January 30, 2025 • 42 mins
As rates stay high, bank lenders retreat and volatility rises, Gramercy Funds Management sees significant growth in private credit to developing nations. “We’re just scratching the surface in emerging markets,” said Robert Koenigsberger, the firm’s founder, chief investment officer and managing partner, referring to private debt. “It’s really exciting to go deeper and broader in EM as an asset class with the tools that have proven to work already,” he tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Tolu Alamutu, in the latest Credit Edge podcast. Koenigsberger and Alamutu also discuss EM private debt returns, default risks, real estate investment strategies, US tariffs and trade policy, as well as recent deals in Mexico and Turkey.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to The Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Robert Koenigsberger, founder
of Grammercy Funds Management. How are you, Robert doing well?
Speaker 2 (00:30):
Thank you so much for having me today.
Speaker 1 (00:31):
Great to have you on the show. We're very excited
to hear your credit market views. And I'm also delighted
to welcome back co host Tolu Alamutu from Bloomberg Intelligence.
Hello Tolu, Hello James.
Speaker 3 (00:40):
Great to be here as all ways.
Speaker 1 (00:42):
So this week we introduce things a little bit differently. First,
I want to point out that we Bloomberg love feedback,
whatever it is good or bad. We learn a lot
from both. We did a show last year with Pimco
on public versus private credit markets. They didn't see enough
value in private to justify the extra risk. Can find
it on the Bloomberg terminal that episode at bpodg or online.
(01:03):
I think it was out in October, and the feedback
from today's guests was a strongly worded I could not
disagree more. So, we are very pleased that Robert has
finally agreed to join us, and we are going to
dig into that whole public versus private debate a little
later in the show. In addition, we don't often get
to talk about emerging markets on Credit Edge, but I
(01:24):
did spend about half my career, roughly fifteen years, covering it.
It is truly fascinating. Some great stories out there, really
wild stuff, larger than life characters, and I spent a
lot of time on the road visiting some amazing places,
talking to some very interesting people while I was covering it.
So for that reason too, I'm very happy we have
got Robert, a real veteran, on the show. But emerging
(01:46):
markets have been out of favor for years. They've never
quite recovered the Brick era luster of say, fifteen or
twenty years ago, and the return of Donald Trump to
the White House only makes it trickier for investors to
go outside the US, even though it may seem a
lot cheaper, the returns may look larger, and the long
term benefits of geographical diversification are appealing. So let's start there.
(02:07):
Why emerging markets? Why emerging markets?
Speaker 2 (02:10):
Credit?
Speaker 1 (02:10):
Right now, Robert, surely there's way too much risk not
to mention all the complexity, the different currencies, political regimes,
economic policies, legal systems, languages. It makes my head spin.
Why do we need all the bother? Isn't there enough
to worry about?
Speaker 2 (02:24):
Robert?
Speaker 1 (02:24):
Why why should we care about em? Right now?
Speaker 2 (02:26):
Great, great question, James.
Speaker 4 (02:28):
And you know, as I hear you ask that question,
and you know, some of the experiences that you talked
about that investments have had and the challenges that emerging
markets have had, i'd start the discussion by saying, you know,
there's been a big disconnect between the returns that have
been present in emerging markets and the returns that many
emerging market investors have captured from emerging markets. And that
(02:50):
disconnect comes from and totally you know this as well
in terms of you know, if you look at the
fundamentals of M versus DM, if you look at the
YEM versus DM, and if you look at the actual
returns over a long period of.
Speaker 2 (03:04):
Time, they've been compelling.
Speaker 4 (03:06):
Yet when you talk to investors, they have talked about
all the challenges they've had, and so I think that
disconnect comes from the mistakes that investors have made in
terms of the acid class itself. Oftentimes, first of all,
emerging markets is not this homogeneous acid class at the
Brick label or anyone else allows us to believe it is.
Speaker 2 (03:25):
You know, when you have China and Sri Lanka and
the same asset class, it's hardly an acid class. But
I think the mistakes that people have made is one
they've typically gone.
Speaker 4 (03:33):
Into equity, and equity and emerging markets for a long
period time has been quite challenging. And a big reason
for that is you've had emerging market currency risk in
your face the entire time, but you also have issues
like minority governance issues and illiquidity and what have you.
Some have been brave enough to go into private equity,
and private equity has all the equity risk, but then
(03:55):
you also have the monestization issue. You've got to line
up all the stars and be able to get the
IPO or whatever it may be. Well, let's go into
our world's emerging market's debt. And I think you know,
the markets had this love affair, this dance with emerging markets,
which is yes or no, and it's usually fear or
(04:15):
fear of missing out, and that's been the challenge.
Speaker 2 (04:17):
So where's the fear come from?
Speaker 4 (04:20):
We've had twelve major dislocations in emerging markets in the
past twenty five years, they all look about the same.
The peak to trough. The market's dropped about twenty percent
in five months. That's the bad news. The good news
is twelve to twenty four months later, the market's up
thirty to fifty percent. It's almost like you think a
monkey can trade this market, but everyone's ripped around. And
(04:43):
that's because when it drops into a dislocation, everybody capitulates
to be polayed, and then they sit out, and then
it runs thirty to fifty percent.
Speaker 2 (04:53):
And then they get the FOMO. So one of the
challenges is just the approach they've taken.
Speaker 4 (04:58):
Yes or no, I'll call it beta as opposed to
beta agnostic. The other one is the index. Right, so
I've been allowed I've been around in emerging markets. You
were polite to say veteran. I've been around in emerging
markets since before the emerging markets dead index was created, right,
So it used to be an asset class that was
into full a bunch of loans became a bond, and
(05:19):
then on the other side of the bond, JP Organ's like, whoa,
We've got to create an index. Well, if you look
at the index that they created when we started grammar
seeing nineteen ninety nine or ninety eight, Argentina was eighteen
percent of that index. Somehow that's safe, but you could
say that was a long time ago. Well, in twenty
twenty two, that same index made you by Russia and
made you by Ukraine.
Speaker 2 (05:40):
So this index based in investing.
Speaker 4 (05:42):
In emerging markets, if you look at the last three years,
the dispersion of that index is minus ninety for some
assets and over one hundred percent for other assets. So
all sorts of reasons why people have had a bad experience,
the approach, the dance, the passive versus active.
Speaker 2 (06:02):
I think passive index investment basing has killed.
Speaker 4 (06:05):
More emerging market investors than any idiocy graph that I've
seen in twenty five plus years.
Speaker 3 (06:11):
If I could just jump in, Robert, if you don't mind,
I think we will definitely have to come back and
discuss the index and benchmarking issue a lot more later
on this podcast. But one of the issues that even
I have been sort of grappling with, someone who is
a huge fan of emerging markets, is the fact that
(06:35):
prior to the current situation, let's say, if we look
back two years or so ago, you had literally trillions
of dollars of negative yielding or very low yielding assets
in the developed world. And so the positive or the
story for emerging markets was, hey, you know, you can
get much much better yields here. You're not getting anything
(06:57):
in the developed world, So come join us in the
emerging market party. Now, obviously we know what US treasuries
are yielding. Our EM strategist was noting, for instance, that
AUM in some emerging market funds, some emerging market funds
has declined over the last couple of years. So how
does one position EM now that treasuries DM yields are
(07:21):
not that bad? When people might maybe come to you
and say, well, look, I don't even know this place
on the map. Why don't I just put my money
in the US that I know and I'm safe there, right, and.
Speaker 4 (07:35):
A lot to unpack there, And in that question is
almost the trap that most investors have fallen into an
emerging markets right, because they typically come to EM when
all the juice has been squeezed out of every other market.
Speaker 2 (07:47):
And you're right, you know, rates have gone from the extraordinary.
Speaker 4 (07:50):
Part what you talked about was for a short period
of time, rates were extraordinarily low. But for most of
the time that I've been in the SASSA class, rates
have been here or even higher in terms of treasure rates.
But I think the and that question is is a
I think there's almost a public credit bias to that question, right,
So I could buy US treasuries, I could buy liquid
(08:13):
public debt and US treasuries corporates ideal and when there's
nothing left there, then I'll go to em I remember
that's when they do the phone wo trade and they
missed everything else. So I think the right way to
think about it is the same way that people are
handling that problem in develop markets. You know, yields went
very low in developed markets, and what's developed is private credit,
(08:36):
direct lending.
Speaker 2 (08:37):
And if I look at you.
Speaker 4 (08:39):
Know what people have hoped to get out of emerging
markets over the past twenty twenty five years, typical pension fund,
what have you like? You know what we'd like to
get maybe seven percent we turn out of emerging markets.
Speaker 2 (08:50):
Well, we go to direct lending. In emerging markets, we're probably.
Speaker 4 (08:53):
Two times at close to two times at U levered
basis collateral, uncorrelated collateral and what have you. So James
I know we want to talk about this later, but
my statement about I couldn't disagree more about private credit.
You forgot the word emerging markets private credit because I
would agree with developed.
Speaker 2 (09:11):
Market private credit. EM is fifteen.
Speaker 4 (09:14):
Years by develop markets and totally you can find those
high natural yields twelve thirteen, fourteen, fifteen percent good collateral,
good uncorrelated collateral, and you can you can take emerging
markets exposure without taking emerging markets.
Speaker 3 (09:29):
THETA I mean that actually leads to the second point
I was going to ask about, which is obviously EM
private credit. We know that you've been a huge proponent
of this for a long time, but what and the
market has certainly grown. Even here at Bloomberg we have
invested quite a lot in the private market related functions
(09:50):
on determinal broadly, not just obviously for EM. But I
guess one concern that people may have, despite the fact that,
as you said, you might be able to double your returns,
is the liquidity. So one of the first stories I
heard about EM was, you know, it's called emerging because
how quickly can you emerge with your money from the market.
(10:13):
So when it comes to private credit in emerging markets,
is that not a concern that people may not be
able to get out as quickly as they want or
at the level that they would like. Is that something
people should be concerned about.
