February 6, 2025 • 45 mins
Corporate debt is well placed to withstand global turmoil caused by new US trade policy, according to Crescent Capital Group. “There is going to be a lot of volatility, but I think the markets are now becoming more accustomed to not reacting to those headlines,” said Chris Wright, the firm’s president and head of private debt. “Credit markets are pretty stable,” he tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Julie Hung, in the latest Credit Edge podcast. Wright highlights pro-growth policies of the new US administration and presence of business-friendly people in very senior roles, and views tariff announcements as a negotiating tactic. Wright and Hung also discuss inflation, consumer trends, private debt returns and default risks, as well as the need for scale to compete in direct lending.
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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 Crumbie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Chris Wright, president
at Crescent Capital. How are you, Chris, I'm great, I'm great, James,
and yourself very well. Thank you, Thank you so much
for joining us today and very excited to hear your
credit market views, and also delighted to have back on
the show as co host Julie Hung with Bloomberg Intelligence.
Speaker 2 (00:39):
Hello Julie, Hello, good afternoon, Good morning. My name is
Julie Hung. I am Bloomberg Intelligence Credit sector analyst for
the consumer stables sector.
Speaker 1 (00:47):
Great, So, I'm just going to set the scene here
at the top. Markets have been whipswored by trade wars
that will probably fuel inflation and could also dent US growth.
Both will be quite bad for credit. Yet corporate bonds
and loans remain priced for perfection. After getting squeezed a
lot last year, Debt spreads are pretty close to where
they were in two thousand and seven, just before the
global financial crisis blew everything up. If you only looked
(01:09):
at credit market pricing, you'd think the world was a
very peaceful, calm place right now, but the news headlines
would suggest the exact opposite. There seems to be quite
a lot of complacency out there. And I also think
that the very strong demand for credit product and not
a lot of new supply is actually keeping things artificially
tight at the moment. But I wanted to start there, Chris,
what's your take, Why the disconnect do you think between
(01:31):
pricing and all the external noise and are we in
for some kind of reckoning here?
Speaker 3 (01:37):
Yeah, look, it's a it's a great question.
Speaker 4 (01:39):
I mean, as you mentioned, you know, when I when
I'd look at the capital markets, you know, high yield,
incredibly tight, floating rate you know, they're you know, they're
obviously very tight too.
Speaker 3 (01:50):
The in the loan market.
Speaker 4 (01:52):
You know, at the same time, obviously default rates continue
to be very very low. We have a backdrop of
a very pro growth, you know, administration in place. There's
a lot of optimism that's being infused into the.
Speaker 3 (02:06):
Economy right now.
Speaker 4 (02:08):
You know, with the you we're starting to see a
little bit of visibility I think into what the how
the administration is gonna you know, act over the next
four years, as well as how the FED is going
to act over the next four years. We've seen them
obviously slow down and pause rate cuts. And what does
(02:29):
that mean. I mean that means that the economies is
on unstable footing. Capital markets are opening open right now,
and you know, my expectation is is you know, we're
gonna we're you know, we're in a good situation right now,
but you know, there certainly could be some volatility.
Speaker 3 (02:45):
On the horizon.
Speaker 2 (02:47):
Chris, I was looking at some spread movement yesterday. I mean,
Monday was just hectic coming into the office, and it
didn't seem like consumer spreads moved that much given that
there would be a threats of like higher like food inflation,
higher inflation generally for buyers. Is it more like a
function that consumers aren't believing that the tariffs are really
(03:09):
going to go through because we have, you know, the
thirty day pause for Mexico and Canada. Do you think
that it's just like a healthier overall economy and you know,
everyone's just kind of like waiting to see what's happening,
because it didn't seem like it would have the effect
on the credit markets as I thought it would have.
Speaker 4 (03:27):
Yeah, Look, I think that I think the market is
understanding that we are in a business friendly environment. You know,
when you look at the people around the Trump administration,
they are relatively you know, it's.
Speaker 3 (03:40):
Full of commercial people.
Speaker 4 (03:42):
So I think when we see the headlines like the tariffs,
and obviously if they did go through, you know, inflation
would get passed along and we'd see price increases. But
I think the markets are kind of seeing through that
that that tariffs are in fact nuanced. You know, we
obviously have seen the pauses. This this is just of
you know, the beginning of a negotiation. I think Trump
(04:02):
would say, you know, look, I mean his negotiating style
is different than what we have seen historically in the president,
you know, so in in we're just starting to see that,
and I think I think the I think the markets
are seeing through that, and that's why you're not seeing
the quite the volatility that you may expect when you
see a twenty five percent tariff coming across the bottom
of the ticker.
Speaker 1 (04:23):
Not in credit, but you definitely have seen it on
the FEX in the stock market, and so, you know,
I get the business friendly side of the administration. We've
all seen the guys behind Trump, but still it's very
hard to do business when it's been you know, when
it's so chaotic, you really can't see clear rules of
the game. It's really hard to take a long term view.
So operating businesses must be quite hard at this point.
Speaker 4 (04:43):
Now. Yeah, you know, I may take a little bit
of the opposite side of that is that I think
we are aren't starting to see the breadcrumbs of things
to come right, that that things are going to be nuanced,
That the markets shouldn't react to every headline. That you know,
(05:05):
there are going to be a lot of actions and reactions.
Speaker 3 (05:08):
And that is going to move things forward.
Speaker 4 (05:11):
And so you know, I think you know, look, the
fattest is staying, you know, pretty steady right now as well.
The credit markets you know, are are pretty stable. So
you know, yes, there is going to be a lot
of volatility, but I think the markets are now, uh
becoming more accustomed to not reacting to those headlines.
Speaker 2 (05:34):
Do you feel that, you know, just from a because
I covered the consumer sector that let's say, the tarffs
to go through and we do see like higher inflation
at that level, that eventually the consumer is going to
adjust to it. Because I feel like in this higher
food inflation environment that we've seen over the past couple
of years. There wasn't this big major shift to private label.
(05:58):
There was some like increasing valuable sales, but I feel
like in the United States it was a lot more muted,
and it seems like for you know, some of the
branded products, like there's more of an adjustment, like the
consumer gets concerned kind of like you said, like the
knee jerk reaction, and then they just adjust to it
and it just becomes normal life. So if these tariffs
(06:19):
do go through, do you think there will be like
like an eventual adjustment to higher prices.
Speaker 4 (06:25):
Yeah. I mean, look, you know, I am by no
means a consumer expert here, but look, I think their
natural reaction is going to be initially to you know.
Speaker 3 (06:34):
Trade down to help offset. And as you mentioned, you know,
there hasn't been a lot of trading.
Speaker 4 (06:40):
Down over the you know, over the last few years,
and so I think that will be the first step.
And then look, I don't think you know, Trump was
elected certainly on an anti inflation platform, and as I mentioned,
you know, it does feel like there's a number of
commercial people that he's placed in very senior roles, you know,
(07:01):
My expectation is he is not going to let inflation
get out of control here. You know, it does make
me a little nervous when he says, hey, we're going
to have to go through some pain. I'm hoping that
is just a negotiating tactic, and I suspect that is
a negotiating tactic. But to your point, yes, the consumer
I think has some room to adjust, and I think
that adjustment will be made relatively quickly if we do
(07:23):
some see some inflationary pressures, particularly on the consumer side.
Speaker 2 (07:26):
Yeah, So do you feel like you know that the
tear of talk is all not fear, But he's just like,
this is what we're going to do if you don't
help us with securing your borders. This is what we're
going to do if you know, you don't like stop
fentnel from coming into the country. So, kind of going
back to what you said, it's more of a negotiating
tactic than something that he really wants to impose on
(07:50):
our neighbors.
Speaker 3 (07:52):
Yeah, I have to imagine.
Speaker 4 (07:53):
I mean, he looks at that as you know, it's
it's very headline worthy. It's something that he has the
power to an act. It's something that he has talked
about and it's something that he did implement, you know,
back in his first administration. You know, but I think
he's using terists for both economic and non economic purposes,
as you mentioned, and so I think that's what he's uh,
(08:14):
you know, he's focused on, is trying to use that
as a stick, if you will, to get outcomes that
are both economic and non economic.
Speaker 1 (08:22):
So, Chris, you're head of private credit over at Crescent
and you also do a lot of middle market business,
and I think that really is the kind of foundational
piece of the economy that we don't often get to
hear of. But you know, you're close to that action.
What are you hearing from the middle market guys, How
are they operating on the ground.
Speaker 4 (08:38):
Yeah, Look, you know it's been talked for the last
twelve months of rekindling of deal making activity.
Speaker 3 (08:46):
We are starting to see, uh, some of that happen.
Speaker 4 (08:49):
We saw, you know, increase in deal making activity towards
the end of last year. I think there's a number
of tailwinds that you know, are really going to kind
of move the market forward.
Speaker 3 (09:01):
You know, certainly now with.
Speaker 4 (09:02):
The election behind us, we do have you know, despite
the uncertainty that we just talked about. At least we
know what we're going to have over the next four years.
We've got a little bit better visibility on the path
of the FED. And you know, when you look at
some of the broad numbers out there, lots of dry
powder in the hands of private equity firms, plenty of
(09:26):
capital available to finance buyouts, portfolios that are getting long
in the tooth, institutional investors clamoring for some realizations. I
think a lot of those things set up for increased
M and A activity, and we're well prepared for that
and excited about that opportunity.
Speaker 2 (09:45):
So private credit has been like another like big topic
that has been discussed, just like the explosiveness of it.
Do you see that continuing in the near term, near
to intermediate terms?
Speaker 4 (09:59):
Yeah, look, I mean, you know, I think we've gone
through this, uh, you know, the start of a change
in capital formation, right, And and what private credit does
is is it brings capital to companies into sponsors in
a much more efficient manner than the old methodology of
(10:20):
going to a bank and having them underwrite and then
having them just move the paper to another buyer. And
so you know, I think We're going to continue to
see that growth as we evolve this capital formation and
efficiency and the.
Speaker 3 (10:35):
Expediency of which we can bring capital to companies.
Speaker 4 (10:39):
You know, I just sort of think about you know,
I started this business, you know, close to twenty five
years ago at at Creston, and at the time we
were primarily a you know, a junior debt investor. And
back then, the way it would work is we would
get called by a private actutity sponsor, and like I said,
we were primarily junior debt focused, and you know, we
would work with the banks.
