borrowers shut off overnight if you're you know
(21:49):
a hotel as an example, right, and you know cost
of borrowing cash flow, you know, massive impact given the
rise in rates. I think we've been through a pretty
stressful ironment.
Speaker 1 (22:00):
Okay, And so this one fifty to two hundred base
point premium for private against public do you think that
holds on the liquidity premium alone? Do you think we're
going to get squashed as everyone pals in more with
the private side.
Speaker 3 (22:13):
Look, I think there's an element of if that premium
gets too small, then as an investor, you're going to
start to question why am I locking my capital up?
So I think there's a self correcting mechanism.
Speaker 1 (22:28):
Yeah.
Speaker 3 (22:28):
Probably. One of the reasons it's been so historical, been
so you know, consistent historically, is.
Speaker 1 (22:34):
That one hundred basis points that's too low. I mean,
what's what's the level that people jump out to.
Speaker 3 (22:38):
Yeah, no, I think that one hundred and fifty to
two hundred basis point level is good. Now that that's
only for now. Private credit the universe and the definition
of what is private credit is expanding, you reference, you know,
some of those large numbers earlier. Key driver behind the
growth of the market is also the expansion of investment
(23:01):
great private credit, where in some instances you're getting a
fifty basis point pick up to what you can get
in the corporate high yield market and higher. So as
you move up quality, that that that premium that that
you need.
Speaker 1 (23:15):
Well, so sorry, this one fifty that applies to just
high yield, is it?
Speaker 3 (23:19):
I'm thinking of that as in the context of corporate
direct lend and what that spread premium has been historically interesting.
Speaker 2 (23:26):
Okay, Matt, you mentioned the pandemic, and definitely it did
lead to some almost shocking or valuations in real estate
in particular, which you've also mentioned, not just hotels or offices,
but even residential even though we stay safe as houses
(23:46):
and so when we've seen some residential landlords come under
very significant strain. Looking at the real estate sector now
at Alion Spernstein, do you still see opportunity given how
much of a recovery we've seen, at least in the
public market, or do you think that it's run its
course and it's time to be looking at other sectors.
(24:08):
Now that's for real estate in general, and I have
another question on offices after maybe.
Speaker 3 (24:13):
Yeah. So commercial real estate is a global markets, very
local market, so you really can't paint it with one
broad brush. So, plus, there are differences in investment opportunities,
ranging from on the credit side, on the dead side,
financing cash flowing stabilized core properties, all through investing in
(24:35):
opportunistic assets, buying assets at a discount, et cetera. So
from a market perspective, we're certainly a bottoming in a recovery.
Right you look at how open. The capital markets are
for financing commercial real estate, in particular high quality assets.
You look at transaction volume, you look at property valuations.
(24:56):
Really across asset classes where we're seeing a recovery, you
kind of step back and look under the hood. There.
You take office as an example, there still is a
bifurcation in terms of in that asset class. You have
high quality, new vintage, highly immanetized buildings, which are highly
(25:19):
financible capital markets today, public and private. You compare that
with with older office buildings, which still might be in
a challenging situation from a leasing current future leasing perspective,
that will continue to have challenges.
Speaker 2 (25:34):
You basically sound quite positive on the outlook for select
office real estate, if I can say that. But one
of the issues I guess with those high quality, super
efficient newer buildings is that everyone seems to be looking
at them. So the margins, I guess might be squeezed,
(25:56):
the returns might be much lower. So at what point
do you think people will start to look at those
sort of see lower tier offices and other real estate
because the returns on the top tier are so squeezed.
Speaker 3 (26:14):
Yeah, I mean, look from our perspective, We've got a
global strategy. We've got a footprint in the US and Europe,
so we finance across property types, and we also have
the flexibility to provide both on the performing, high quality
(26:35):
you know, core core plus type of financing all the
way through opportunistic. So I think important in the market
particular today is having a broad strategy. You're not focused
on one particular asset class, where you could really pivot
to where where the opportunity is and where you see
the best relative value for your investors.
Speaker 2 (26:54):
Another question, also focused on real estate. You mentioned obviously
you are a truly global player, but a lot of
the comparison this day these days has been US versus
the rest of the world. So considering the real estate sector,
where do you think the greater opportunity is within the
US or maybe there are other geographies where people should
(27:17):
be looking at private credit real estate.