Speaker 4 (10:28):
Well, what I'd say first of all that that that
phenomenon is no different than the decision people are making
the develop arguments to give up some liquidity to get
a different return characteristic.
Speaker 2 (10:38):
But as I think about all of the mistakes that
you and I have seen.
Speaker 4 (10:41):
Investors make historically in emerging markets, is somehow they have
associated the appearance of liquidity with safety, and I say.
Speaker 2 (10:50):
The appearance of liquidity because every time they come.
Speaker 4 (10:52):
To get liquidity, they found that it wasn't there, and
that's what created the dislocation to begin with. So I
would much rather focus on credit risk and ensure that
we have good credit and good collateral, and I'm willing
to explicitly give up some liquidity for that trade off.
(11:13):
Whereas in public markets, where I think the mistake is
in made is I'm going to take lower returns no collateral,
I'm going to have to deal with a bond trustee
and a collective action clause, which means if I ever
get trouble, I don't control my own destiny and all
in exchange for liquidity that's proven not to be there
whenever I want.
Speaker 3 (11:32):
It's going on with the liquidity argument, and so and
that angle of things in emerging market is another issue
I guess that some people have is about size and
scaling things up. So, even on the public side, sometimes
the bonds that we see issued in emerging markets aren't
your typical benchmark size, right, So on the private side,
(11:56):
I guess some of those transactions may sometimes be a
bit small. So how do you get over the scale issue,
especially as a fund your size, how do you make
sure that whatever you're investing in makes a difference to
the returns of your fund, makes it worthwhile?
Speaker 2 (12:15):
So, I mean there's two ways to answer that.
Speaker 4 (12:17):
One is in a dedicated context for private credit, what's
the scale, what's the size? And so you know, for us,
if we're running a billion or billion and a half
dollar fund at any given time in private credit, and
to think about, you know, a thirty million dollar position,
I understand that doesn't move the needle for black Rock,
(12:37):
but that's meaningful for our vestors to say, you know,
we got a three percent waiting in a highly cloorized
transaction and you name the you name the country. So
in a dedicated portfolio, we can build a diversified portfolio
of thirty fifty million dollar names all day long. In
a multi asset portfolio where private credits may be only
twenty five thirty percent of the portfolio, it's you know,
(13:00):
go back to our market, which it's like, we're getting
a much more you know, optimal portfolio by bringing the
private in, the higher return, the last collateral, and.
Speaker 2 (13:08):
We're getting getting enough scale. But you'd be surprised that,
you know, if you look at like what.
Speaker 4 (13:15):
We've done in pemics, you know, you can get a
lot of scale public markets and pems you get no collabal,
you get no you know, no seniority, so to speak.
We are lending to pemics suppliers probably in one thousand
basis points more yield.
Speaker 2 (13:33):
We get pemics receivable as are correlated collateral, and then
we get uncorrelated pledges of real estate. We've done four
and a half billion of that in the last five years.
That's enough. That's meaningful scale for us. Now.
Speaker 4 (13:43):
It may not move the needle for large traditional asset managers,
put for us in our clients it's very meaningful.
Speaker 3 (13:49):
So that brings us another issue in the asset management industry,
which is mn A. Right, So there are some, as
you said, that have been getting bigger and bigger over
the years, acquiring niche players and not so niche businesses
and even some moderately sized asset managers that are merging
and so on. What's your view on that for Grammarcy then, like,
(14:11):
do you think that staying your the size that you
are roughly growing a little bit and being nimble is
more important than gaining size or gaining share.
Speaker 4 (14:23):
I mean, we would never want size just for the
for the sake of size, And you know, I think
what's been important for us is that we're perceived as
a perpetuity, that our clients and our.
Speaker 2 (14:35):
Employees know that we're here for the long hold.
Speaker 4 (14:38):
And sometimes that's associated with size just because you have
X billions of dollars or what have you.
Speaker 2 (14:43):
But I really think it's the way that the firm
the firm is organized.
Speaker 4 (14:46):
You know, we disaggregated from a founder led firm to
a CIO classic PM. All of our employees are aligned
with the profitability of their phones and their strategies as
well as the profitability.
Speaker 2 (14:56):
Of the firm. So I think it's important what a
system that you create, and for us in our team,
you know, the growth path that we've been on.
Speaker 4 (15:05):
You know, we started with four million in nineteen ninety
nine and we've grown as six billion today in twenty
twenty five, and we see plenty of organic growth that
makes us very excited. That being said, I think that
the inorganic growth opportunities that we see are less abound
M and A and more around partnering with institutions that
(15:25):
don't have the expertise that we have and but have
some of the other things that we don't have, the distribution,
the reasons that you might want to be part of
a part of a larger organization, and finding ways to
collaborate and partner in different strategies. So I mentioned you
know a great example in Mexico, we put out four
and a half billion dollars to once one sector. We're
(15:48):
six billion dollar manent acid management firm. You can't do
that on your own. So we have plenty of partnerships
with our clients and LPs and allowed us to punch
over our weight. And you know, we've never been constrained
by you know, in New market in the UK. Last
year we did a five hundred and fifty million dollar
deal for litigation finance and Down and Them angled to it.
So we're we're happy where we are. We've been doing
(16:11):
this for twenty six years, hope you know. We also
feel like a twenty six year old startup, got a
lot of energy, a lot of ambition, and I think
our growth in organic. It's well placed here in the
organic partnerships that we find along the way.
Speaker 1 (16:26):
Did you say UK for litigation finance, Robert correct, So
I'm interested in that being considered an emerging market, but
probably is nowadays. But I just wanted to back up
to what you said about pemics because we do have
the joy of having many different types of listeners from
all sorts of backgrounds. Some of them don't even know
what pemics is. I will explain it. As you know,
(16:46):
one of the biggest oil companies in the world, Mexico
is a huge producer of oil. It's a state run producer,
and you have been lending to their supplies. But in
terms of other kinds of deals, and as I said
at the beginning, we don't really cover a lot of
emerging market. So what does emerging markets direct lending look
look like to you? What other kinds of sectors you
generally engaged in?
Speaker 4 (17:07):
Yeah, and it'll help you answer the question. And told
ask them before about how do you get scaled in
these markets?
Speaker 2 (17:12):
And I didn't necessarily answer that. So one, when.
Speaker 4 (17:16):
You talk about developed market private credit, and you James
us the word that sponsored back deals, mergers and acquisitions,
what have you for better worse, that doesn't really exist
in emerging markets. And the way that we have sourced
diversification and scale and emerging markets is through having our
own dedicated lending platforms in the different markets. So when
we mentioned Mexico, we have a lending platform that's called Grammax.
Speaker 2 (17:39):
It has multiple suppliers to.
Speaker 4 (17:41):
Pemex, so we can get depth and breadth in an industry,
but it also gets you boots on the ground in Mexico,
where we've also diversified into real estate, real estate back
transactions or transactions.
Speaker 2 (17:51):
That have to do with nearshore in French shore and
whatever may be.
Speaker 4 (17:55):
So we have a platform in Mexico, we have one
in Brazil, we have one in Peru, we have one
in Turkey, et cetera. What that gives you is unique,
repeatable origination. What we're not doing is waiting for an
M and a deal where some sponsor is going to
ask twelve guys to put a term sheet in, And
we're not sitting here waiting for a bank to come
(18:17):
by and say, hey, we've completely baked this deal, would
you like to buy five or ten million. Everything that
we do is bespoke and tailor made for the needs
that we have. So probably half of what we do
today comes through these platforms, where.
Speaker 2 (18:32):
On any given.
Speaker 4 (18:35):
Vehicle that we may do, we know that like fifty
percent of the loans we make are kind of already
spoken for to the repeatability of those platforms. And then
the other one is having been in this asset classes
individuals for thirty thirty.
Speaker 2 (18:46):
Five after forty years, we have all.
Speaker 4 (18:49):
Sorts of relationships in all these different markets with folks
that normally help us do due diligence on transactions, with
sorts of a lot of transactions for us.
Speaker 1 (18:57):
What are they supplying to pemics, what kind of supplies?
Speaker 2 (19:00):
So it's really around.
Speaker 4 (19:04):
For example, we have folks that lend lay the pipes,
people to build the platforms, people that service the pipe layers, the.
Speaker 2 (19:12):
Platforms they having. So there's whole ecosystem.
Speaker 4 (19:14):
Around some of the shallow, shallow water drilling that the
pemic stuffs.
Speaker 1 (19:19):
And why isn't a local bank, you know, they have
tons of pesos captive, probably very cheap. Why aren't they
just doing those deals?
Speaker 2 (19:25):
Well as totally.
Speaker 4 (19:26):
Knows because she's been covering banks for a long period
of time that banks like to cover quote the the
quote safe, easy, liquid business. Right, so they'll be doing
syndicated loans at libraries, So for plus two hundred that
are uncollabalized or whatever.
Speaker 2 (19:43):
It may be.
Speaker 4 (19:44):
So I think the banks have committed their balance sheets
to kind of traditional corporate lending, and the working capital
needs of pemics and their suppliers have been left to others.
Speaker 3 (19:57):
Just sort of to follow up on what you meant
men about doing business in Mexico and Turkey and elsewhere,
just more broadly, where would you say you see the
biggest opportunities across the em universe at the moment if
we're talking about regions, and also maybe in terms of industry,
obviously Pemex is oil and gas, but are there other
(20:21):
industries that you think are or sectors that you think
are interesting at the moment, and what regions or countries
is grammar sly looking at at the current time.
Speaker 4 (20:31):
Sure, when you say grammar seeders, you know, in some
ways there's three grammar seas, right, there's a public credit
grammar seeds, there's a private credit grammar.
Speaker 2 (20:36):
Seen, there's a special situations.
Speaker 4 (20:38):
So I'll do my best and say, look, generally, we
continue to see a lot of opportunities in Latin America.
We see a lot of opportunities in emerging Europe and Africa,
and lesso in Asia. And so when I think about,
you know, the returns that we get out of Latam
relative to unit of risk, you can't find that in Asia.