Speaker 3 (10:59):
They would the first lead.
Speaker 4 (11:00):
We would come in with a junior piece typically at
the time it was a senior.
Speaker 3 (11:04):
Subordinated note we would invest in.
Speaker 4 (11:07):
That would be the last time that we would actually
infuse capital unless something went wrong. And so you know,
we'd obviously monitor the company and work with the management team,
and then we would get our current income, our coupon back,
and then we would look to get a realization and
then we'd move on to the next company.
Speaker 3 (11:22):
So you you.
Speaker 4 (11:23):
Transport that to you know, to today and and and
today you know, we'll make that initial acquisition, but.
Speaker 3 (11:31):
We're working with the company in a lot closer ways.
We're providing revolvers. We're providing additional capital to help them
execute on their growth plan, whether that be capital to
make acquisitions, whether that be additional capital for them to
buy equipment and machinery to expand their business, whether it
be additional capital to expand their sales force. And so
(11:54):
we have become much more intertwined with companies and we
have been a much more important part of their growth thesis.
Speaker 4 (12:03):
I think that dynamic, that's that capital formation change that
I'm talking about.
Speaker 3 (12:07):
I think that dynamic is here to stay.
Speaker 1 (12:10):
Is it getting tough of those to do this sort
of business? As as you said, you know, the fetis
on hold rates are quite high. Maybe inflation pushes them higher.
You know, some people are talking about a high as
a potential next move. And at the same time we're
seeing the stress from amendments, extensions, payment in kind. It's
hard to see the defaulops, but you know, there's definitely
(12:30):
some stress out there. Your colleague Mark at Snasio was
on the show last year and he called a golden age.
Is it still a golden age?
Speaker 3 (12:39):
Yeah? Look, I you know, I certainly think it is.
Speaker 4 (12:42):
Look, when we're investing at forty percent loan to value,
meaning we have sixty percent of the of the company.
Speaker 3 (12:50):
Of the capital of the company sits below us.
Speaker 4 (12:54):
We're able to generate intoday's environment, double digit return earns.
With senior debt, we as I mentioned, are much more
intertwined with the company. Oftentimes in the senior debt that
we're investing in, you know, there's two, three or four groups.
Oftentimes we're taking controlling positions. You know, that dynamic that
(13:19):
think sets up very very favorably as a you know,
as an investment manager, and so you know, I'm very
very optimistic. It's always going to get harder. I think
what you're seeing with the growth in private credit, you're
seeing a lot of the capital go to the scaled managers.
Speaker 3 (13:39):
I think scale does matter.
Speaker 4 (13:42):
Why does it matter because we have additional capital, because
we have experience, We've invested through cycles, we have the
resources to help companies, We have the resources to access
other you know, areas of capital or other avenues of capital.
Speaker 3 (13:57):
And so I think you're going to continue to see that.
Speaker 4 (13:59):
Trend towards you know, towards scale, towards consolidation, and you
just got to make sure you're.
Speaker 3 (14:06):
On the right side of that.
Speaker 2 (14:07):
I mean from from my perspective, like if I was
looking for capital, the ease of or how how much
easier it is in the private credit markets, like the
the investment in an entire companies capital structure. It seems
like your involvement with a company from beginning to end,
I mean, do you think that there would ever be
in the future more private credit activity versus going into
(14:31):
the public markets.
Speaker 4 (14:33):
So just don't understand so more private market activity versus
going into the public markets. I mean, do I think
there's going to be a market share shift back to
the public markets exactly?
Speaker 3 (14:44):
Yeah.
Speaker 4 (14:44):
Look, I think you know, look, we've proven our wares, right,
I think the private credit all all all of our
peers here have really kind of proven our value add
to both the companies and the management teams. I think
that the stat that sort of you know that that
I like to that supports that is is you know,
when you look at how we're deploying our capital. You know,
(15:06):
nowadays a significant amount of our capital is going into,
you know, supporting existing companies. Those companies make you change hands,
they want the existing lenders to stay with them. So
I think it's important to CFOs that they know who
their lenders are, they develop that relationship.
Speaker 3 (15:25):
It accrues to our benefit.
Speaker 4 (15:27):
Because quite honestly, you know, if we're invested in a
company for four or five years, we're getting board packages,
we're seeing monthly financials, we're talking to the to the CFO,
to the CEO, to the salespeople on a on a
monthly basis. You know, that's we're doing diligence over that
long period of time. And I can can can you know,
invest in a company with a lot more conviction after
(15:49):
a four year timeframe with them than over a three
or four month period of a typical diligence into a
new company. So I don't see quite the shift that
you're talking about coming back to the public markets now
where we stay at an eighty five percent market share,
you know, private credit call it an eighty five percent
market share of new biots.
Speaker 3 (16:07):
Will it stay that high? Look?
Speaker 4 (16:09):
I think that is partly a function of of you know,
of the rising rate environment, the pullback in the public markets,
and so I think it will equalize a little bit more,
not fifty to fifty, but it will, I should say
stabilize a little bit more.
Speaker 3 (16:23):
But we're going to continue to have a line share
of of the market share.
Speaker 4 (16:27):
And I think as private credit grows, we're able to
write bigger checks. And so that addressable market that used
to be topped out with a certain size now continues
to increase. And so you know that's going to you know,
accrue to our benefit too, with with A with a
with a greater addressable market.
Speaker 1 (16:44):
So what does a middle market deal like to you, Chris?
We had our guest a couple of weeks ago tell
us that a billion dollars is now a middle market loan.
But that surprised me.
Speaker 4 (16:51):
That, Yeah, look, you know I kind of think about
you know, lower and core middle market at some one
hundred and fifty million of eba DA sized company.
Speaker 3 (17:00):
You know, if you think about that at you know,
six times leverage, one hundred.
Speaker 4 (17:03):
And fifty million dollars, Ebida company is kind of a
nine hundred million dollar you know called that that's you know, unitron.
So you know, sub I would always say, kind of
sub kind of nine hundred to a billion dollar unitranch
is middle market. I think when you get up north
of that, you know, you start getting into syndicated markets,
syndicated replacement opportunities that market has grown substantially. That's really
(17:27):
addressed by you know, the really large players. But that's
kind of how we break apart the market.
Speaker 2 (17:33):
And then where do you see more of the the
use for funds like more like you mentioned M and
A before you mentioned some capex. Do you see more
companies borrowing for M and A or for other purposes?
Speaker 4 (17:48):
Yeah, I mean, look at a huge use is M
and A, you know, especially in that in that middle
market that you know that I just defined right. You know,
they're going out, they're partnering with private equity sponsor, who
brings a ton of governance, who brings access to capital,
who brings you know, strategic advice, and oftentimes we're seeing
(18:10):
their investment thesis is centered around expanding the company through acquisitions,
and that's why they partner with someone like us. So
you know the primary use of additional capital after our
initial investment is going to be M and A activity.
Speaker 1 (18:25):
You said double digit returns. I'm curious as to whether
that means ten twenty more than that and what kind
of deal would get you that return?
Speaker 4 (18:34):
Yeah?
Speaker 3 (18:34):
Look, I mean spreads.
Speaker 4 (18:35):
You know, when the unitronch you know today are going
to be sort of you know, five hundred ish, you know,
give or take. You know, you'll see them as litt
as four to fifty, you'll see them to five fifty,
and so you know you can get sort of high
single digit, low double digit returns.
Speaker 3 (18:51):
I think what we've done a good job.
Speaker 4 (18:52):
To is is is using some leverage, but doing it
in a very reasonable manner. I think the industry is
been pretty disciplined about not overlevering their fund structures. And
so if you if you put just say one turn
of leverage on there, you'll get up into a you know,
gross levered yield and kind of that thirteen to fifteen
(19:13):
percent range. And so you know, we're talking kind of
low double digit returns at forty percent loan to value
in a company that you know is growing and is
obviously you know, given the loan to value, is you
know valued in the opportunes if not?
Speaker 2 (19:27):
If not higher, Chris just shifting gears a little bit,
and you know, trying to delve into this more because
I'm a consumer analyst, Like, what sub sectors within consumer
services are you trying to gain more or less exposure to?
Speaker 4 (19:43):
Yeah, Look, you know in private credit, we you don't
kind of set the year out and say, Okay, we're
going to go after this specific sector or that specific sector.
You certainly have to have a macro view of how
you want to put a portfolio together. You typically, you know,
how you manage a fund, you'll have between you know,
fifteen one hundred credits in there. But what you're doing
(20:07):
and how we execute is we're calling on the private responsors,
and so that's where we are originating our deal flow from.
And so what we look at from just from a
basic credit fundamental standpoint is highly cast generative companies that
we can look back and see how they performed through cycles,
(20:28):
low cap X, high free cash flow conversion, companies that
have leading market shares can have pricing power. So those
are the types of things that we tend to focus
on in the sectors. What that leads us to is
service related businesses, business services, consumer services, healthcare technology.
Speaker 3 (20:50):
Though we do not focus on arr loans where.
Speaker 4 (20:55):
You underwrite recurring revenue, and so that's kind of how
we focus now as I think about the consumer today
and where we are underwriting, particularly when you think about
some of the dynamics that are taking place right with
you know, We talked about inflation earlier, immigration reform and
so forth, and what we're seeing is obviously the higher
(21:18):
income consumer continues to spend well and we are seeing
some fractures in the in the lower income consumer. So
we're certainly factoring that into the types of businesses that
we invest in how we're underwriting in this different scenarios
that you know that we're putting together as we're underwriting
these companies.
Speaker 1 (21:37):
I'm interesting, Christy what you said earlier about size scale
of your platform. You know, scale doesn't matter. There is
going to be consolidation. We are seeing it and we
had I think Goldman last year said something along the
lines of there's only going to be eight players in
this market ultimately, because it's a sort of arms race
at the moment and you are competing against very large
firms that are doing very large deals. What's yours rategy
(22:00):
to stay ahead?
Speaker 3 (22:02):
Yeah?