Speaker 3 (27:20):
Yes, so on the real estate side, again, I would
anchor back to the markets being extremely local. Local location matters,
But I think Europe is an interesting place to be
right now from a commercial real estate debt perspective. It
is a market that is less efficient than the US
in terms of providers of capital right, So you get
(27:43):
a benefit there. Now, I think you've still given that
smaller you know, kind of universe of private capital suppliers
you can you know, on the margin those transactions, you know,
get get better structure, get better terms, better covenants in place.
Again a supply demand dynamic which makes you know you're
(28:03):
particularly attractive. You know that that's that that's that's one.
That's one perspective.
Speaker 2 (28:07):
And just within Europe, are there specific countries that ALIGNE
spent ting has been looking at or sub sectors maybe.
I mean we've seen quite a significant recovery in the
more sector in shopping for instance, and we even had
one issue where upgraded recently. Is that an area that
you're looking at or is it more at the offices
(28:30):
that we mentioned.
Speaker 3 (28:31):
Yeah, I would say, just stepping back, we we do
have a broad mandate in terms of end market. It's
one of the areas that we we have found attractive
continue to find attractive. You know, speaking of Europe, is
is in multifamily particular assisted living. So you've got real
benefit you know, tailwind aging population as individuals move from
(28:57):
single family homes, uh and and progress. Right, there's there's
an attractive supply demand imbalance and the assisted living side.
We think that's an interesting space from a commercial real
estate perspective.
Speaker 2 (29:09):
And within assisted living, are there specific countries that you
think offer greater opportunity than others. The other issue with
assisted living is the amount of regulation of course, so
there are standard of course in terms of the type
of facility and so on, and sometimes I guess that
can affect your margins. Is that a concern when you're
(29:30):
looking at these social housing? Were those types of housing provided?
Speaker 3 (29:34):
Yeah, all all concerns. Look in terms of all things
we focus on. In terms of the markets, I would say,
you know, UK is the largest, but we gotta we
have a full European footprint. We actively look at opportunities
in the continent as well.
Speaker 1 (29:51):
How do you stay ahead of the competition? What's your
edge in terms of you know, private alternatives because everyone
wants to be there. I think Globin Lusty said that
there's any going to be ten players left. After all
it gets shaken out and everybody's acquiring and everybody's you know,
trying to scale up.
Speaker 3 (30:10):
What do you do and look, it starts with the
experience we have in the market, so you know our business,
you know We largely built that from scratch over a
period of fifteen years through a combination of team liftouts,
build outs, main acquisition. About two years ago, Carballe Investors
(30:31):
rebranded ab Carbal Investors. So it starts with having kind
of the quality of the team investment process, your ability
to source differentiated transactions and kind of execute them on
a consistent basis. So, you know, having that team focus
and that that coverage across markets, right, that allows us
(30:52):
to you know, grow our relationship with borrowers, execute on
repeat business and grow the business. Right the reality is over.
You know, from time to time transactions we're looking at
will will rhyme. We'll see similar types of companies, issuers, industries, controversies,
(31:13):
and our experience gives us an edge in the market,
right in terms of past transactions.
Speaker 2 (31:20):
In that context, do you still think that there's room
for so called niche or small players, because I guess
one of the issues with being an asset manager of
your size approaching a trillion a UM, potentially one of
the issues might be that you can't be as nimble
as some others, and perhaps in terms of the size
(31:45):
of the opportunity for an opportunity to really make a
difference to your overall return, it has to be quite
a significant one. So do you think there's there's still
a room for these niche asset manager or do you
think we'll continue to see consolidation in the sector.
Speaker 3 (32:04):
I always think that. I think you're always going to
have certain asset classes that are more niche, more limited
capacity in nature that you know, warrant smaller specialist firms.