(20:59):
So what we take quickly find in Asia is high
returns with a tremendous amount of risk. So typically mezzanine
finance and you know, M and A financing and what
have you, or really low yields because the risk, you know, it's.
Speaker 2 (21:12):
It's low and it's over bought in net market.
Speaker 4 (21:15):
So we're finding quite a bit from a from a
regional perspective in Latan and samea. Turkey has been a
phenomenal market for us on the direct lending side. You know,
there's been this aversion to Turkey on the public side,
which I understand, particularly with the currency that's gone from
one point three to thirty five over the past you know,
ten years whatever. Maybe dollar based bond investors that have
(21:38):
done okay, but we're able to go into Turkey and
get mid to upper teams doing really simple trade finance
sitting with collateral in our warehouse is real estate backed finance,
you know LTVs of.
Speaker 2 (21:52):
You know, zero point twenty five, and that to us
is a great example of you know, we're willing to
give up a couple of years of liquidy to be
in Turkey, to get rid of the currency risk and
have a bunch of collateral in case things go wrong.
Speaker 3 (22:03):
Since you brought up Turkey, I will ask a question
about that before I sort of switched back to latime,
where I have another question. So, you know, you mentioned
obviously that there is a lot of public Turkey debt,
and we know that the Turkish banks, major banks anyway,
are accustomed to dealing with challenges and they've managed relatively well.
(22:25):
But there are these issues that you mentioned with the
currency inflation, et cetera. So how does that affect the
direct lending and other businesses that you're looking at in
Turkey or are they not affected by these headlines that
we sometimes see coming out of Turkey and the broader region.
Speaker 4 (22:43):
Look, it creates those challenges, those headlines, the headwinds for
the banks in places like Turkey. That's what creates the
opportunity for us something like plund I mean, we oftentimes
will sit in an investment committee and say, if this
risk was anywhere else in the world, we probably wouldn't
get to price it.
Speaker 2 (23:01):
Where we are, we wouldn't see it.
Speaker 4 (23:03):
So we're getting to lend to what would otherwise be
investment grade barrowards if it wasn't for the fact that
it was being constrained by the sovereign itself, the sovereign
rating right, And that's what that's really interesting when you
when you talk about deals where you have collateral and
you can ensure and protect principle, but it's in a
(23:23):
place that's not investment grade. That's that's the arbitrage in
Turkey in particular, if you go back, goes back as
far as twenty eighteen, when the banks, you know, we're
really suffering from the from the beginning of the Lyric crisis.
That's when the direct lending market really.
Speaker 2 (23:40):
Opened up for us. And I recall.
Speaker 4 (23:42):
There was a transaction where one corporate thing we'd known
for twenty years, we knew their business, I knew him personally.
Speaker 2 (23:49):
Colin said, can we have lunch in London?
Speaker 4 (23:52):
It turns into a seven hour meeting walk out with
cocktail napkins.
Speaker 2 (23:57):
Which we'll call it, which call a turn sheet.
Speaker 4 (24:00):
We describe a problem that the banking sector was happ
not that his business has happened.
Speaker 2 (24:03):
Is business is fun.
Speaker 4 (24:04):
But in Turkey, if you have what we would call
post dated checks, they call commercial paper, and they used
to be able to take that commercial paper to a
bank and factory. Well, when the banks were under pressure,
they stopped the factory. So not only do these people
lose their working capital, but they had great assets and
(24:25):
they had.
Speaker 2 (24:26):
Ill liquidity issues.
Speaker 4 (24:27):
For us, you know, banks oftentimes will only lend against
tangible cash flow and they don't look at the assets.
We'll look at a combination of the tangible cash flow
and the assets, and we're given extraordinary yields, both in
terms of absolute and relative to the risk for doing
so well.
Speaker 3 (24:43):
We'll try not to keep you here for seven hours, Robert,
but so going back to Latin, and you know the
opportunities that you see there. In the last few days,
well mainly over the weekend, clearly Columbia was in the
news very unwelcome, especially given that the US and Columbia
is supposed to be allies. So given the risks related
(25:08):
to tariffs and potential trade wars and politics and immigration
and so on, are you concerned about latime in that
context or do you think that, like we saw at
the weekend, there will be some sort of quick solution
when these sorts of issues come up, whether it's with
(25:29):
countries that are allies of Trump or countries that are
not so close to him.
Speaker 4 (25:35):
Look, I think the highest conviction theme that we have
as a team is volatility. There's so much uncertainty and
you know where Muhammalarian, when we speak about all the
different possibilities, you should think about like a normal distribution curve,
and there's all sorts of you know, various outcomes that
(25:55):
have very little wings to them, but when they occur,
they have material, major impact. So the reason that we
have the most conviction in volatility is because we have
the most uncertain environment that one could imagine, and when
uncertainty goes up, whether it's top down or bottoms up,
then one should expect volatility to increase. And remember you
(26:17):
were talking about an era when rates were very low
financial repression.
Speaker 2 (26:22):
Well, volatility was also very low.
Speaker 4 (26:24):
And if you remember, everybody was bellyaching that there was
no volatility and they couldn't trade the volatility, and macro
funds would have you had a very difficult time. Volatility
it embraced properly as your friend. And so if you
expect volatility and you position around volatility, and I don't
want to sound too simple, but if you think about
buying low and selling high, or planning the trade and
(26:47):
trading the plan, which is, you know, if the Colombian
pesot gets to forty eight hundred, we're going to think
about increasing our pacer risk or reducing our PASO hedges
and it over gets over bought to thirty eight hundred,
And that just happens with volatility, you know.
Speaker 2 (27:05):
Unfortunately, the Trump volatility.
Speaker 4 (27:06):
Was opened before the market opened on Monday morning, so
all we could do was think about it on Sunday,
not actually executed on Monday.
Speaker 2 (27:13):
But there's plenty of opportunities.
Speaker 4 (27:14):
I'm sure there will continue to be where if you
think about planning the trade and trading a plan, and
then you execute your plan, volatility.
Speaker 2 (27:23):
Is your friend.
Speaker 1 (27:24):
But you mentioned the uncertainy. I mean it's always uncertain
that it's particularly in emerging markets. Would you say that
this is an extreme point in history. You've been covering
this for decades. Is this worse than you've seen it before?
Speaker 4 (27:35):
Look, I've used the word beta agnostics several times today,
and one of the older I get, the less beta
I went the portfolio, and I think that question relates
to beta and the way that people typically think about
emerging markets. I remember a couple of years ago the
markets were really volatile. The US market was down five
(27:56):
six seven percent one day and a friend called me
up and said where are you I I'm out with
my family, and I'm like, well, don't you see what's going.
Speaker 2 (28:02):
On with the market? And my response was private credit,
we're well structured. It doesn't really matter. And that's in
Turkey as well.
Speaker 4 (28:08):
Like you know that loan we made in twenty eighteen,
the lero was at twelve five.
Speaker 2 (28:13):
Years later was it thirty two?
Speaker 4 (28:14):
Our clou was still there and we got we got
pre paid because the borrow. We just wanted to get
their cloud back. So it's the world is uncertain, you know.
I think one of the challenges in the world today
is thirty five years ago when I started this asset class,
there was a strong trend towards globalization, and emerging markets
was a huge beneficiary of that. Globalization looks different today,
(28:38):
looks more like regionalization, and you know, fences and barriers.
Speaker 2 (28:43):
And blocks and what have you. So it's more challenging.
Speaker 4 (28:47):
But if you have a background in the political science
and history and economics and finance, what have you, it's
a playground.
Speaker 1 (28:52):
Also, things can change very quickly, and they can, you know,
erupt in all sorts of terrible conditions, and you may
have the collateral, but you can't collect it or you
don't want to collect it. I mean, do you really
want to own a gas station in Turkey? Or as
we saw in the Argentina restructurings, it's really very hard
to collect on all of the judgments you might get.
(29:15):
So how do you hedge how do you stay out
of trouble?
Speaker 4 (29:18):
Well, first of all, in emerging markets when you underwrite
and I'll go to Turkey for example, Since you mentioned
the gas station. The first thing you have to underwrite
is the people, the person, the borrower. You have to
understand them, their credit culture and how they behaved in
times of dress in the past to predict how they're.
Speaker 2 (29:37):
Going to behave in the future.
Speaker 4 (29:39):
And everybody keeps talking about how challenging Turkey's been for five, ten, fifteen,
twenty years. That's really been a local market Lira story.
But total talk to me about the last time there
was a sovereign default Turkey.
Speaker 3 (29:51):
Of course, I mean, we haven't had that in a while,
but we.
Speaker 2 (29:54):
Do have strong credit culture.
Speaker 3 (29:58):
It is a culture where they believe that debt should
be paid back, which but if.
Speaker 4 (30:04):
You don't pay it, they come to your door and
they take your sofa, right the credit card company and James,
you're right, like, we don't want the gas stations, but
the borrower did yet two of them, one for each
of his sons, and so.
Speaker 2 (30:18):
Having pledge cloudal was it that you want to take
the collateral. It's that they want the collateral.
Speaker 4 (30:23):
And when you have collateral, or even in bad situations,
you come up with good outcomes.
Speaker 2 (30:28):
That's what it's about.
Speaker 3 (30:29):
One of the issues, I guess looking at the real
estate sector in em specifically has been what happened with China.
So you already said that you're not necessarily focused on
that aspect of emerging markets. But is there anywhere that
you think within emerging markets where you think there are
good real estate sector opportunities or do you think maybe
(30:52):
now think that there's more to do in China now
that we are having a number of the restructurings and
so on shakeout.
Speaker 2 (31:00):
So I think.
Speaker 4 (31:02):
Real estate emerging markets is a bit of a Barbelle.
So there's kind of traditional real estate back financing that
you can do, and I think you can get a
good return and a great relative return to some of
the other corporate debt that you might get when you
speak about China. And I think China is a great
example of in the season doing damage to emerging.