Speaker 4 (22:02):
You know, look, you know we've got just north of
forty five billion of a UM at Crescent today. We
did have we sold a portion of our business to
an insurance company, suddenlighte Financial, back in twenty twenty one,
and you know, likely it will be another transaction with
the same insurance company will go by the remaining part
(22:23):
of our business at the end of this year.
Speaker 3 (22:26):
They have an asset management platform.
Speaker 4 (22:28):
So the way I think about ways we can face
the market is there's a real estate arm, there's credit arm,
there's an infrastructure. So we face the market with over
three hundred billion of AUM and so that is very
beneficial when we're talking to investors, that's very beneficial, when
(22:48):
we're talking to banks, that's very beneficial when we're talking
to other service providers. And so we're getting scale from
our association with an insurance company. Now, when I look
at how do we grow Crescent, you certainly distribution is
a major growth avenue for us. When you look at
our investor base, it's almost all institutional today.
Speaker 3 (23:09):
We can't look the other way on the.
Speaker 4 (23:12):
Opportunity set within the wealth in the retail consumer. And
so we've made significant investments at the sun Life at
our parent companies level, and we've made significant investments Increscent
to capitalize on the democratization of private credit in bringing
that product.
Speaker 3 (23:30):
To the to the retail client.
Speaker 4 (23:33):
At the same time, we've expanded our distribution from the
institutional side, and you know, it's just actually on a
call today, and you know, we've got to get more creative.
Speaker 3 (23:43):
We've got to be thinking.
Speaker 4 (23:44):
Outside the box in bringing better product to our institutional clients.
Speaker 3 (23:50):
You know, like I said twenty years ago, we would
raise a fund.
Speaker 4 (23:52):
It was a closed end fund, five year investment period,
ten year life and everybody would come into that fund.
Speaker 3 (23:59):
That is just no longer the case. You know, you
have to you have to have.
Speaker 4 (24:04):
The flexibility, You have to have the platform that can
take on capital that wants to come into different strategies,
it wants to invest in different assets, wants to take
on different structures, whether it be leverage structures, liquidity structures,
geographic focus areas. And so with the size of our platform,
we're able to do that, and I think that is
going to be the other huge growth area for us.
(24:26):
And then as I think about you know, we're credit focused.
You know, private credit focus is very very broadly defined,
and so I think there's going to be significant opportunity
to expand outside of direct lending as well.
Speaker 1 (24:39):
Just to be clear that christ you said that some
Life will purchase the remainder of Crescent that it doesn't
already own by the end of this year.
Speaker 3 (24:46):
They have an option too, yes, And.
Speaker 1 (24:49):
Do you think they'll actually take that option?
Speaker 3 (24:51):
I do?
Speaker 2 (24:52):
Okay.
Speaker 1 (24:52):
Interesting on the democratization, that's something we've discussed many times
on this show. You raised some concerns about that los year.
We wrote about it at the time. What's changed.
Speaker 4 (25:04):
Look, I think you know our focus and what my
concern was derived from is, you know, we've grown up
in the institutional world where we focus on providing a
great experience for our institutional investor. In what that means
is is matching their expectations with what we can deliver
(25:25):
to them. You know what I raised last year, which
you guys wrote about and I still have concerns around,
is is we think about pivoting our business and addressing
the wealth and the red channel is making sure that
we can deliver a product that has the same experience
as they expect. You know, with the with the way
that the structures are set up today, I do think
(25:47):
there is some asymmetry within them that can create some confusion.
I'm not too sure that the you know, we want
to up our education process. We want to make sure
that we take on cas capital in a prudent manner
so that if there is volatility in the marketplace, and
that wealth channel investor, or, that retail investor wants the liquidity,
(26:10):
they understand the liquidity that we can provide. They have
to know that going in we're going to provide them
with an ill liquidity premium. We're going to aspire to
deliver an ill liquidity premium.
Speaker 3 (26:20):
Obviously there's a cost to that on on on liquidity
for them too.
Speaker 4 (26:24):
So we're focused on making sure that we put together
a product, we put together an educational process, we develop
the relationship with them that we can deliver and you know,
to their expectation and that that sort of is I
still have those same concerns and that's why we've been
you know, I think very prudent in our approach to
(26:46):
this is is we look to grow that channel of
our business.
Speaker 2 (26:49):
And is that how you differentiate Crescent or you know,
is that how you market you guys are different from
other private credit lenders.
Speaker 3 (26:57):
Yeah, I mean there's not many.
Speaker 4 (26:59):
There's not many other private credit lenders that have have,
you know, thirty five plus years of experience investing across cycles.
That's comprised of teams that you know, the senior people
have all been there for fifteen plus years, invested across
economic cycles. You know, we've created the relationships with the
(27:19):
private acuity sponsors over the course of decades, not months.
We've you know, we've you know, as I mentioned, we've
kind of invested across those cycles. So you can look
at our default rates and our credit underwriting standards and
the relationships and the and so forth that we've developed.
I think that's really how we kind of differentiate, you
know that that that investor experience. It certainly is first
(27:41):
and foremost on our mind, and I think we have
always been very, very thoughtful, and that's why we've been
able to develop an institutional following that has stayed with
us for years and years and years. As global in
nature is comprised of you know, the gold standard and
institutional investors, and we want to make sure we take
that same approach with the wealth and retail channel.
Speaker 1 (27:58):
Some of the private credit shops you're competing with teaming
up with retail banks that are trying to get some
of these loans off their books. Is that something that
you might consider.
Speaker 4 (28:07):
Yeah, Look, I mean, you know, never say never. I
mean the you know, as regulation comes, you know, and
we've seen it in Europe we actually saw a couple
of trades in Canada last year. We've seen a few
trades here in the US. You know, I think, uh,
you know, partnering with banks can be very very interesting
if if done appropriately. You know, some of the partnerships
(28:29):
that have been struck out there, you know, weren't necessarily
of interest to us. But I think that partnership model
is going to continue to evolve. I think that partnership
model is going to evolve with banks. I think it's
going to evolve with kind of traditional asset managers where
you can tap into their distribution channels.
Speaker 3 (28:44):
And so there's different things. I think what you needed
to define and you need to be.
Speaker 4 (28:49):
Clear on when you start to enter into these you know, conversations,
is what your need is, what what are you trying
to solve for? And so you know, we we we
have been pretty clear and kind of figuring out what
we're trying to solve for. And you know, I think
you'll see some partnerships and we've had some conversations over
the years, you know, but I think you are going
to see continued.
Speaker 3 (29:08):
Evolution of that partnership model.
Speaker 4 (29:10):
And you know, I think it's it's it's beneficial for
the asset manager.
Speaker 3 (29:14):
It's beneficial for the bank.
Speaker 4 (29:15):
It's it's beneficial for the traditional asset manager that has
the distribution network set up.
Speaker 2 (29:21):
And what would be a downside to partnering with the bank.
Speaker 3 (29:25):
Well, again, it depends upon kind of that partnership.
Speaker 4 (29:27):
You know. Some of the concerns with you know, some
of the partnerships that have struck is if you look
at the at the bank, is simply a sourcing model
for assets, you know, the sourcing of an asset, of
a private credit loan. That's only one component of what
we really need to do in order to be successful. Right,
You've got to manage that portfolio or that asset and
(29:50):
not everything is going to you know, end up how
you underwriter, how you expect it, and so you've got
to be able to have control, make decisions, work with
the management teams.
Speaker 3 (30:03):
And I think that you know, that is one area
where we.
Speaker 4 (30:06):
Have concern with some of these, with some of the
partnerships is who controls the assets once they're on your books,
who's making the uh, the investment decision? You know, are
there peripheral products that are involved that may drive decisions
that aren't necessarily aligned with both of.
Speaker 3 (30:26):
The partners in a partnership.
Speaker 4 (30:28):
Those are kind of some of the things that you know,
we are focused on and we want to make sure
we're lined up when we do find a partner, that
they're lined up with us.
Speaker 1 (30:37):
You mentioned regulation earlier. One thing regulations have flagged in
this market is valuations on the b d C loans.
You know, valuation has been a bit of a tricky
subject around private credit. But what I'm wondering is, given
some of the situations we've seen over the last year
or so, whether that needs to be more frequent valuation
(31:00):
and more frequent disclosure of what's going on under the
surface on these loans.
Speaker 2 (31:05):
Yeah.
Speaker 4 (31:06):
I certainly think that's an evolving topic, particularly as we
take private credit out to the retail and wealth channels
and when they're coming in and out and so forth.
So I think, you know, it's we're going to see
that evolve. But at the end of the day, these
(31:28):
loans are held by a small number of of investors.
We have secured structures, and what I mean by that
is the capital behind us is secured. They can't there
can't be a run on the bank of quote quote
unquote run on the bank and so you you don't
you don't have that daily liquidity momentum that is moving
(31:51):
the price of these loans. And so that's why I
think you tend to see a lot, you know, less
volatility within private credit. But we all have the capability
to value them on a on a daily basis, if
you will. But there's just not going to be a
lot of movement because of the structures and so forth
that we have set up and the protections around our
(32:13):
ability to hold these loans to maturity.
Speaker 1 (32:16):
And on the same kind of line, I mean, secondary
trading is picking up a little bit that have been
pushed by some some of the banks to do that,
but it is not really taking off as first as expected.
Do you think there will be more trading of these
loans secondary, you.
Speaker 3 (32:30):
Know, we haven't.
Speaker 4 (32:32):
There's been a lot of capital coming in long term
holders that create partnerships with companies, that create partnerships with
the private equity sponsors. We're investing to maturity, and so
the long term scaled providers. You know, I don't think
you're going to see a big uptick once you have
invested in a good loan. What you want to do
(32:53):
is provide that current income stream to to to our
investor and and and provide.
Speaker 3 (32:59):
Them with that yield.
Speaker 4 (33:01):
So, you know, I think there's going to be a
lot less trading kind of post you know, investment. I
do think what you'll see is, you know, we are
seeing credit secondaries space grow in popularity and that is
providing LPs with liquidity. I do think you're going to
continue to see that. You're seeing firms out there raise
very specific vehicles around credit secondaries, and so that will
(33:23):
be another liquidity feature that we I do expect to
see grow significantly within the space.
Speaker 1 (33:30):
On the capital coming in, you mentioned that we are
seeing a lot of larger fund closes. Is that expected
to continue? I mean, how big can you get?