I think that's going to remain true. I think the
other trend that you have in the market is, you know,
as we talked about, one of the key drivers of
(32:24):
the growth in private credit broadly and the growth of
corporate private credit, the expansion beyond corporate private credit to
asset based finance is you know, growth in retail and
particular growth in uh A insurance capital. So the insurance
side in particular, given that you're focused on investment grade
(32:45):
private credit and it's a larger part of the overall
capital structure, leads to larger scale and to be a
relevant provider of capital in that market. I do think
you need you need to be larger. Right You're providing
solutions to borrowers that include everything from investment grade execution
through opportunistic, and I think that that does lead to
(33:07):
needing a larger platform to stay competitive. So I think
you can have both trends, Like you're still going to
have very successful specialist niche firms that stick to their
domain focus manage capacity effectively, and on the other end,
you're going to have growth of larger private credit firms
(33:28):
across asset classes with the client base from you know,
insurance through through institutional and investment grade through opportunistic, which
necessitates I think the larger scale to compete effectively.
Speaker 1 (33:43):
Then going back to where we started about ETFs, do
they really make sense for this? I mean there's no liquidity, really,
no daily liquidity, So how can an ETF work in
private credit?
Speaker 3 (33:52):
The ETF rapper has various advantages, Now, how successful will
it be in private credit? I think that's an open question.
One concern I have as you start to introduce more
and more liquidity to private credit, to illiquid investments, and
(34:13):
the provider of that liquidity is going to need to
be compensated, how much of that illiquidity premium gets eroded?
And then just from an investor's perspective, are you better
off in that vehicle or are you better off taking
public exposure in a pure form. So we talked about
what is the right Where does the illiquidity premium settle out?
(34:37):
I think it's going to be determined by the end investor,
and what extra form of compensation in terms of yielder
return you need to generate for locking your capital up.
Speaker 2 (34:48):
I think there's a view I guess that the lines
might become increasingly bled between public and private, which goes
to your point about being adequately compensated to go from
one to the other. So maybe maybe that's sort of
one of the risks. But what would you say keeps
(35:09):
you up at night most looking at alternative credit? Would
it be that, as in bloodlines between private and public
or are there other risks that you think that one
should be aware of.
Speaker 3 (35:23):
Yes, so we talk a lot. There is a lot
of talk about the blurring line between public and private.
That the reality for issuers of a certain size, you
always had that alternative right to choose between public execution
and private execution. So what we've seen over the past
(35:45):
three or so years at the large end of the
corporate private credit market is an example of that. Issuers
have access to both broadly syndicated markets, private markets, and
you know, while there are benefit fits to private execution
in terms of speed, certainty, structural flexibility, when the public
(36:06):
capital markets are open, the investor demand is there and
the pricing makes sense, those issuers will make logical economic decisions.
So I think that that blur, that that gray space continues,
in particular for larger issuers. We saw it in corporate,
You're going to see it in other forms of asset
(36:29):
that asset based finance. You know, if it's a non bank,
specially finance company looking to finance its origination, do you
focus on the capital markets, curitization markets, private financing, bank financing,
It's probably a combination of all three different percentages based
on where you are in the cycle. So I think
(36:49):
that I think that continues.
Speaker 1 (36:52):
What kind of questions your clients ask you when you're fundraising?
I mean, what do they do they get private credit? Now?
Is it so well known that I mean, I still
get a lot of confusion, and so what kind of
questions are they asking you?
Speaker 3 (37:02):
Yeah, no, look to to the to the earlier point.
We do get the question what what keeps you up
at nights? A natural question, I think, you know, for
for me, it gets back to UH, liquidity and ensuring
that you know, we as private investors are effectively matching
(37:22):
assets and liability. That the beauty of this asset class
is the time it gives you right to work out
of issues should should should they come to should should
you have them on the credit side. So as as
we're growing in retail, look, by the way, there there
the retail vehicles that we have today, the interval funds,
(37:44):
public non traded BDCs. They have the structural features in place,
if it's maximum percentage of shares that could be tendered,
or quarterly gates that are designed to protect existing investors.