Speaker 2 (31:20):
Market investors because if we re recall when all the China.
Speaker 4 (31:23):
Property names were at par they were material way to
the corporate bond index.
Speaker 2 (31:27):
So if you didn't own it, it.
Speaker 4 (31:29):
Was painful, and eventually if you owned it, it was
even more painful. So when China was China property was
at PARR was part of an index. We had no
interest in it, We didn't see any property backing up.
Speaker 2 (31:42):
There was no collabteral. They called it China property, but
there was no property for offshore investors, and for offshore
investors to.
Speaker 4 (31:47):
Get paid, you needed the ability and the willingness of
the onshore borrower to dividends some money to the offshore
to pay well.
Speaker 2 (31:57):
All those par bonds have turned into five cent bonds.
Speaker 4 (32:00):
There's over a thousand home builders one hundred issue bonds,
and we think maybe there's five sixty seven of them
that will go through restructurings as opposed to liquidations that'll
never get anywhere near parer. But when you're coming in
at five fifteen twenty twenty five, it's pretty powerful.
Speaker 3 (32:18):
So it's all about the entry point there then, which
is right enough?
Speaker 4 (32:21):
Everyone talks about the investibility of China. Is China investment?
We'll say, well, you know, if you're talking about a
bunch of power securities, and the closer you get to
things a matter of national security and defense and technology,
the answer is absolutely.
Speaker 2 (32:34):
Know.
Speaker 4 (32:35):
If you're talking about a five cent bond in a
sector that matters to China, you know you can't ignore
twenty five to thirty.
Speaker 2 (32:44):
Percent of your GDP forever you.
Speaker 4 (32:46):
Know, they instead of the Bazuka that's coming out in.
Speaker 2 (32:50):
Little pieces.
Speaker 4 (32:50):
But I think the goal of the Chinese government was
to isolate Evergrand and insulate the rest of the sector,
and that's failed miserably.
Speaker 3 (32:57):
I mean, away from China real estate, then you wouldn't
necessarily see, well, the same sorts of opportunities to go
from five to fifteen or whatever to make those sorts
of returns in real estate outside of China, then it's
fair to say that China's where those opportunities exist.
Speaker 4 (33:17):
Yeah, China's less about the real estate cru se, right,
and the value and the process of the destructuring. And
then to James's point, you know, we don't want the
gas stations and we don't want the apartment buildings. This
isn't about underwriting what the departments are worth. It's about
underwriting that there's a subset that I go through restructuring,
and quite frankly, the value might be in the equity
(33:39):
as much as is in the bonds, because if you
look at these restructurings and emerging markets, you know what
happens is typically debt and equity you're both worth one
hundred before you've got to default or whatever, they both
go down and trade at pennies. The debt gets restructured
and hair code and the equity doesn't get materially deluded.
Speaker 2 (33:56):
That's what we're seeing in the China property sector.
Speaker 4 (33:58):
So the value of a deadly structuring in China property
maybe the death and maybe some combination.
Speaker 2 (34:05):
Of debt and equity.
Speaker 3 (34:06):
Another question on return, So I know we've talked about
not hugging the benchmark a lot here, but if we
do look at those main em benchmarks, performance last year
twenty twenty four and the previous year wasn't too bad.
So given that you've had two consecutive years of okay performance,
(34:28):
what do you think people should expect in twenty twenty five.
I can tell you, like from a European real estate perspective,
that's one of the concerns that you've had two great years.
Can we have a third? Maybe not? So is that
also an issue in emerging market or do you think
that because of your differentiated positioning you might continue to
(34:49):
perform well again this year.
Speaker 2 (34:50):
So I think that's a public credit question, on a
private credit question.
Speaker 4 (34:54):
Particularly talk about the industry, but I also think as
on where you are in public credit right so the
money to be made in public credit in.
Speaker 2 (35:03):
Twenty three twenty four was.
Speaker 4 (35:07):
Not so much about yes, no, but where you were
even within that index based world, and not just the
dispersion of the emerging market sovereigns, but even some sub
sub subsectors like you know, for US, we found that
high yield was a great place to be when rates
were rapidly rising, and that the corporate balance sheets were
(35:28):
in great shape. The sovereign balance sheets were not such
great at space. So the sovereigns had two headwinds. They
had the duration, which was typically more duration and the
ig stuff, ironically than the high yield.
Speaker 2 (35:39):
And then you know.
Speaker 4 (35:41):
Late last year, I say late twenty three twenty four,
it was about turning the doll back towards investment.
Speaker 2 (35:45):
Grade and duration. So it's hard to answer it in
a blanket fashion.
Speaker 4 (35:50):
I think there's a lot of analysis that needs to
be done below the surface.
Speaker 1 (35:55):
So em private debt. I mean, we have a lot
of conversations on this show about private debt in general
and the potential scale of it. And you know, Polo
is talking about a forty trillion dollar market addressable. I
think they're mostly talking about US and developed markets there,
But is there a huge undiscovered opportunity in emerging markets
that you you are seeing and you know it doesn't
(36:15):
seem like a lot of other people are piling in,
So how big is this opportunity? And you know, what's
the addressable market?
Speaker 2 (36:20):
Well, I mean, one way to think about it is
just you know, you talked about all.
Speaker 4 (36:24):
The challenges at the beginning of the show of emerging
market investing emerging market debt investing is why is anybody investable?
Speaker 2 (36:29):
The route is there's you know, over trillion dollarge and
emerging market debt today, right, So.
Speaker 4 (36:33):
You don't have to necessarily convince people to take emerging
market risks.
Speaker 2 (36:37):
They already have the risk. The conversation you have to
have is like, is there a more.
Speaker 4 (36:40):
Intelligent way to take the risk? And I think that's
the opportunity for private credit. And I also think that,
like the example we talked about in the Turkey, the
flows to dedicate an emerging market have slowed down the
massive outflows, the recovery hasn't come, which means if that continues,
(37:01):
it's going to be more and more challenging for emerging
market issuers to get capital at the rate that they
find competitive, and again we have lent to investment grade
what would otherwise have been investment grade borrowers in places
like Turkey in Mexico because of the dearth of capital
that was either coming from dedicated to emerging market debt
investors and maybe for the reason totally mentioned, because the
(37:22):
size of the loan was an index weight or whatever
it may be, or there's just other regulatory challenges going
on in the country at that time that allows you
to seek that risk wouldn't otherwise.
Speaker 2 (37:32):
But I remember runninground Turkey.
Speaker 4 (37:34):
In two thousand and probably mid twenty fourteen fifteen, as
we were starting a private credit business and meeting with
all sorts of borrowers, and they were like, we can
borrow seven percent unsecured all day long.
Speaker 2 (37:45):
We don't need your capital.
Speaker 4 (37:46):
And my response was to keep my cards just in
case it doesn't work out. You know, all those people
started calling us in twenty eighteen. You know, same thing
that happened in Argentina in two thousand and seven. Hey,
everybody's investing, we don't need your capital.
Speaker 1 (37:57):
We'll keep the cards, kids, And you'll see more of that,
more of those calls now because rates are high because
local banks are pulling back, is that the general.
Speaker 4 (38:06):
Local banks are point back rates are higher, and the
dedicated corporate emerging market flow isn't necessarily there. So that
being said, emerging market new issues is doing pretty well,
and we think a lot of that's coming from the
local buyer as well from the cross server buyer.
Speaker 3 (38:25):
I have one question, because I think you've come across
very constructive, which is what we would have expected, obviously
from someone who has seen many cycles or the twelve
dislocations that you talked about in emerging markets. But what
keeps Robert up at night? Then in emerging markets, what
are you concerned might go wrong in twenty twenty five
or sooner or soon, sorry, that would change your view
(38:49):
drastically on the outlook for emerging markets.
Speaker 4 (38:53):
And just to clarify a lot constructive on the asset
class for the non am em shop.
Speaker 2 (38:57):
I've been talking about an approach to an answer clas
it's not seeing the praises of the acid class.
Speaker 3 (39:04):
Fair enough, Yeah, so you did. It's specific and.
Speaker 4 (39:06):
Again when you ask that question, I have to I
think I have to answer it from the perspective of
different types.
Speaker 2 (39:12):
Of lending to the acid class. Right, So, if I
think about.
Speaker 4 (39:14):
Public markets, you know, a week ago we said that
the the pain trade was to four and a quarter,
not to five and a quarter. That everyone was pricing
that the treasuries were going to go to five five
and a.
Speaker 2 (39:27):
Quarter, and we got below four fifteen.
Speaker 4 (39:31):
I think one of the one of the challenges for
fixed income and emerging markets is as we think about
this new administration in the United States, and you know,
we all kind of think that Trump's using the thread
of the tariff more than the implementation of the tariff.
Speaker 2 (39:47):
It's one thing if it's two and a half or
five percent.
Speaker 4 (39:49):
It's another thing if it's twenty five percent of Columbia
for fifteen minutes. But if we end up in a
world where what we say higher for longer, so we
say bigger for longer, larger for longer.
Speaker 2 (39:59):
On on the terrorists, that's.
Speaker 4 (40:02):
Not just gonna have an impact on the individual countries,
but it's going to start to have an impact on
the macro in the United States and rates in the
United States. And you know, unfortunately, I think emerging markets
public credit has been setting itself up for the traditional
When the Fed starts cutting rates, just close your eyes
and by it.
Speaker 2 (40:21):
Well, now you have to.
Speaker 4 (40:21):
Think more about the volatility and all these other factors
that are going on at the same time.
Speaker 1 (40:26):
And to end on a high note, Rolle, what's the
biggest opportunity for this year? What are you most excited
about in global credit?
Speaker 2 (40:31):
Look, I mean, we've talked about it at nauseum.
Speaker 4 (40:34):
I think what I'm excited about is I see what's
happened in developed markets as it relates to direct land
in private credit, and I see that we're just scratching
the surface in emerging markets. And I think it's really
exciting to go deeper and broader in EM as an
asset class with the tools that have proven to work
already in DAM. That's super exciting and it's the way
to navigate all the risks that we talked about today.