Speaker 4 (33:39):
Yeah, Look, you know it is a scale game, as
I mentioned, and and so some of the particularly the
publicly traded managers, you know, they can go out and
they will raise very very large funds. We've seen fourteen
(34:00):
you know, fifteen to twenty billion dollar funds out there
being raised.
Speaker 3 (34:04):
It does mean that they have to write bigger checks.
Speaker 4 (34:07):
It does open up that addressable market that I was
referencing earlier. It makes you know, the opportunity set for
all of us more significant, and you know, it puts
the entire syndicated loan and bond market within the range.
Speaker 3 (34:21):
Of private credit providers.
Speaker 4 (34:22):
And so, you know, I think we are going to
continue to see that movement to scale, increasing fund size.
Where I think it gets, I think it is going
to require some investor discipline around what we have seen
in that upper middle market is tighter spreads, looser documentation,
(34:43):
a closer correlation with the syndicated markets. We've tried to
stay in that kind of that core and lower middle
market where we do think we can provide some differentiation
different portfolios, incremental spread, better control features, closer relationships with
the with the management teams and sponsors, and so we
think that is going to all accrue to our investors' benefit.
Speaker 3 (35:06):
But I do think you're going to.
Speaker 4 (35:08):
Continue to see expansion within private credit fundraising. And I
think you know, total AUM within the private credit space
has continue to grow quite dramatically.
Speaker 1 (35:16):
And do you think spreads get tizer and documentation gets
looser in the private middle market this year?
Speaker 3 (35:22):
You know, Look, I think what we're going to see is,
you know.
Speaker 4 (35:26):
What happened last year is we had a dearth of
m and a activity and so let you know, very
little new paper out there. My expectation is we are
going to see more new paper. Obviously, the trajectory or
the trajectory of the of the base rate has changed,
and as it comes down, we have seen stabilization in spreads.
(35:48):
You know, it's it tightened up one hundred to one
hundred and fifty basis points in the last twenty four
months or eighteen to twenty four months. But we have
a scene a stabilization of that. My expectation is, you know,
now that the base rate has slowed its descent and
we're in a pause environment, we're going to see a
pause in the compression of the spreads. And you know,
(36:11):
if we do see another rate decrease here, we'll probably
you know, you could theoretically see an increase in spreads,
and I think that's what the history would tell you
as well.
Speaker 1 (36:20):
Is there still relative value on the private against the
public market?
Speaker 3 (36:24):
Yeah?
Speaker 4 (36:24):
Look, I think when you when you look at you know,
relative value right now, private credits trading about one hundred
and fifty basis points wide of the syndicated markets. I
think there is true value. I think that value is
going to stay here. You know, Look, we're able to
deliver upfront fees, coupon call protection.
Speaker 3 (36:44):
We deliver that all to our investors.
Speaker 4 (36:47):
That's not something that you know happens across the syndicated markets.
Speaker 1 (36:52):
Talk to us about Europe, Chris, because you're one of
the rare guests who covers both Europe and the US.
I know it's not a big part of your value.
What's what's the opportunity there?
Speaker 4 (37:01):
Yeah, Look, I think when you think about Europe, you
have to think about it not just as one region,
but multiple regions.
Speaker 3 (37:08):
And so our strategy.
Speaker 4 (37:10):
Over there is lower middle market direct lending and so
that's really sub thirty five to forty million of EBA
DA sized companies. We are seeing greater yield per turn
of leverage over there. But again you have to be
I think, very careful when you think about what's happening
in the UK or in Germany. It's different than what's
(37:32):
happening in the Benelux region or in Spain and Italy,
and so we have seen a slower environment in Germany.
In the UK, we have had a lot of success
up in the you know, as we call it, the
northern beer drinking regions, and so we have feet on
the ground there.
Speaker 3 (37:49):
We have the local relationships. We've got an excellent team
that's out creating these relationships. It has an excellent, excellent
track record.
Speaker 4 (37:58):
It's led by someone that's been in that mark for
over twenty five years, and so you know, we're very
excited about that opportunity. Uh, with what you know, combined
with the with with our strategy there.
Speaker 1 (38:10):
And if you step back, I mean we started I
started by by talking about all the stuff I'm worried about.
I worry a lot about stuff because I'm a credit
personally generous as well, spend my whole time worrying. But
do you you you've seem a bit more up upbeat.
You have been doing this a long time though, and
you've seen the cycles. What what are we missing?
Speaker 3 (38:27):
Why? Why?
Speaker 1 (38:28):
You know, why should we be more positive on the
market than maybe I'm sounding.
Speaker 4 (38:33):
Yeah. Look, I'm a credit guy too, so I you know,
I'm I'm always a skeptic.
Speaker 3 (38:38):
You know, It's as my wife would constantly remind me.
Speaker 4 (38:42):
Look, I you know when I look back at you know,
I started here in two thousand and one. You know,
we were fighting for twenty five percent equity contributions and
highly leverage transactions. We'd be putting five and a half
six times leverage on a you know, eight or nine
time valued company. You Know, what I am highly encouraged
(39:03):
by is the amount of capitalists coming in behind us,
our ability to really work in a senior position with
these with the management teams. I think that addressable market
continues to expand, you know, I do think you know.
Speaker 3 (39:18):
We obviously have a lot of optimism.
Speaker 4 (39:20):
And a pro growth environment over the next foreseeable future.
Speaker 3 (39:25):
Here the economy seems to be on stable footing.
Speaker 4 (39:28):
So you know, I'm highly encouraged by some of the
opportunities that we're seeing out there. I think there's a
maturation in the industry. I think there has been discipline
within the industry when we talk about the use of leverage,
when we talk about you know, valuations and so forth,
and so, you know, I continue to be very bullish
on the opportunity set.
Speaker 2 (39:46):
Well, what's going to be the cause of the shoot
to drop if anything at all?
Speaker 4 (39:52):
Yeah, Look, I mean, look, there's going to be volatility, right,
so if we go into recession. At some point, we
are going to go into a recession. And I think
that that's where you're going to see differentiation that takes
place in the marketplace for private for private lenders, right,
you know. I think the concern is there's been a
lot of new capital with new managers raised in a
short period of time in the last few years, where
(40:13):
they have been investing in a in a bull market,
and so I think that's where you're really going to
see differentiation from the tenured long term managers that have
stayed disciplined in their investment philosophy and those that were
putting money to work because they had to put money
to work to grow the firm.
Speaker 1 (40:31):
So we shouldn't expect a big wave of defilise and
until the recession. Is that the take away?
Speaker 3 (40:36):
Yeah, that would be.
Speaker 1 (40:37):
I mean one of the things I worry about is
that the high rates that are being charged by private
lenders are unsustainable. Is that a completely rung proposition run assumption.
Speaker 3 (40:49):
Look, we I.
Speaker 4 (40:50):
Think when you look at the underlying portfolios and not
just speaking for for our portfolio, but you know, when
you look through the BBC filings and so forth, and
there's been a an incredible amount of resilience within these
companies in the face of this higher rate environment. I
think management teams have done a good job at kind
(41:10):
of cutting costs and right sizing their cash flow streams.
You know, there are times and you have seen an
increase in pick rates, right, So you've seen that in
the BBC universe, and in some ways it's reflection of
lenders working with management teams to give them the runway
to allow the companies to grow into their balance sheet.
Speaker 3 (41:29):
Right.
Speaker 4 (41:29):
Where I get concerned is when you have a lot
of bad companies that are overlevered today. And to your point,
you know, I think you still have a lot of
good companies that are capitalizing on a very constructive macro backdrop.
Maybe they have a little bit too much leverage, but
they have lenders in there that are working with them
(41:51):
to affect a successful outcome for everyone. So I think
that collaboration is a very positive thing that's in the
economy or in in our space. And that's what you're seeing,
you know, in the performance of the underlying portfolio companies
in this higher for longer environment.
Speaker 1 (42:09):
And there's not one thing right now that you worry
about in credit markets that kind of keeps you up
at night worrying.
Speaker 4 (42:14):
Well, look, I like you said earlier, I'm a credit
I worry about a lot of things, you know, the
you know, look, we've got geopolitical issues, notwithstanding what we
talked about earlier, you know, tariffs.
Speaker 3 (42:25):
And immigration and inflation, obviously a recession. I mean, those
are the types of things that that that that I'm
I'm really worried about.
Speaker 1 (42:34):
And if you have to put your finger on the
best credit market opportunity, that's say for the next twelve
to eighteen months, what's what's what's the undiscovered value? Where's
your edge?
Speaker 4 (42:43):
Yeah, Look, I mean we have a capital markets business too,
you know, so when I think about, you know, where
we're finding value right now, you know, it's that lower
core middle market in private lending right where we can
deliver on a levered basis double digit returns at that
forty percent lonch of value. So I like that space
a lot, and I think that we're going to see
a resurgence as I mentioned in deal activity and so deployment.
(43:06):
I would say number two, we have a lightly syndicated
product that we have an edge on. We've been executing
that strategy for a number of years. We can deliver
you know, a significant premium to the syndicated markets through
our origination channels, and so that's.
Speaker 3 (43:21):
A product that's been around for a while.
Speaker 4 (43:23):
Like I said, we have a differentiate and other people
haven't been able to figure out the special sauce.
Speaker 3 (43:27):
And so we're seeing a lot of capital come into.
Speaker 4 (43:29):
That strategy and then unstructured products right now, you know,
you know, we are seeing structured products. Obviously spreads have compressed,
but they still do offer a very very attractive premium
relative to other called investment grade products. So you know,
we're seeing some very kind of specifically for kind of
(43:50):
the COLO space. So I think that's a very attractive
area to invest in as well.
Speaker 1 (43:56):
And the golden age for private credit just goes on
keeps going. Great stuff. Chris Wright, President at Crestin Capital.
It's been a pleasure having you on the credit edge.
Many thanks, great well, thank you, and of course very
grateful to Julie Hung from Bloomberg Intelligence. Thank you for
joining us today. Julie, thank you for more credit analysis.
Read all of Julie Hung's work on the Bloomberg terminal.