And if we if we look at what happened with
b read as an example, you know, the the vehicle
(38:06):
kind of proved its efficacy. Now uh, you know, the
vehicle proved its efficacy and in terms of protecting and
the current investors and and gating at the appropriate level
in terms of other themes as we engage with clients
that there's definitely uh, there has been a shift in
(38:27):
focus on liquidity, right that that's not new, what's been
with us for some time and and and really focusing
on distributions or or dp I. In addition, to I
r R as a return metric. So in addition the
I r R this investment is generated, which may not
be realized. What are the cash distributions relative to the
(38:50):
capital I've paid in that I'm seeing? So, uh, we're
you know, institutional investors are a lot more focused on
liquidity as transaction volumes have slowed down, repaid inments have
slowed down, realizations have slowed down. So that's a big,
a large area of focus. The other the other area
in private credit broadly would be, you know, one, as
(39:13):
institutions look to grow their core corporate private credit allocation,
how do I continue to grow that allocation and do
in a way that's diversifying. This is where asset based
finance comes into play, where you can generate comparable returns,
but generate those returns by taking totally different risks consumer
versus corporate as an example, do it on a shorter
(39:36):
duration as well. So you know, the notion of asset
based finances diversifier a corporate private credit is coming through
a lot of client conversations as well.
Speaker 1 (39:48):
Can I ask you, Matt, why you think the best
relative value is right now? In terms of you know,
everything you look at there's a ton of stuff. It's
a huge question. But and with near the end of
the podcast, but where is the relative value?
Speaker 2 (39:59):
What?
Speaker 1 (39:59):
What do people where should they go?
Speaker 3 (40:01):
Yeah, so I'll answer that question first the kind of
preface of you know, our strategies we're typically deploying over
a two to three year period, so given that we're
not making a specific relative value call at the moment,
we're looking for good companies, good borrowers, good industries, good
(40:23):
stable cash flow profiles, and we get our arms around.
So with that as kind of a background to how
we're operating and how we're investing. Look, I think parts
of the private credit market are interesting now in asset
based finance where we have there there are still you know,
(40:43):
if it is banks, you know, even an environment where
regulations will probably become more less restrictive, not more restrictive
in the US certainly, maybe less so in Europe. Banks
are increasingly looking for partners that their model is continuing
to transition to a more capital light originate and distribution
(41:06):
originate to distribute models. So that's creating interesting opportunities in
asset based finance for lenders who have a long standing
footprint in the market. Who understand the underlying asset classes.
So I think that's a that's a space that we're
focused on broadly, if it's residential, mortgage, consumer transportation SLTS
(41:29):
as well, you know SRTs, you know, is we think
of that as a tool, right, and you know, various
tools we have to craft a solution for a bank
or a non bank financial institution. Could be acquiring an
existing portfolio, could be partnering on future forward flow. It
(41:50):
could be you know, significant risk transfer SRT. It could
be you know, executing on a cash basis a securitization
that allows the bank to to kind of deconsolidate the position.
So there are a lot of tools not uh, you
know what you know, our role is is to figure
out what tool is right to use at at the
(42:13):
current time.
Speaker 1 (42:14):
Right Where do you think you're being contrarian? Right now?
Speaker 3 (42:16):
Where do I think I'm being contrarian? I don't know
if it's a contrarian view at at the moment certainly now,
but you know we are you know, positioning for a
higher for longer environment from a rate perspective. Now, certainly,
what what the market has been, you know, pricing in
(42:37):
has has decreased over time, compared to where we were
six months ago. But you know, as we look at
our existing portfolio new investments, we're certainly uh, you know,
preparing for you know, an environment where rates you know,
continue to be relatively high for the foreseeable future.
Speaker 1 (42:55):
Do you expect any cuts this year?
Speaker 3 (42:57):
You know, I think, you know, we we we look
at what the markets implying, it looks pretty modest at
this point.
Speaker 1 (43:04):
Chance for hike potentially a.
Speaker 3 (43:06):
Hike that would certainly be a surprise and could have
impacts on the market from a liquidity perspective.
Speaker 1 (43:13):
Great Steff Matt Bess, head of Private Alternatives at Alliance Bernstein.
It's been a pleasure having you on the credit edge.
Speaker 3 (43:18):
Many thanks great, thank you for having me.
Speaker 1 (43:20):
And of course we're very grateful to Tolu ala Mutu
from Bloomberg Intelligence. Thanks for joining us again.
Speaker 2 (43:24):
Thank you James, and thank you Matt as well.
Speaker 1 (43:26):
Thanks Toler for more credit analysis. Read all of Tolu'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. We're on all good podcast providers, Apple,
(43:48):
Spotify and all the others. Give us a review, tell
your friends, or email me directly at jcrombe eight at
Bloomberg dot net. I'm James Cromby. It's been a pleasure
having you join us again next week on the Credit Edge.
Host
James Crombie
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