Speaker 1 (40:57):
Is this the year you think it breaks through?
Speaker 2 (40:59):
All right? We'll breaking through every year.
Speaker 4 (41:00):
So yeah, on the one hand, I'm excited about it,
but my competitors to get too excited about it.
Speaker 1 (41:05):
We've been talking about a golden age in private credit
in the US for some years now, so emerging markets follows.
There therefore a golden age for emerging markets.
Speaker 2 (41:12):
And we look, I'll joke in aside.
Speaker 4 (41:15):
I mean the story that people used to tell about
emerging markets. It was just x years behind developed markets,
and it was emerging towards and converging.
Speaker 2 (41:22):
Towards what's going on in develop markets.
Speaker 4 (41:24):
Don't know why that won't be the case for private
credit and the strategies that you can build around private
credit and emerging markets.
Speaker 1 (41:31):
Great stuff, Robert Koenigsberger, founder of Grammacy Funds Management. It's
been a pleasure having you on the Credit Edge. Many thanks,
thank you very much, and of course we're always very
grateful to Tolu Alamutu from Bloomberg Intelligence. Thanks for joining
us today.
Speaker 3 (41:42):
Thank you for having me for.
Speaker 1 (41:44):
More credit market analysis and insight. Followed Tolu Alamutu's work
on the Bloomberg terminal. Bloomberg Intelligence is part of our
research department, with five hundred analysts and strategists working across
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Credit Edge wherever you get your podcasts. We're on Apple,
(42:05):
Spotify and all other good podcast providers, including the Bloomberg
Terminal at bpod Go, Give us a review, tell your friends,
or email me directly at jcrombieight 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, and welcome to The Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Robert Koenigsberger, founder
of Grammercy Funds Management. How are you, Robert doing well?
Speaker 2 (00:30):
Thank you so much for having me today.
Speaker 1 (00:31):
Great to have you on the show. We're very excited
to hear your credit market views. And I'm also delighted
to welcome back co host Tolu Alamutu from Bloomberg Intelligence.
Hello Tolu, Hello James.
Speaker 3 (00:40):
Great to be here as all ways.
Speaker 1 (00:42):
So this week we introduce things a little bit differently. First,
I want to point out that we Bloomberg love feedback,
whatever it is good or bad. We learn a lot
from both. We did a show last year with Pimco
on public versus private credit markets. They didn't see enough
value in private to justify the extra risk. Can find
it on the Bloomberg terminal that episode at bpodg or online.
(01:03):
I think it was out in October, and the feedback
from today's guests was a strongly worded I could not
disagree more. So, we are very pleased that Robert has
finally agreed to join us, and we are going to
dig into that whole public versus private debate a little
later in the show. In addition, we don't often get
to talk about emerging markets on Credit Edge, but I
(01:24):
did spend about half my career, roughly fifteen years, covering it.
It is truly fascinating. Some great stories out there, really
wild stuff, larger than life characters, and I spent a
lot of time on the road visiting some amazing places,
talking to some very interesting people while I was covering it.
So for that reason too, I'm very happy we have
got Robert, a real veteran, on the show. But emerging
(01:46):
markets have been out of favor for years. They've never
quite recovered the Brick era luster of say, fifteen or
twenty years ago, and the return of Donald Trump to
the White House only makes it trickier for investors to
go outside the US, even though it may seem a
lot cheaper, the returns may look larger, and the long
term benefits of geographical diversification are appealing. So let's start there.
(02:07):
Why emerging markets? Why emerging markets?
Speaker 2 (02:10):
Credit?
Speaker 1 (02:10):
Right now, Robert, surely there's way too much risk not
to mention all the complexity, the different currencies, political regimes,
economic policies, legal systems, languages. It makes my head spin.
Why do we need all the bother? Isn't there enough
to worry about?
Speaker 2 (02:24):
Robert?
Speaker 1 (02:24):
Why why should we care about em? Right now?
Speaker 2 (02:26):
Great, great question, James.
Speaker 4 (02:28):
And you know, as I hear you ask that question,
and you know, some of the experiences that you talked
about that investments have had and the challenges that emerging
markets have had, i'd start the discussion by saying, you know,
there's been a big disconnect between the returns that have
been present in emerging markets and the returns that many
emerging market investors have captured from emerging markets. And that
(02:50):
disconnect comes from and totally you know this as well
in terms of you know, if you look at the
fundamentals of M versus DM, if you look at the
YEM versus DM, and if you look at the actual
returns over a long period of.
Speaker 2 (03:04):
Time, they've been compelling.
Speaker 4 (03:06):
Yet when you talk to investors, they have talked about
all the challenges they've had, and so I think that
disconnect comes from the mistakes that investors have made in
terms of the acid class itself. Oftentimes, first of all,
emerging markets is not this homogeneous acid class at the
Brick label or anyone else allows us to believe it is.
Speaker 2 (03:25):
You know, when you have China and Sri Lanka and
the same asset class, it's hardly an acid class. But
I think the mistakes that people have made is one
they've typically gone.
Speaker 4 (03:33):
Into equity, and equity and emerging markets for a long
period time has been quite challenging. And a big reason
for that is you've had emerging market currency risk in
your face the entire time, but you also have issues
like minority governance issues and illiquidity and what have you.
Some have been brave enough to go into private equity,
and private equity has all the equity risk, but then
(03:55):
you also have the monestization issue. You've got to line
up all the stars and be able to get the
IPO or whatever it may be. Well, let's go into
our world's emerging market's debt. And I think you know,
the markets had this love affair, this dance with emerging markets,
which is yes or no, and it's usually fear or
(04:15):
fear of missing out, and that's been the challenge.
Speaker 2 (04:17):
So where's the fear come from?
Speaker 4 (04:20):
We've had twelve major dislocations in emerging markets in the
past twenty five years, they all look about the same.
The peak to trough. The market's dropped about twenty percent
in five months. That's the bad news. The good news
is twelve to twenty four months later, the market's up
thirty to fifty percent. It's almost like you think a
monkey can trade this market, but everyone's ripped around. And
(04:43):
that's because when it drops into a dislocation, everybody capitulates
to be polayed, and then they sit out, and then
it runs thirty to fifty percent.
Speaker 2 (04:53):
And then they get the FOMO. So one of the
challenges is just the approach they've taken.
Speaker 4 (04:58):
Yes or no, I'll call it beta as opposed to
beta agnostic. The other one is the index. Right, so
I've been allowed I've been around in emerging markets. You
were polite to say veteran. I've been around in emerging
markets since before the emerging markets dead index was created, right,
So it used to be an asset class that was
into full a bunch of loans became a bond, and
(05:19):
then on the other side of the bond, JP Organ's like, whoa,
We've got to create an index. Well, if you look
at the index that they created when we started grammar
seeing nineteen ninety nine or ninety eight, Argentina was eighteen
percent of that index. Somehow that's safe, but you could
say that was a long time ago. Well, in twenty
twenty two, that same index made you by Russia and
made you by Ukraine.
Speaker 2 (05:40):
So this index based in investing.
Speaker 4 (05:42):
In emerging markets, if you look at the last three years,
the dispersion of that index is minus ninety for some
assets and over one hundred percent for other assets. So
all sorts of reasons why people have had a bad experience,
the approach, the dance, the passive versus active.
Speaker 2 (06:02):
I think passive index investment basing has killed.
Speaker 4 (06:05):
More emerging market investors than any idiocy graph that I've
seen in twenty five plus years.
Speaker 3 (06:11):
If I could just jump in, Robert, if you don't mind,
I think we will definitely have to come back and
discuss the index and benchmarking issue a lot more later
on this podcast. But one of the issues that even
I have been sort of grappling with, someone who is
a huge fan of emerging markets, is the fact that
(06:35):
prior to the current situation, let's say, if we look
back two years or so ago, you had literally trillions
of dollars of negative yielding or very low yielding assets
in the developed world. And so the positive or the
story for emerging markets was, hey, you know, you can
get much much better yields here. You're not getting anything
(06:57):
in the developed world, So come join us in the
emerging market party. Now, obviously we know what US treasuries
are yielding. Our EM strategist was noting, for instance, that
AUM in some emerging market funds, some emerging market funds
has declined over the last couple of years. So how
does one position EM now that treasuries DM yields are
(07:21):
not that bad? When people might maybe come to you
and say, well, look, I don't even know this place
on the map. Why don't I just put my money
in the US that I know and I'm safe there, right, and.
Speaker 4 (07:35):
A lot to unpack there, And in that question is
almost the trap that most investors have fallen into an
emerging markets right, because they typically come to EM when
all the juice has been squeezed out of every other market.
Speaker 2 (07:47):
And you're right, you know, rates have gone from the extraordinary.
Speaker 4 (07:50):
Part what you talked about was for a short period
of time, rates were extraordinarily low. But for most of
the time that I've been in the SASSA class, rates
have been here or even higher in terms of treasure rates.
But I think the and that question is is a
I think there's almost a public credit bias to that question, right,
So I could buy US treasuries, I could buy liquid
(08:13):
public debt and US treasuries corporates ideal and when there's
nothing left there, then I'll go to em I remember
that's when they do the phone wo trade and they
missed everything else. So I think the right way to
think about it is the same way that people are
handling that problem in develop markets. You know, yields went
very low in developed markets, and what's developed is private credit,
(08:36):
direct lending.
Speaker 2 (08:37):
And if I look at you.
Speaker 4 (08:39):
Know what people have hoped to get out of emerging
markets over the past twenty twenty five years, typical pension fund,
what have you like? You know what we'd like to
get maybe seven percent we turn out of emerging markets.
Speaker 2 (08:50):
Well, we go to direct lending. In emerging markets, we're probably.
Speaker 4 (08:53):
Two times at close to two times at U levered
basis collateral, uncorrelated collateral and what have you. So James
I know we want to talk about this later, but
my statement about I couldn't disagree more about private credit.