Bloomberg Intelligence is part of our research department, with five
(44:17):
hundred analysts and strategists working across all markets. Coverage includes
over two thousand equities and credits, and outlooks on more
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Please do subscribe to the Credit Edge wherever you got
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Give us a review, tell your friends, or email me
(44:40):
directly at jcromb eight at Bloomberg dot net. I'm James Crombie.
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 Crumbie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Chris Wright, president
at Crescent Capital. How are you, Chris, I'm great, I'm great, James,
and yourself very well. Thank you, Thank you so much
for joining us today and very excited to hear your
credit market views, and also delighted to have back on
the show as co host Julie Hung with Bloomberg Intelligence.
Speaker 2 (00:39):
Hello Julie, Hello, good afternoon, Good morning. My name is
Julie Hung. I am Bloomberg Intelligence Credit sector analyst for
the consumer stables sector.
Speaker 1 (00:47):
Great, So, I'm just going to set the scene here
at the top. Markets have been whipswored by trade wars
that will probably fuel inflation and could also dent US growth.
Both will be quite bad for credit. Yet corporate bonds
and loans remain priced for perfection. After getting squeezed a
lot last year, Debt spreads are pretty close to where
they were in two thousand and seven, just before the
global financial crisis blew everything up. If you only looked
(01:09):
at credit market pricing, you'd think the world was a
very peaceful, calm place right now, but the news headlines
would suggest the exact opposite. There seems to be quite
a lot of complacency out there. And I also think
that the very strong demand for credit product and not
a lot of new supply is actually keeping things artificially
tight at the moment. But I wanted to start there, Chris,
what's your take, Why the disconnect do you think between
(01:31):
pricing and all the external noise and are we in
for some kind of reckoning here?
Speaker 3 (01:37):
Yeah, look, it's a it's a great question.
Speaker 4 (01:39):
I mean, as you mentioned, you know, when I when
I'd look at the capital markets, you know, high yield,
incredibly tight, floating rate you know, they're you know, they're
obviously very tight too.
Speaker 3 (01:50):
The in the loan market.
Speaker 4 (01:52):
You know, at the same time, obviously default rates continue
to be very very low. We have a backdrop of
a very pro growth, you know, administration in place. There's
a lot of optimism that's being infused into the.
Speaker 3 (02:06):
Economy right now.
Speaker 4 (02:08):
You know, with the you we're starting to see a
little bit of visibility I think into what the how
the administration is gonna you know, act over the next
four years, as well as how the FED is going
to act over the next four years. We've seen them
obviously slow down and pause rate cuts. And what does
(02:29):
that mean. I mean that means that the economies is
on unstable footing. Capital markets are opening open right now,
and you know, my expectation is is you know, we're
gonna we're you know, we're in a good situation right now,
but you know, there certainly could be some volatility.
Speaker 3 (02:45):
On the horizon.
Speaker 2 (02:47):
Chris, I was looking at some spread movement yesterday. I mean,
Monday was just hectic coming into the office, and it
didn't seem like consumer spreads moved that much given that
there would be a threats of like higher like food inflation,
higher inflation generally for buyers. Is it more like a
function that consumers aren't believing that the tariffs are really
(03:09):
going to go through because we have, you know, the
thirty day pause for Mexico and Canada. Do you think
that it's just like a healthier overall economy and you know,
everyone's just kind of like waiting to see what's happening,
because it didn't seem like it would have the effect
on the credit markets as I thought it would have.
Speaker 4 (03:27):
Yeah, Look, I think that I think the market is
understanding that we are in a business friendly environment. You know,
when you look at the people around the Trump administration,
they are relatively you know, it's.
Speaker 3 (03:40):
Full of commercial people.
Speaker 4 (03:42):
So I think when we see the headlines like the tariffs,
and obviously if they did go through, you know, inflation
would get passed along and we'd see price increases. But
I think the markets are kind of seeing through that
that that tariffs are in fact nuanced. You know, we
obviously have seen the pauses. This this is just of
you know, the beginning of a negotiation. I think Trump
(04:02):
would say, you know, look, I mean his negotiating style
is different than what we have seen historically in the president,
you know, so in in we're just starting to see that,
and I think I think the I think the markets
are seeing through that, and that's why you're not seeing
the quite the volatility that you may expect when you
see a twenty five percent tariff coming across the bottom
of the ticker.
Speaker 1 (04:23):
Not in credit, but you definitely have seen it on
the FEX in the stock market, and so, you know,
I get the business friendly side of the administration. We've
all seen the guys behind Trump, but still it's very
hard to do business when it's been you know, when
it's so chaotic, you really can't see clear rules of
the game. It's really hard to take a long term view.
So operating businesses must be quite hard at this point.
Speaker 4 (04:43):
Now. Yeah, you know, I may take a little bit
of the opposite side of that is that I think
we are aren't starting to see the breadcrumbs of things
to come right, that that things are going to be nuanced,
That the markets shouldn't react to every headline. That you know,
(05:05):
there are going to be a lot of actions and reactions.
Speaker 3 (05:08):
And that is going to move things forward.
Speaker 4 (05:11):
And so you know, I think you know, look, the
fattest is staying, you know, pretty steady right now as well.
The credit markets you know, are are pretty stable. So
you know, yes, there is going to be a lot
of volatility, but I think the markets are now, uh
becoming more accustomed to not reacting to those headlines.
Speaker 2 (05:34):
Do you feel that, you know, just from a because
I covered the consumer sector that let's say, the tarffs
to go through and we do see like higher inflation
at that level, that eventually the consumer is going to
adjust to it. Because I feel like in this higher
food inflation environment that we've seen over the past couple
of years. There wasn't this big major shift to private label.
(05:58):
There was some like increasing valuable sales, but I feel
like in the United States it was a lot more muted,
and it seems like for you know, some of the
branded products, like there's more of an adjustment, like the
consumer gets concerned kind of like you said, like the
knee jerk reaction, and then they just adjust to it
and it just becomes normal life. So if these tariffs
(06:19):
do go through, do you think there will be like
like an eventual adjustment to higher prices.
Speaker 4 (06:25):
Yeah. I mean, look, you know, I am by no
means a consumer expert here, but look, I think their
natural reaction is going to be initially to you know.
Speaker 3 (06:34):
Trade down to help offset. And as you mentioned, you know,
there hasn't been a lot of trading.
Speaker 4 (06:40):
Down over the you know, over the last few years,
and so I think that will be the first step.
And then look, I don't think you know, Trump was
elected certainly on an anti inflation platform, and as I mentioned,
you know, it does feel like there's a number of
commercial people that he's placed in very senior roles, you know,
(07:01):
My expectation is he is not going to let inflation
get out of control here. You know, it does make
me a little nervous when he says, hey, we're going
to have to go through some pain. I'm hoping that
is just a negotiating tactic, and I suspect that is
a negotiating tactic. But to your point, yes, the consumer
I think has some room to adjust, and I think
that adjustment will be made relatively quickly if we do
(07:23):
some see some inflationary pressures, particularly on the consumer side.
Speaker 2 (07:26):
Yeah, So do you feel like you know that the
tear of talk is all not fear, But he's just like,
this is what we're going to do if you don't
help us with securing your borders. This is what we're
going to do if you know, you don't like stop
fentnel from coming into the country. So, kind of going
back to what you said, it's more of a negotiating
tactic than something that he really wants to impose on
(07:50):
our neighbors.
Speaker 3 (07:52):
Yeah, I have to imagine.
Speaker 4 (07:53):
I mean, he looks at that as you know, it's
it's very headline worthy. It's something that he has the
power to an act. It's something that he has talked
about and it's something that he did implement, you know,
back in his first administration. You know, but I think
he's using terists for both economic and non economic purposes,
as you mentioned, and so I think that's what he's uh,
(08:14):
you know, he's focused on, is trying to use that
as a stick, if you will, to get outcomes that
are both economic and non economic.
Speaker 1 (08:22):
So, Chris, you're head of private credit over at Crescent
and you also do a lot of middle market business,
and I think that really is the kind of foundational
piece of the economy that we don't often get to
hear of. But you know, you're close to that action.
What are you hearing from the middle market guys, How
are they operating on the ground.
Speaker 4 (08:38):
Yeah, Look, you know it's been talked for the last
twelve months of rekindling of deal making activity.
Speaker 3 (08:46):
We are starting to see, uh, some of that happen.
Speaker 4 (08:49):
We saw, you know, increase in deal making activity towards
the end of last year. I think there's a number
of tailwinds that you know, are really going to kind
of move the market forward.
Speaker 3 (09:01):
You know, certainly now with.
Speaker 4 (09:02):
The election behind us, we do have you know, despite
the uncertainty that we just talked about. At least we
know what we're going to have over the next four years.
We've got a little bit better visibility on the path
of the FED. And you know, when you look at
some of the broad numbers out there, lots of dry
powder in the hands of private equity firms, plenty of
(09:26):
capital available to finance buyouts, portfolios that are getting long
in the tooth, institutional investors clamoring for some realizations. I
think a lot of those things set up for increased
M and A activity, and we're well prepared for that
and excited about that opportunity.
Speaker 2 (09:45):
So private credit has been like another like big topic
that has been discussed, just like the explosiveness of it.
Do you see that continuing in the near term, near
to intermediate terms?
Speaker 4 (09:59):
Yeah, look, I mean, you know, I think we've gone
through this, uh, you know, the start of a change
in capital formation, right, And and what private credit does
is is it brings capital to companies into sponsors in
a much more efficient manner than the old methodology of
(10:20):
going to a bank and having them underwrite and then
having them just move the paper to another buyer. And
so you know, I think We're going to continue to
see that growth as we evolve this capital formation and
efficiency and the.
Speaker 3 (10:35):
Expediency of which we can bring capital to companies.
Speaker 4 (10:39):
You know, I just sort of think about you know,
I started this business, you know, close to twenty five
years ago at at Creston, and at the time we
were primarily a you know, a junior debt investor. And
back then, the way it would work is we would
get called by a private actutity sponsor, and like I said,
we were primarily junior debt focused, and you know, we
would work with the banks.
Speaker 3 (10:59):
They would the first lead.
Speaker 4 (11:00):
We would come in with a junior piece typically at
the time it was a senior.
Speaker 3 (11:04):
Subordinated note we would invest in.