You forgot the word emerging markets private credit because I
would agree with developed.
Speaker 2 (09:11):
Market private credit. EM is fifteen.
Speaker 4 (09:14):
Years by develop markets and totally you can find those
high natural yields twelve thirteen, fourteen, fifteen percent good collateral,
good uncorrelated collateral, and you can you can take emerging
markets exposure without taking emerging markets.
Speaker 3 (09:29):
THETA I mean that actually leads to the second point
I was going to ask about, which is obviously EM
private credit. We know that you've been a huge proponent
of this for a long time, but what and the
market has certainly grown. Even here at Bloomberg we have
invested quite a lot in the private market related functions
(09:50):
on determinal broadly, not just obviously for EM. But I
guess one concern that people may have, despite the fact that,
as you said, you might be able to double your returns,
is the liquidity. So one of the first stories I
heard about EM was, you know, it's called emerging because
how quickly can you emerge with your money from the market.
(10:13):
So when it comes to private credit in emerging markets,
is that not a concern that people may not be
able to get out as quickly as they want or
at the level that they would like. Is that something
people should be concerned about.
Speaker 4 (10:28):
Well, what I'd say first of all that that that
phenomenon is no different than the decision people are making
the develop arguments to give up some liquidity to get
a different return characteristic.
Speaker 2 (10:38):
But as I think about all of the mistakes that
you and I have seen.
Speaker 4 (10:41):
Investors make historically in emerging markets, is somehow they have
associated the appearance of liquidity with safety, and I say.
Speaker 2 (10:50):
The appearance of liquidity because every time they come.
Speaker 4 (10:52):
To get liquidity, they found that it wasn't there, and
that's what created the dislocation to begin with. So I
would much rather focus on credit risk and ensure that
we have good credit and good collateral, and I'm willing
to explicitly give up some liquidity for that trade off.
(11:13):
Whereas in public markets, where I think the mistake is
in made is I'm going to take lower returns no collateral,
I'm going to have to deal with a bond trustee
and a collective action clause, which means if I ever
get trouble, I don't control my own destiny and all
in exchange for liquidity that's proven not to be there
whenever I want.
Speaker 3 (11:32):
It's going on with the liquidity argument, and so and
that angle of things in emerging market is another issue
I guess that some people have is about size and
scaling things up. So, even on the public side, sometimes
the bonds that we see issued in emerging markets aren't
your typical benchmark size, right, So on the private side,
(11:56):
I guess some of those transactions may sometimes be a
bit small. So how do you get over the scale issue,
especially as a fund your size, how do you make
sure that whatever you're investing in makes a difference to
the returns of your fund, makes it worthwhile?
Speaker 2 (12:15):
So, I mean there's two ways to answer that.
Speaker 4 (12:17):
One is in a dedicated context for private credit, what's
the scale, what's the size? And so you know, for us,
if we're running a billion or billion and a half
dollar fund at any given time in private credit, and
to think about, you know, a thirty million dollar position,
I understand that doesn't move the needle for black Rock,
(12:37):
but that's meaningful for our vestors to say, you know,
we got a three percent waiting in a highly cloorized
transaction and you name the you name the country. So
in a dedicated portfolio, we can build a diversified portfolio
of thirty fifty million dollar names all day long. In
a multi asset portfolio where private credits may be only
twenty five thirty percent of the portfolio, it's you know,
(13:00):
go back to our market, which it's like, we're getting
a much more you know, optimal portfolio by bringing the
private in, the higher return, the last collateral, and.
Speaker 2 (13:08):
We're getting getting enough scale. But you'd be surprised that,
you know, if you look at like what.
Speaker 4 (13:15):
We've done in pemics, you know, you can get a
lot of scale public markets and pems you get no collabal,
you get no you know, no seniority, so to speak.
We are lending to pemics suppliers probably in one thousand
basis points more yield.
Speaker 2 (13:33):
We get pemics receivable as are correlated collateral, and then
we get uncorrelated pledges of real estate. We've done four
and a half billion of that in the last five years.
That's enough. That's meaningful scale for us. Now.
Speaker 4 (13:43):
It may not move the needle for large traditional asset managers,
put for us in our clients it's very meaningful.
Speaker 3 (13:49):
So that brings us another issue in the asset management industry,
which is mn A. Right, So there are some, as
you said, that have been getting bigger and bigger over
the years, acquiring niche players and not so niche businesses
and even some moderately sized asset managers that are merging
and so on. What's your view on that for Grammarcy then, like,
(14:11):
do you think that staying your the size that you
are roughly growing a little bit and being nimble is
more important than gaining size or gaining share.
Speaker 4 (14:23):
I mean, we would never want size just for the
for the sake of size, And you know, I think
what's been important for us is that we're perceived as
a perpetuity, that our clients and our.
Speaker 2 (14:35):
Employees know that we're here for the long hold.
Speaker 4 (14:38):
And sometimes that's associated with size just because you have
X billions of dollars or what have you.
Speaker 2 (14:43):
But I really think it's the way that the firm
the firm is organized.
Speaker 4 (14:46):
You know, we disaggregated from a founder led firm to
a CIO classic PM. All of our employees are aligned
with the profitability of their phones and their strategies as
well as the profitability.
Speaker 2 (14:56):
Of the firm. So I think it's important what a
system that you create, and for us in our team,
you know, the growth path that we've been on.
Speaker 4 (15:05):
You know, we started with four million in nineteen ninety
nine and we've grown as six billion today in twenty
twenty five, and we see plenty of organic growth that
makes us very excited. That being said, I think that
the inorganic growth opportunities that we see are less abound
M and A and more around partnering with institutions that
(15:25):
don't have the expertise that we have and but have
some of the other things that we don't have, the distribution,
the reasons that you might want to be part of
a part of a larger organization, and finding ways to
collaborate and partner in different strategies. So I mentioned you
know a great example in Mexico, we put out four
and a half billion dollars to once one sector. We're
(15:48):
six billion dollar manent acid management firm. You can't do
that on your own. So we have plenty of partnerships
with our clients and LPs and allowed us to punch
over our weight. And you know, we've never been constrained
by you know, in New market in the UK. Last
year we did a five hundred and fifty million dollar
deal for litigation finance and Down and Them angled to it.
So we're we're happy where we are. We've been doing
(16:11):
this for twenty six years, hope you know. We also
feel like a twenty six year old startup, got a
lot of energy, a lot of ambition, and I think
our growth in organic. It's well placed here in the
organic partnerships that we find along the way.
Speaker 1 (16:26):
Did you say UK for litigation finance, Robert correct, So
I'm interested in that being considered an emerging market, but
probably is nowadays. But I just wanted to back up
to what you said about pemics because we do have
the joy of having many different types of listeners from
all sorts of backgrounds. Some of them don't even know
what pemics is. I will explain it. As you know,
(16:46):
one of the biggest oil companies in the world, Mexico
is a huge producer of oil. It's a state run producer,
and you have been lending to their supplies. But in
terms of other kinds of deals, and as I said
at the beginning, we don't really cover a lot of
emerging market. So what does emerging markets direct lending look
look like to you? What other kinds of sectors you
generally engaged in?
Speaker 4 (17:07):
Yeah, and it'll help you answer the question. And told
ask them before about how do you get scaled in
these markets?
Speaker 2 (17:12):
And I didn't necessarily answer that. So one, when.
Speaker 4 (17:16):
You talk about developed market private credit, and you James
us the word that sponsored back deals, mergers and acquisitions,
what have you for better worse, that doesn't really exist
in emerging markets. And the way that we have sourced
diversification and scale and emerging markets is through having our
own dedicated lending platforms in the different markets. So when
we mentioned Mexico, we have a lending platform that's called Grammax.
Speaker 2 (17:39):
It has multiple suppliers to.
Speaker 4 (17:41):
Pemex, so we can get depth and breadth in an industry,
but it also gets you boots on the ground in Mexico,
where we've also diversified into real estate, real estate back
transactions or transactions.
Speaker 2 (17:51):
That have to do with nearshore in French shore and
whatever may be.
Speaker 4 (17:55):
So we have a platform in Mexico, we have one
in Brazil, we have one in Peru, we have one
in Turkey, et cetera. What that gives you is unique,
repeatable origination. What we're not doing is waiting for an
M and a deal where some sponsor is going to
ask twelve guys to put a term sheet in, And
we're not sitting here waiting for a bank to come
(18:17):
by and say, hey, we've completely baked this deal, would
you like to buy five or ten million. Everything that
we do is bespoke and tailor made for the needs
that we have. So probably half of what we do
today comes through these platforms, where.
Speaker 2 (18:32):
On any given.
Speaker 4 (18:35):
Vehicle that we may do, we know that like fifty
percent of the loans we make are kind of already
spoken for to the repeatability of those platforms. And then
the other one is having been in this asset classes
individuals for thirty thirty.
Speaker 2 (18:46):
Five after forty years, we have all.
Speaker 4 (18:49):
Sorts of relationships in all these different markets with folks
that normally help us do due diligence on transactions, with
sorts of a lot of transactions for us.
Speaker 1 (18:57):
What are they supplying to pemics, what kind of supplies?
Speaker 2 (19:00):
So it's really around.
Speaker 4 (19:04):
For example, we have folks that lend lay the pipes,
people to build the platforms, people that service the pipe layers, the.
Speaker 2 (19:12):
Platforms they having. So there's whole ecosystem.
Speaker 4 (19:14):
Around some of the shallow, shallow water drilling that the
pemic stuffs.
Speaker 1 (19:19):
And why isn't a local bank, you know, they have
tons of pesos captive, probably very cheap. Why aren't they
just doing those deals?
Speaker 2 (19:25):
Well as totally.
Speaker 4 (19:26):
Knows because she's been covering banks for a long period
of time that banks like to cover quote the the
quote safe, easy, liquid business. Right, so they'll be doing
syndicated loans at libraries, So for plus two hundred that
are uncollabalized or whatever.