Speaker 4 (11:07):
That would be the last time that we would actually
infuse capital unless something went wrong. And so you know,
we'd obviously monitor the company and work with the management team,
and then we would get our current income, our coupon back,
and then we would look to get a realization and
then we'd move on to the next company.
Speaker 3 (11:22):
So you you.
Speaker 4 (11:23):
Transport that to you know, to today and and and
today you know, we'll make that initial acquisition, but.
Speaker 3 (11:31):
We're working with the company in a lot closer ways.
We're providing revolvers. We're providing additional capital to help them
execute on their growth plan, whether that be capital to
make acquisitions, whether that be additional capital for them to
buy equipment and machinery to expand their business, whether it
be additional capital to expand their sales force. And so
(11:54):
we have become much more intertwined with companies and we
have been a much more important part of their growth thesis.
Speaker 4 (12:03):
I think that dynamic, that's that capital formation change that
I'm talking about.
Speaker 3 (12:07):
I think that dynamic is here to stay.
Speaker 1 (12:10):
Is it getting tough of those to do this sort
of business? As as you said, you know, the fetis
on hold rates are quite high. Maybe inflation pushes them higher.
You know, some people are talking about a high as
a potential next move. And at the same time we're
seeing the stress from amendments, extensions, payment in kind. It's
hard to see the defaulops, but you know, there's definitely
(12:30):
some stress out there. Your colleague Mark at Snasio was
on the show last year and he called a golden age.
Is it still a golden age?
Speaker 3 (12:39):
Yeah? Look, I you know, I certainly think it is.
Speaker 4 (12:42):
Look, when we're investing at forty percent loan to value,
meaning we have sixty percent of the of the company.
Speaker 3 (12:50):
Of the capital of the company sits below us.
Speaker 4 (12:54):
We're able to generate intoday's environment, double digit return earns.
With senior debt, we as I mentioned, are much more
intertwined with the company. Oftentimes in the senior debt that
we're investing in, you know, there's two, three or four groups.
Oftentimes we're taking controlling positions. You know, that dynamic that
(13:19):
think sets up very very favorably as a you know,
as an investment manager, and so you know, I'm very
very optimistic. It's always going to get harder. I think
what you're seeing with the growth in private credit, you're
seeing a lot of the capital go to the scaled managers.
Speaker 3 (13:39):
I think scale does matter.
Speaker 4 (13:42):
Why does it matter because we have additional capital, because
we have experience, We've invested through cycles, we have the
resources to help companies, We have the resources to access
other you know, areas of capital or other avenues of capital.
Speaker 3 (13:57):
And so I think you're going to continue to see that.
Speaker 4 (13:59):
Trend towards you know, towards scale, towards consolidation, and you
just got to make sure you're.
Speaker 3 (14:06):
On the right side of that.
Speaker 2 (14:07):
I mean from from my perspective, like if I was
looking for capital, the ease of or how how much
easier it is in the private credit markets, like the
the investment in an entire companies capital structure. It seems
like your involvement with a company from beginning to end,
I mean, do you think that there would ever be
in the future more private credit activity versus going into
(14:31):
the public markets.
Speaker 4 (14:33):
So just don't understand so more private market activity versus
going into the public markets. I mean, do I think
there's going to be a market share shift back to
the public markets exactly?
Speaker 3 (14:44):
Yeah.
Speaker 4 (14:44):
Look, I think you know, look, we've proven our wares, right,
I think the private credit all all all of our
peers here have really kind of proven our value add
to both the companies and the management teams. I think
that the stat that sort of you know that that
I like to that supports that is is you know,
when you look at how we're deploying our capital. You know,
(15:06):
nowadays a significant amount of our capital is going into,
you know, supporting existing companies. Those companies make you change hands,
they want the existing lenders to stay with them. So
I think it's important to CFOs that they know who
their lenders are, they develop that relationship.
Speaker 3 (15:25):
It accrues to our benefit.
Speaker 4 (15:27):
Because quite honestly, you know, if we're invested in a
company for four or five years, we're getting board packages,
we're seeing monthly financials, we're talking to the to the CFO,
to the CEO, to the salespeople on a on a
monthly basis. You know, that's we're doing diligence over that
long period of time. And I can can can you know,
invest in a company with a lot more conviction after
(15:49):
a four year timeframe with them than over a three
or four month period of a typical diligence into a
new company. So I don't see quite the shift that
you're talking about coming back to the public markets now
where we stay at an eighty five percent market share,
you know, private credit call it an eighty five percent
market share of new biots.
Speaker 3 (16:07):
Will it stay that high? Look?
Speaker 4 (16:09):
I think that is partly a function of of you know,
of the rising rate environment, the pullback in the public markets,
and so I think it will equalize a little bit more,
not fifty to fifty, but it will, I should say
stabilize a little bit more.
Speaker 3 (16:23):
But we're going to continue to have a line share
of of the market share.
Speaker 4 (16:27):
And I think as private credit grows, we're able to
write bigger checks. And so that addressable market that used
to be topped out with a certain size now continues
to increase. And so you know that's going to you know,
accrue to our benefit too, with with A with a
with a greater addressable market.
Speaker 1 (16:44):
So what does a middle market deal like to you, Chris?
We had our guest a couple of weeks ago tell
us that a billion dollars is now a middle market loan.
But that surprised me.
Speaker 4 (16:51):
That, Yeah, look, you know I kind of think about
you know, lower and core middle market at some one
hundred and fifty million of eba DA sized company.
Speaker 3 (17:00):
You know, if you think about that at you know,
six times leverage, one hundred.
Speaker 4 (17:03):
And fifty million dollars, Ebida company is kind of a
nine hundred million dollar you know called that that's you know, unitron.
So you know, sub I would always say, kind of
sub kind of nine hundred to a billion dollar unitranch
is middle market. I think when you get up north
of that, you know, you start getting into syndicated markets,
syndicated replacement opportunities that market has grown substantially. That's really
(17:27):
addressed by you know, the really large players. But that's
kind of how we break apart the market.
Speaker 2 (17:33):
And then where do you see more of the the
use for funds like more like you mentioned M and
A before you mentioned some capex. Do you see more
companies borrowing for M and A or for other purposes?
Speaker 4 (17:48):
Yeah, I mean, look at a huge use is M
and A, you know, especially in that in that middle
market that you know that I just defined right. You know,
they're going out, they're partnering with private equity sponsor, who
brings a ton of governance, who brings access to capital,
who brings you know, strategic advice, and oftentimes we're seeing
(18:10):
their investment thesis is centered around expanding the company through acquisitions,
and that's why they partner with someone like us. So
you know the primary use of additional capital after our
initial investment is going to be M and A activity.
Speaker 1 (18:25):
You said double digit returns. I'm curious as to whether
that means ten twenty more than that and what kind
of deal would get you that return?
Speaker 4 (18:34):
Yeah?
Speaker 3 (18:34):
Look, I mean spreads.
Speaker 4 (18:35):
You know, when the unitronch you know today are going
to be sort of you know, five hundred ish, you know,
give or take. You know, you'll see them as litt
as four to fifty, you'll see them to five fifty,
and so you know you can get sort of high
single digit, low double digit returns.
Speaker 3 (18:51):
I think what we've done a good job.
Speaker 4 (18:52):
To is is is using some leverage, but doing it
in a very reasonable manner. I think the industry is
been pretty disciplined about not overlevering their fund structures. And
so if you if you put just say one turn
of leverage on there, you'll get up into a you know,
gross levered yield and kind of that thirteen to fifteen
(19:13):
percent range. And so you know, we're talking kind of
low double digit returns at forty percent loan to value
in a company that you know is growing and is
obviously you know, given the loan to value, is you
know valued in the opportunes if not?
Speaker 2 (19:27):
If not higher, Chris just shifting gears a little bit,
and you know, trying to delve into this more because
I'm a consumer analyst, Like, what sub sectors within consumer
services are you trying to gain more or less exposure to?
Speaker 4 (19:43):
Yeah, Look, you know in private credit, we you don't
kind of set the year out and say, Okay, we're
going to go after this specific sector or that specific sector.
You certainly have to have a macro view of how
you want to put a portfolio together. You typically, you know,
how you manage a fund, you'll have between you know,
fifteen one hundred credits in there. But what you're doing
(20:07):
and how we execute is we're calling on the private responsors,
and so that's where we are originating our deal flow from.
And so what we look at from just from a
basic credit fundamental standpoint is highly cast generative companies that
we can look back and see how they performed through cycles,
(20:28):
low cap X, high free cash flow conversion, companies that
have leading market shares can have pricing power. So those
are the types of things that we tend to focus
on in the sectors. What that leads us to is
service related businesses, business services, consumer services, healthcare technology.
Speaker 3 (20:50):
Though we do not focus on arr loans where.
Speaker 4 (20:55):
You underwrite recurring revenue, and so that's kind of how
we focus now as I think about the consumer today
and where we are underwriting, particularly when you think about
some of the dynamics that are taking place right with
you know, We talked about inflation earlier, immigration reform and
so forth, and what we're seeing is obviously the higher
(21:18):
income consumer continues to spend well and we are seeing
some fractures in the in the lower income consumer. So
we're certainly factoring that into the types of businesses that
we invest in how we're underwriting in this different scenarios
that you know that we're putting together as we're underwriting
these companies.
Speaker 1 (21:37):
I'm interesting, Christy what you said earlier about size scale
of your platform. You know, scale doesn't matter. There is
going to be consolidation. We are seeing it and we
had I think Goldman last year said something along the
lines of there's only going to be eight players in
this market ultimately, because it's a sort of arms race
at the moment and you are competing against very large
firms that are doing very large deals. What's yours rategy
(22:00):
to stay ahead?
Speaker 3 (22:02):
Yeah?
Speaker 4 (22:02):
You know, look, you know we've got just north of
forty five billion of a UM at Crescent today. We
did have we sold a portion of our business to
an insurance company, suddenlighte Financial, back in twenty twenty one,
and you know, likely it will be another transaction with
the same insurance company will go by the remaining part
(22:23):
of our business at the end of this year.
Speaker 3 (22:26):
They have an asset management platform.