Speaker 2 (19:43):
It may be.
Speaker 4 (19:44):
So I think the banks have committed their balance sheets
to kind of traditional corporate lending, and the working capital
needs of pemics and their suppliers have been left to others.
Speaker 3 (19:57):
Just sort of to follow up on what you meant
men about doing business in Mexico and Turkey and elsewhere,
just more broadly, where would you say you see the
biggest opportunities across the em universe at the moment if
we're talking about regions, and also maybe in terms of industry,
obviously Pemex is oil and gas, but are there other
(20:21):
industries that you think are or sectors that you think
are interesting at the moment, and what regions or countries
is grammar sly looking at at the current time.
Speaker 4 (20:31):
Sure, when you say grammar seeders, you know, in some
ways there's three grammar seas, right, there's a public credit
grammar seeds, there's a private credit grammar.
Speaker 2 (20:36):
Seen, there's a special situations.
Speaker 4 (20:38):
So I'll do my best and say, look, generally, we
continue to see a lot of opportunities in Latin America.
We see a lot of opportunities in emerging Europe and Africa,
and lesso in Asia. And so when I think about,
you know, the returns that we get out of Latam
relative to unit of risk, you can't find that in Asia.
(20:59):
So what we take quickly find in Asia is high
returns with a tremendous amount of risk. So typically mezzanine
finance and you know, M and A financing and what
have you, or really low yields because the risk, you know, it's.
Speaker 2 (21:12):
It's low and it's over bought in net market.
Speaker 4 (21:15):
So we're finding quite a bit from a from a
regional perspective in Latan and samea. Turkey has been a
phenomenal market for us on the direct lending side. You know,
there's been this aversion to Turkey on the public side,
which I understand, particularly with the currency that's gone from
one point three to thirty five over the past you know,
ten years whatever. Maybe dollar based bond investors that have
(21:38):
done okay, but we're able to go into Turkey and
get mid to upper teams doing really simple trade finance
sitting with collateral in our warehouse is real estate backed finance,
you know LTVs of.
Speaker 2 (21:52):
You know, zero point twenty five, and that to us
is a great example of you know, we're willing to
give up a couple of years of liquidy to be
in Turkey, to get rid of the currency risk and
have a bunch of collateral in case things go wrong.
Speaker 3 (22:03):
Since you brought up Turkey, I will ask a question
about that before I sort of switched back to latime,
where I have another question. So, you know, you mentioned
obviously that there is a lot of public Turkey debt,
and we know that the Turkish banks, major banks anyway,
are accustomed to dealing with challenges and they've managed relatively well.
(22:25):
But there are these issues that you mentioned with the
currency inflation, et cetera. So how does that affect the
direct lending and other businesses that you're looking at in
Turkey or are they not affected by these headlines that
we sometimes see coming out of Turkey and the broader region.
Speaker 4 (22:43):
Look, it creates those challenges, those headlines, the headwinds for
the banks in places like Turkey. That's what creates the
opportunity for us something like plund I mean, we oftentimes
will sit in an investment committee and say, if this
risk was anywhere else in the world, we probably wouldn't
get to price it.
Speaker 2 (23:01):
Where we are, we wouldn't see it.
Speaker 4 (23:03):
So we're getting to lend to what would otherwise be
investment grade barrowards if it wasn't for the fact that
it was being constrained by the sovereign itself, the sovereign
rating right, And that's what that's really interesting when you
when you talk about deals where you have collateral and
you can ensure and protect principle, but it's in a
(23:23):
place that's not investment grade. That's that's the arbitrage in
Turkey in particular, if you go back, goes back as
far as twenty eighteen, when the banks, you know, we're
really suffering from the from the beginning of the Lyric crisis.
That's when the direct lending market really.
Speaker 2 (23:40):
Opened up for us. And I recall.
Speaker 4 (23:42):
There was a transaction where one corporate thing we'd known
for twenty years, we knew their business, I knew him personally.
Speaker 2 (23:49):
Colin said, can we have lunch in London?
Speaker 4 (23:52):
It turns into a seven hour meeting walk out with
cocktail napkins.
Speaker 2 (23:57):
Which we'll call it, which call a turn sheet.
Speaker 4 (24:00):
We describe a problem that the banking sector was happ
not that his business has happened.
Speaker 2 (24:03):
Is business is fun.
Speaker 4 (24:04):
But in Turkey, if you have what we would call
post dated checks, they call commercial paper, and they used
to be able to take that commercial paper to a
bank and factory. Well, when the banks were under pressure,
they stopped the factory. So not only do these people
lose their working capital, but they had great assets and
(24:25):
they had.
Speaker 2 (24:26):
Ill liquidity issues.
Speaker 4 (24:27):
For us, you know, banks oftentimes will only lend against
tangible cash flow and they don't look at the assets.
We'll look at a combination of the tangible cash flow
and the assets, and we're given extraordinary yields, both in
terms of absolute and relative to the risk for doing
so well.
Speaker 3 (24:43):
We'll try not to keep you here for seven hours, Robert,
but so going back to Latin, and you know the
opportunities that you see there. In the last few days,
well mainly over the weekend, clearly Columbia was in the
news very unwelcome, especially given that the US and Columbia
is supposed to be allies. So given the risks related
(25:08):
to tariffs and potential trade wars and politics and immigration
and so on, are you concerned about latime in that
context or do you think that, like we saw at
the weekend, there will be some sort of quick solution
when these sorts of issues come up, whether it's with
(25:29):
countries that are allies of Trump or countries that are
not so close to him.
Speaker 4 (25:35):
Look, I think the highest conviction theme that we have
as a team is volatility. There's so much uncertainty and
you know where Muhammalarian, when we speak about all the
different possibilities, you should think about like a normal distribution curve,
and there's all sorts of you know, various outcomes that
(25:55):
have very little wings to them, but when they occur,
they have material, major impact. So the reason that we
have the most conviction in volatility is because we have
the most uncertain environment that one could imagine, and when
uncertainty goes up, whether it's top down or bottoms up,
then one should expect volatility to increase. And remember you
(26:17):
were talking about an era when rates were very low
financial repression.
Speaker 2 (26:22):
Well, volatility was also very low.
Speaker 4 (26:24):
And if you remember, everybody was bellyaching that there was
no volatility and they couldn't trade the volatility, and macro
funds would have you had a very difficult time. Volatility
it embraced properly as your friend. And so if you
expect volatility and you position around volatility, and I don't
want to sound too simple, but if you think about
buying low and selling high, or planning the trade and
(26:47):
trading the plan, which is, you know, if the Colombian
pesot gets to forty eight hundred, we're going to think
about increasing our pacer risk or reducing our PASO hedges
and it over gets over bought to thirty eight hundred,
And that just happens with volatility, you know.
Speaker 2 (27:05):
Unfortunately, the Trump volatility.
Speaker 4 (27:06):
Was opened before the market opened on Monday morning, so
all we could do was think about it on Sunday,
not actually executed on Monday.
Speaker 2 (27:13):
But there's plenty of opportunities.
Speaker 4 (27:14):
I'm sure there will continue to be where if you
think about planning the trade and trading a plan, and
then you execute your plan, volatility.
Speaker 2 (27:23):
Is your friend.
Speaker 1 (27:24):
But you mentioned the uncertainy. I mean it's always uncertain
that it's particularly in emerging markets. Would you say that
this is an extreme point in history. You've been covering
this for decades. Is this worse than you've seen it before?
Speaker 4 (27:35):
Look, I've used the word beta agnostics several times today,
and one of the older I get, the less beta
I went the portfolio, and I think that question relates
to beta and the way that people typically think about
emerging markets. I remember a couple of years ago the
markets were really volatile. The US market was down five
(27:56):
six seven percent one day and a friend called me
up and said where are you I I'm out with
my family, and I'm like, well, don't you see what's going.
Speaker 2 (28:02):
On with the market? And my response was private credit,
we're well structured. It doesn't really matter. And that's in
Turkey as well.
Speaker 4 (28:08):
Like you know that loan we made in twenty eighteen,
the lero was at twelve five.
Speaker 2 (28:13):
Years later was it thirty two?
Speaker 4 (28:14):
Our clou was still there and we got we got
pre paid because the borrow. We just wanted to get
their cloud back. So it's the world is uncertain, you know.
I think one of the challenges in the world today
is thirty five years ago when I started this asset class,
there was a strong trend towards globalization, and emerging markets
was a huge beneficiary of that. Globalization looks different today,
(28:38):
looks more like regionalization, and you know, fences and barriers.
Speaker 2 (28:43):
And blocks and what have you. So it's more challenging.
Speaker 4 (28:47):
But if you have a background in the political science
and history and economics and finance, what have you, it's
a playground.
Speaker 1 (28:52):
Also, things can change very quickly, and they can, you know,
erupt in all sorts of terrible conditions, and you may
have the collateral, but you can't collect it or you
don't want to collect it. I mean, do you really
want to own a gas station in Turkey? Or as
we saw in the Argentina restructurings, it's really very hard
to collect on all of the judgments you might get.
(29:15):
So how do you hedge how do you stay out
of trouble?
Speaker 4 (29:18):
Well, first of all, in emerging markets when you underwrite
and I'll go to Turkey for example, Since you mentioned
the gas station. The first thing you have to underwrite
is the people, the person, the borrower. You have to
understand them, their credit culture and how they behaved in
times of dress in the past to predict how they're.
Speaker 2 (29:37):
Going to behave in the future.
Speaker 4 (29:39):
And everybody keeps talking about how challenging Turkey's been for five, ten, fifteen,
twenty years. That's really been a local market Lira story.
But total talk to me about the last time there
was a sovereign default Turkey.
Speaker 3 (29:51):
Of course, I mean, we haven't had that in a while,
but we.
Speaker 2 (29:54):
Do have strong credit culture.
Speaker 3 (29:58):
It is a culture where they believe that debt should
be paid back, which but if.