Speaker 4 (22:28):
So the way I think about ways we can face
the market is there's a real estate arm, there's credit arm,
there's an infrastructure. So we face the market with over
three hundred billion of AUM and so that is very
beneficial when we're talking to investors, that's very beneficial, when
(22:48):
we're talking to banks, that's very beneficial when we're talking
to other service providers. And so we're getting scale from
our association with an insurance company. Now, when I look
at how do we grow Crescent, you certainly distribution is
a major growth avenue for us. When you look at
our investor base, it's almost all institutional today.
Speaker 3 (23:09):
We can't look the other way on the.
Speaker 4 (23:12):
Opportunity set within the wealth in the retail consumer. And
so we've made significant investments at the sun Life at
our parent companies level, and we've made significant investments Increscent
to capitalize on the democratization of private credit in bringing
that product.
Speaker 3 (23:30):
To the to the retail client.
Speaker 4 (23:33):
At the same time, we've expanded our distribution from the
institutional side, and you know, it's just actually on a
call today, and you know, we've got to get more creative.
Speaker 3 (23:43):
We've got to be thinking.
Speaker 4 (23:44):
Outside the box in bringing better product to our institutional clients.
Speaker 3 (23:50):
You know, like I said twenty years ago, we would
raise a fund.
Speaker 4 (23:52):
It was a closed end fund, five year investment period,
ten year life and everybody would come into that fund.
Speaker 3 (23:59):
That is just no longer the case. You know, you
have to you have to have.
Speaker 4 (24:04):
The flexibility, You have to have the platform that can
take on capital that wants to come into different strategies,
it wants to invest in different assets, wants to take
on different structures, whether it be leverage structures, liquidity structures,
geographic focus areas. And so with the size of our platform,
we're able to do that, and I think that is
going to be the other huge growth area for us.
(24:26):
And then as I think about you know, we're credit focused.
You know, private credit focus is very very broadly defined,
and so I think there's going to be significant opportunity
to expand outside of direct lending as well.
Speaker 1 (24:39):
Just to be clear that christ you said that some
Life will purchase the remainder of Crescent that it doesn't
already own by the end of this year.
Speaker 3 (24:46):
They have an option too, yes, And.
Speaker 1 (24:49):
Do you think they'll actually take that option?
Speaker 3 (24:51):
I do?
Speaker 2 (24:52):
Okay.
Speaker 1 (24:52):
Interesting on the democratization, that's something we've discussed many times
on this show. You raised some concerns about that los year.
We wrote about it at the time. What's changed.
Speaker 4 (25:04):
Look, I think you know our focus and what my
concern was derived from is, you know, we've grown up
in the institutional world where we focus on providing a
great experience for our institutional investor. In what that means
is is matching their expectations with what we can deliver
(25:25):
to them. You know what I raised last year, which
you guys wrote about and I still have concerns around,
is is we think about pivoting our business and addressing
the wealth and the red channel is making sure that
we can deliver a product that has the same experience
as they expect. You know, with the with the way
that the structures are set up today, I do think
(25:47):
there is some asymmetry within them that can create some confusion.
I'm not too sure that the you know, we want
to up our education process. We want to make sure
that we take on cas capital in a prudent manner
so that if there is volatility in the marketplace, and
that wealth channel investor, or, that retail investor wants the liquidity,
(26:10):
they understand the liquidity that we can provide. They have
to know that going in we're going to provide them
with an ill liquidity premium. We're going to aspire to
deliver an ill liquidity premium.
Speaker 3 (26:20):
Obviously there's a cost to that on on on liquidity
for them too.
Speaker 4 (26:24):
So we're focused on making sure that we put together
a product, we put together an educational process, we develop
the relationship with them that we can deliver and you know,
to their expectation and that that sort of is I
still have those same concerns and that's why we've been
you know, I think very prudent in our approach to
(26:46):
this is is we look to grow that channel of
our business.
Speaker 2 (26:49):
And is that how you differentiate Crescent or you know,
is that how you market you guys are different from
other private credit lenders.
Speaker 3 (26:57):
Yeah, I mean there's not many.
Speaker 4 (26:59):
There's not many other private credit lenders that have have,
you know, thirty five plus years of experience investing across cycles.
That's comprised of teams that you know, the senior people
have all been there for fifteen plus years, invested across
economic cycles. You know, we've created the relationships with the
(27:19):
private acuity sponsors over the course of decades, not months.
We've you know, we've you know, as I mentioned, we've
kind of invested across those cycles. So you can look
at our default rates and our credit underwriting standards and
the relationships and the and so forth that we've developed.
I think that's really how we kind of differentiate, you
know that that that investor experience. It certainly is first
(27:41):
and foremost on our mind, and I think we have
always been very, very thoughtful, and that's why we've been
able to develop an institutional following that has stayed with
us for years and years and years. As global in
nature is comprised of you know, the gold standard and
institutional investors, and we want to make sure we take
that same approach with the wealth and retail channel.
Speaker 1 (27:58):
Some of the private credit shops you're competing with teaming
up with retail banks that are trying to get some
of these loans off their books. Is that something that
you might consider.
Speaker 4 (28:07):
Yeah, Look, I mean, you know, never say never. I
mean the you know, as regulation comes, you know, and
we've seen it in Europe we actually saw a couple
of trades in Canada last year. We've seen a few
trades here in the US. You know, I think, uh,
you know, partnering with banks can be very very interesting
if if done appropriately. You know, some of the partnerships
(28:29):
that have been struck out there, you know, weren't necessarily
of interest to us. But I think that partnership model
is going to continue to evolve. I think that partnership
model is going to evolve with banks. I think it's
going to evolve with kind of traditional asset managers where
you can tap into their distribution channels.
Speaker 3 (28:44):
And so there's different things. I think what you needed
to define and you need to be.
Speaker 4 (28:49):
Clear on when you start to enter into these you know, conversations,
is what your need is, what what are you trying
to solve for? And so you know, we we we
have been pretty clear and kind of figuring out what
we're trying to solve for. And you know, I think
you'll see some partnerships and we've had some conversations over
the years, you know, but I think you are going
to see continued.
Speaker 3 (29:08):
Evolution of that partnership model.
Speaker 4 (29:10):
And you know, I think it's it's it's beneficial for
the asset manager.
Speaker 3 (29:14):
It's beneficial for the bank.
Speaker 4 (29:15):
It's it's beneficial for the traditional asset manager that has
the distribution network set up.
Speaker 2 (29:21):
And what would be a downside to partnering with the bank.
Speaker 3 (29:25):
Well, again, it depends upon kind of that partnership.
Speaker 4 (29:27):
You know. Some of the concerns with you know, some
of the partnerships that have struck is if you look
at the at the bank, is simply a sourcing model
for assets, you know, the sourcing of an asset, of
a private credit loan. That's only one component of what
we really need to do in order to be successful. Right,
You've got to manage that portfolio or that asset and
(29:50):
not everything is going to you know, end up how
you underwriter, how you expect it, and so you've got
to be able to have control, make decisions, work with
the management teams.
Speaker 3 (30:03):
And I think that you know, that is one area
where we.
Speaker 4 (30:06):
Have concern with some of these, with some of the
partnerships is who controls the assets once they're on your books,
who's making the uh, the investment decision? You know, are
there peripheral products that are involved that may drive decisions
that aren't necessarily aligned with both of.
Speaker 3 (30:26):
The partners in a partnership.
Speaker 4 (30:28):
Those are kind of some of the things that you know,
we are focused on and we want to make sure
we're lined up when we do find a partner, that
they're lined up with us.
Speaker 1 (30:37):
You mentioned regulation earlier. One thing regulations have flagged in
this market is valuations on the b d C loans.
You know, valuation has been a bit of a tricky
subject around private credit. But what I'm wondering is, given
some of the situations we've seen over the last year
or so, whether that needs to be more frequent valuation
(31:00):
and more frequent disclosure of what's going on under the
surface on these loans.
Speaker 2 (31:05):
Yeah.
Speaker 4 (31:06):
I certainly think that's an evolving topic, particularly as we
take private credit out to the retail and wealth channels
and when they're coming in and out and so forth.
So I think, you know, it's we're going to see
that evolve. But at the end of the day, these
(31:28):
loans are held by a small number of of investors.
We have secured structures, and what I mean by that
is the capital behind us is secured. They can't there
can't be a run on the bank of quote quote
unquote run on the bank and so you you don't
you don't have that daily liquidity momentum that is moving
(31:51):
the price of these loans. And so that's why I
think you tend to see a lot, you know, less
volatility within private credit. But we all have the capability
to value them on a on a daily basis, if
you will. But there's just not going to be a
lot of movement because of the structures and so forth
that we have set up and the protections around our
(32:13):
ability to hold these loans to maturity.
Speaker 1 (32:16):
And on the same kind of line, I mean, secondary
trading is picking up a little bit that have been
pushed by some some of the banks to do that,
but it is not really taking off as first as expected.
Do you think there will be more trading of these
loans secondary, you.
Speaker 3 (32:30):
Know, we haven't.
Speaker 4 (32:32):
There's been a lot of capital coming in long term
holders that create partnerships with companies, that create partnerships with
the private equity sponsors. We're investing to maturity, and so
the long term scaled providers. You know, I don't think
you're going to see a big uptick once you have
invested in a good loan. What you want to do
(32:53):
is provide that current income stream to to to our
investor and and and provide.
Speaker 3 (32:59):
Them with that yield.
Speaker 4 (33:01):
So, you know, I think there's going to be a
lot less trading kind of post you know, investment. I
do think what you'll see is, you know, we are
seeing credit secondaries space grow in popularity and that is
providing LPs with liquidity. I do think you're going to
continue to see that. You're seeing firms out there raise
very specific vehicles around credit secondaries, and so that will
(33:23):
be another liquidity feature that we I do expect to
see grow significantly within the space.
Speaker 1 (33:30):
On the capital coming in, you mentioned that we are
seeing a lot of larger fund closes. Is that expected
to continue? I mean, how big can you get?
Speaker 4 (33:39):
Yeah, Look, you know it is a scale game, as
I mentioned, and and so some of the particularly the
publicly traded managers, you know, they can go out and
they will raise very very large funds. We've seen fourteen
(34:00):
you know, fifteen to twenty billion dollar funds out there
being raised.
Speaker 3 (34:04):
It does mean that they have to write bigger checks.
Speaker 4 (34:07):
It does open up that addressable market that I was
referencing earlier. It makes you know, the opportunity set for
all of us more significant, and you know, it puts
the entire syndicated loan and bond market within the range.
Speaker 3 (34:21):
Of private credit providers.
Speaker 4 (34:22):
And so, you know, I think we are going to
continue to see that movement to scale, increasing fund size.
Where I think it gets, I think it is going
to require some investor discipline around what we have seen
in that upper middle market is tighter spreads, looser documentation,
(34:43):
a closer correlation with the syndicated markets. We've tried to
stay in that kind of that core and lower middle
market where we do think we can provide some differentiation
different portfolios, incremental spread, better control features, closer relationships with
the with the management teams and sponsors, and so we
think that is going to all accrue to our investors' benefit.
Speaker 3 (35:06):
But I do think you're going to.
Speaker 4 (35:08):
Continue to see expansion within private credit fundraising. And I
think you know, total AUM within the private credit space
has continue to grow quite dramatically.
Speaker 1 (35:16):
And do you think spreads get tizer and documentation gets
looser in the private middle market this year?
Speaker 3 (35:22):
You know, Look, I think what we're going to see is,
you know.
Speaker 4 (35:26):
What happened last year is we had a dearth of
m and a activity and so let you know, very
little new paper out there. My expectation is we are
going to see more new paper. Obviously, the trajectory or
the trajectory of the of the base rate has changed,
and as it comes down, we have seen stabilization in spreads.
(35:48):
You know, it's it tightened up one hundred to one
hundred and fifty basis points in the last twenty four
months or eighteen to twenty four months. But we have
a scene a stabilization of that. My expectation is, you know,
now that the base rate has slowed its descent and
we're in a pause environment, we're going to see a
pause in the compression of the spreads. And you know,
(36:11):
if we do see another rate decrease here, we'll probably
you know, you could theoretically see an increase in spreads,
and I think that's what the history would tell you
as well.
Speaker 1 (36:20):
Is there still relative value on the private against the
public market?
Speaker 3 (36:24):
Yeah?
Speaker 4 (36:24):
Look, I think when you when you look at you know,
relative value right now, private credits trading about one hundred
and fifty basis points wide of the syndicated markets. I
think there is true value. I think that value is
going to stay here. You know, Look, we're able to
deliver upfront fees, coupon call protection.
Speaker 3 (36:44):
We deliver that all to our investors.
Speaker 4 (36:47):
That's not something that you know happens across the syndicated markets.
Speaker 1 (36:52):
Talk to us about Europe, Chris, because you're one of
the rare guests who covers both Europe and the US.
I know it's not a big part of your value.
What's what's the opportunity there?
Speaker 4 (37:01):
Yeah, Look, I think when you think about Europe, you
have to think about it not just as one region,
but multiple regions.
Speaker 3 (37:08):
And so our strategy.
Speaker 4 (37:10):
Over there is lower middle market direct lending and so
that's really sub thirty five to forty million of EBA
DA sized companies. We are seeing greater yield per turn
of leverage over there. But again you have to be
I think, very careful when you think about what's happening
in the UK or in Germany. It's different than what's
(37:32):
happening in the Benelux region or in Spain and Italy,
and so we have seen a slower environment in Germany.
In the UK, we have had a lot of success
up in the you know, as we call it, the
northern beer drinking regions, and so we have feet on
the ground there.
Speaker 3 (37:49):
We have the local relationships. We've got an excellent team
that's out creating these relationships. It has an excellent, excellent
track record.
Speaker 4 (37:58):
It's led by someone that's been in that mark for
over twenty five years, and so you know, we're very
excited about that opportunity. Uh, with what you know, combined
with the with with our strategy there.
Speaker 1 (38:10):
And if you step back, I mean we started I
started by by talking about all the stuff I'm worried about.
I worry a lot about stuff because I'm a credit
personally generous as well, spend my whole time worrying. But
do you you you've seem a bit more up upbeat.
You have been doing this a long time though, and
you've seen the cycles. What what are we missing?
Speaker 3 (38:27):
Why? Why?
Speaker 1 (38:28):
You know, why should we be more positive on the
market than maybe I'm sounding.
Speaker 4 (38:33):
Yeah. Look, I'm a credit guy too, so I you know,
I'm I'm always a skeptic.
Speaker 3 (38:38):
You know, It's as my wife would constantly remind me.
Speaker 4 (38:42):
Look, I you know when I look back at you know,
I started here in two thousand and one. You know,
we were fighting for twenty five percent equity contributions and
highly leverage transactions. We'd be putting five and a half
six times leverage on a you know, eight or nine
time valued company. You Know, what I am highly encouraged
(39:03):
by is the amount of capitalists coming in behind us,
our ability to really work in a senior position with
these with the management teams. I think that addressable market
continues to expand, you know, I do think you know.
Speaker 3 (39:18):
We obviously have a lot of optimism.
Speaker 4 (39:20):
And a pro growth environment over the next foreseeable future.
Speaker 3 (39:25):
Here the economy seems to be on stable footing.
Speaker 4 (39:28):
So you know, I'm highly encouraged by some of the
opportunities that we're seeing out there. I think there's a
maturation in the industry. I think there has been discipline
within the industry when we talk about the use of leverage,
when we talk about you know, valuations and so forth,
and so, you know, I continue to be very bullish
on the opportunity set.
Speaker 2 (39:46):
Well, what's going to be the cause of the shoot
to drop if anything at all?
Speaker 4 (39:52):
Yeah, Look, I mean, look, there's going to be volatility, right,
so if we go into recession. At some point, we
are going to go into a recession. And I think
that that's where you're going to see differentiation that takes
place in the marketplace for private for private lenders, right,
you know. I think the concern is there's been a
lot of new capital with new managers raised in a
short period of time in the last few years, where
(40:13):
they have been investing in a in a bull market,
and so I think that's where you're really going to
see differentiation from the tenured long term managers that have
stayed disciplined in their investment philosophy and those that were
putting money to work because they had to put money
to work to grow the firm.
Speaker 1 (40:31):
So we shouldn't expect a big wave of defilise and
until the recession. Is that the take away?
Speaker 3 (40:36):
Yeah, that would be.
Speaker 1 (40:37):
I mean one of the things I worry about is
that the high rates that are being charged by private
lenders are unsustainable. Is that a completely rung proposition run assumption.
Speaker 3 (40:49):
Look, we I.
Speaker 4 (40:50):
Think when you look at the underlying portfolios and not
just speaking for for our portfolio, but you know, when
you look through the BBC filings and so forth, and
there's been a an incredible amount of resilience within these
companies in the face of this higher rate environment. I
think management teams have done a good job at kind
(41:10):
of cutting costs and right sizing their cash flow streams.
You know, there are times and you have seen an
increase in pick rates, right, So you've seen that in
the BBC universe, and in some ways it's reflection of
lenders working with management teams to give them the runway
to allow the companies to grow into their balance sheet.
Speaker 3 (41:29):
Right.
Speaker 4 (41:29):
Where I get concerned is when you have a lot
of bad companies that are overlevered today. And to your point,
you know, I think you still have a lot of
good companies that are capitalizing on a very constructive macro backdrop.
Maybe they have a little bit too much leverage, but
they have lenders in there that are working with them
(41:51):
to affect a successful outcome for everyone. So I think
that collaboration is a very positive thing that's in the
economy or in in our space. And that's what you're seeing,
you know, in the performance of the underlying portfolio companies
in this higher for longer environment.
Speaker 1 (42:09):
And there's not one thing right now that you worry
about in credit markets that kind of keeps you up
at night worrying.
Speaker 4 (42:14):
Well, look, I like you said earlier, I'm a credit
I worry about a lot of things, you know, the
you know, look, we've got geopolitical issues, notwithstanding what we
talked about earlier, you know, tariffs.
Speaker 3 (42:25):
And immigration and inflation, obviously a recession. I mean, those
are the types of things that that that that I'm
I'm really worried about.
Speaker 1 (42:34):
And if you have to put your finger on the
best credit market opportunity, that's say for the next twelve
to eighteen months, what's what's what's the undiscovered value? Where's
your edge?
Speaker 4 (42:43):
Yeah, Look, I mean we have a capital markets business too,
you know, so when I think about, you know, where
we're finding value right now, you know, it's that lower
core middle market in private lending right where we can
deliver on a levered basis double digit returns at that
forty percent lonch of value. So I like that space
a lot, and I think that we're going to see
a resurgence as I mentioned in deal activity and so deployment.
(43:06):
I would say number two, we have a lightly syndicated
product that we have an edge on. We've been executing
that strategy for a number of years. We can deliver
you know, a significant premium to the syndicated markets through
our origination channels, and so that's.
Speaker 3 (43:21):
A product that's been around for a while.
Speaker 4 (43:23):
Like I said, we have a differentiate and other people
haven't been able to figure out the special sauce.
Speaker 3 (43:27):
And so we're seeing a lot of capital come into.
Speaker 4 (43:29):
That strategy and then unstructured products right now, you know,
you know, we are seeing structured products. Obviously spreads have compressed,
but they still do offer a very very attractive premium
relative to other called investment grade products. So you know,
we're seeing some very kind of specifically for kind of
(43:50):
the COLO space. So I think that's a very attractive
area to invest in as well.
Speaker 1 (43:56):
And the golden age for private credit just goes on
keeps going. Great stuff. Chris Wright, President at Crestin Capital.
It's been a pleasure having you on the credit edge.
Many thanks, great well, thank you, and of course very
grateful to Julie Hung from Bloomberg Intelligence. Thank you for
joining us today. Julie, thank you for more credit analysis.
Read all of Julie Hung's work on the Bloomberg terminal.
Bloomberg Intelligence is part of our research department, with five
(44:17):
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 indices, currencies and commodities.
Please do subscribe to the Credit Edge wherever you got
your podcasts. We're on Apple, Spotify, and all other good
podcast providers, including the Bloomberg terminal at b pod Go.
Give us a review, tell your friends, or email me
(44:40):
directly at jcromb eight at Bloomberg dot net. I'm James Crombie.
It's been a pleasure having you join us again next
week on the Credit Edge.
Host
James Crombie
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