Speaker 4 (30:04):
You don't pay it, they come to your door and
they take your sofa, right the credit card company and James,
you're right, like, we don't want the gas stations, but
the borrower did yet two of them, one for each
of his sons, and so.
Speaker 2 (30:18):
Having pledge cloudal was it that you want to take
the collateral. It's that they want the collateral.
Speaker 4 (30:23):
And when you have collateral, or even in bad situations,
you come up with good outcomes.
Speaker 2 (30:28):
That's what it's about.
Speaker 3 (30:29):
One of the issues, I guess looking at the real
estate sector in em specifically has been what happened with China.
So you already said that you're not necessarily focused on
that aspect of emerging markets. But is there anywhere that
you think within emerging markets where you think there are
good real estate sector opportunities or do you think maybe
(30:52):
now think that there's more to do in China now
that we are having a number of the restructurings and
so on shakeout.
Speaker 2 (31:00):
So I think.
Speaker 4 (31:02):
Real estate emerging markets is a bit of a Barbelle.
So there's kind of traditional real estate back financing that
you can do, and I think you can get a
good return and a great relative return to some of
the other corporate debt that you might get when you
speak about China. And I think China is a great
example of in the season doing damage to emerging.
Speaker 2 (31:20):
Market investors because if we re recall when all the China.
Speaker 4 (31:23):
Property names were at par they were material way to
the corporate bond index.
Speaker 2 (31:27):
So if you didn't own it, it.
Speaker 4 (31:29):
Was painful, and eventually if you owned it, it was
even more painful. So when China was China property was
at PARR was part of an index. We had no
interest in it, We didn't see any property backing up.
Speaker 2 (31:42):
There was no collabteral. They called it China property, but
there was no property for offshore investors, and for offshore
investors to.
Speaker 4 (31:47):
Get paid, you needed the ability and the willingness of
the onshore borrower to dividends some money to the offshore
to pay well.
Speaker 2 (31:57):
All those par bonds have turned into five cent bonds.
Speaker 4 (32:00):
There's over a thousand home builders one hundred issue bonds,
and we think maybe there's five sixty seven of them
that will go through restructurings as opposed to liquidations that'll
never get anywhere near parer. But when you're coming in
at five fifteen twenty twenty five, it's pretty powerful.
Speaker 3 (32:18):
So it's all about the entry point there then, which
is right enough?
Speaker 4 (32:21):
Everyone talks about the investibility of China. Is China investment?
We'll say, well, you know, if you're talking about a
bunch of power securities, and the closer you get to
things a matter of national security and defense and technology,
the answer is absolutely.
Speaker 2 (32:34):
Know.
Speaker 4 (32:35):
If you're talking about a five cent bond in a
sector that matters to China, you know you can't ignore
twenty five to thirty.
Speaker 2 (32:44):
Percent of your GDP forever you.
Speaker 4 (32:46):
Know, they instead of the Bazuka that's coming out in.
Speaker 2 (32:50):
Little pieces.
Speaker 4 (32:50):
But I think the goal of the Chinese government was
to isolate Evergrand and insulate the rest of the sector,
and that's failed miserably.
Speaker 3 (32:57):
I mean, away from China real estate, then you wouldn't
necessarily see, well, the same sorts of opportunities to go
from five to fifteen or whatever to make those sorts
of returns in real estate outside of China, then it's
fair to say that China's where those opportunities exist.
Speaker 4 (33:17):
Yeah, China's less about the real estate cru se, right,
and the value and the process of the destructuring. And
then to James's point, you know, we don't want the
gas stations and we don't want the apartment buildings. This
isn't about underwriting what the departments are worth. It's about
underwriting that there's a subset that I go through restructuring,
and quite frankly, the value might be in the equity
(33:39):
as much as is in the bonds, because if you
look at these restructurings and emerging markets, you know what
happens is typically debt and equity you're both worth one
hundred before you've got to default or whatever, they both
go down and trade at pennies. The debt gets restructured
and hair code and the equity doesn't get materially deluded.
Speaker 2 (33:56):
That's what we're seeing in the China property sector.
Speaker 4 (33:58):
So the value of a deadly structuring in China property
maybe the death and maybe some combination.
Speaker 2 (34:05):
Of debt and equity.
Speaker 3 (34:06):
Another question on return, So I know we've talked about
not hugging the benchmark a lot here, but if we
do look at those main em benchmarks, performance last year
twenty twenty four and the previous year wasn't too bad.
So given that you've had two consecutive years of okay performance,
(34:28):
what do you think people should expect in twenty twenty five.
I can tell you, like from a European real estate perspective,
that's one of the concerns that you've had two great years.
Can we have a third? Maybe not? So is that
also an issue in emerging market or do you think
that because of your differentiated positioning you might continue to
(34:49):
perform well again this year.
Speaker 2 (34:50):
So I think that's a public credit question, on a
private credit question.
Speaker 4 (34:54):
Particularly talk about the industry, but I also think as
on where you are in public credit right so the
money to be made in public credit in.
Speaker 2 (35:03):
Twenty three twenty four was.
Speaker 4 (35:07):
Not so much about yes, no, but where you were
even within that index based world, and not just the
dispersion of the emerging market sovereigns, but even some sub
sub subsectors like you know, for US, we found that
high yield was a great place to be when rates
were rapidly rising, and that the corporate balance sheets were
(35:28):
in great shape. The sovereign balance sheets were not such
great at space. So the sovereigns had two headwinds. They
had the duration, which was typically more duration and the
ig stuff, ironically than the high yield.
Speaker 2 (35:39):
And then you know.
Speaker 4 (35:41):
Late last year, I say late twenty three twenty four,
it was about turning the doll back towards investment.
Speaker 2 (35:45):
Grade and duration. So it's hard to answer it in
a blanket fashion.
Speaker 4 (35:50):
I think there's a lot of analysis that needs to
be done below the surface.
Speaker 1 (35:55):
So em private debt. I mean, we have a lot
of conversations on this show about private debt in general
and the potential scale of it. And you know, Polo
is talking about a forty trillion dollar market addressable. I
think they're mostly talking about US and developed markets there,
But is there a huge undiscovered opportunity in emerging markets
that you you are seeing and you know it doesn't
(36:15):
seem like a lot of other people are piling in,
So how big is this opportunity? And you know, what's
the addressable market?
Speaker 2 (36:20):
Well, I mean, one way to think about it is
just you know, you talked about all.
Speaker 4 (36:24):
The challenges at the beginning of the show of emerging
market investing emerging market debt investing is why is anybody investable?
Speaker 2 (36:29):
The route is there's you know, over trillion dollarge and
emerging market debt today, right, So.
Speaker 4 (36:33):
You don't have to necessarily convince people to take emerging
market risks.
Speaker 2 (36:37):
They already have the risk. The conversation you have to
have is like, is there a more.
Speaker 4 (36:40):
Intelligent way to take the risk? And I think that's
the opportunity for private credit. And I also think that,
like the example we talked about in the Turkey, the
flows to dedicate an emerging market have slowed down the
massive outflows, the recovery hasn't come, which means if that continues,
(37:01):
it's going to be more and more challenging for emerging
market issuers to get capital at the rate that they
find competitive, and again we have lent to investment grade
what would otherwise have been investment grade borrowers in places
like Turkey in Mexico because of the dearth of capital
that was either coming from dedicated to emerging market debt
investors and maybe for the reason totally mentioned, because the
(37:22):
size of the loan was an index weight or whatever
it may be, or there's just other regulatory challenges going
on in the country at that time that allows you
to seek that risk wouldn't otherwise.
Speaker 2 (37:32):
But I remember runninground Turkey.
Speaker 4 (37:34):
In two thousand and probably mid twenty fourteen fifteen, as
we were starting a private credit business and meeting with
all sorts of borrowers, and they were like, we can
borrow seven percent unsecured all day long.
Speaker 2 (37:45):
We don't need your capital.
Speaker 4 (37:46):
And my response was to keep my cards just in
case it doesn't work out. You know, all those people
started calling us in twenty eighteen. You know, same thing
that happened in Argentina in two thousand and seven. Hey,
everybody's investing, we don't need your capital.
Speaker 1 (37:57):
We'll keep the cards, kids, And you'll see more of that,
more of those calls now because rates are high because
local banks are pulling back, is that the general.
Speaker 4 (38:06):
Local banks are point back rates are higher, and the
dedicated corporate emerging market flow isn't necessarily there. So that
being said, emerging market new issues is doing pretty well,
and we think a lot of that's coming from the
local buyer as well from the cross server buyer.
Speaker 3 (38:25):
I have one question, because I think you've come across
very constructive, which is what we would have expected, obviously
from someone who has seen many cycles or the twelve
dislocations that you talked about in emerging markets. But what
keeps Robert up at night? Then in emerging markets, what
are you concerned might go wrong in twenty twenty five
or sooner or soon, sorry, that would change your view
(38:49):
drastically on the outlook for emerging markets.
Speaker 4 (38:53):
And just to clarify a lot constructive on the asset
class for the non am em shop.
Speaker 2 (38:57):
I've been talking about an approach to an answer clas
it's not seeing the praises of the acid class.
Speaker 3 (39:04):
Fair enough, Yeah, so you did. It's specific and.
Speaker 4 (39:06):
Again when you ask that question, I have to I
think I have to answer it from the perspective of
different types.
Speaker 2 (39:12):
Of lending to the acid class. Right, So, if I
think about.
Speaker 4 (39:14):
Public markets, you know, a week ago we said that
the the pain trade was to four and a quarter,
not to five and a quarter. That everyone was pricing
that the treasuries were going to go to five five
and a.
Speaker 2 (39:27):
Quarter, and we got below four fifteen.
Speaker 4 (39:31):
I think one of the one of the challenges for
fixed income and emerging markets is as we think about
this new administration in the United States, and you know,
we all kind of think that Trump's using the thread
of the tariff more than the implementation of the tariff.
Speaker 2 (39:47):
It's one thing if it's two and a half or
five percent.
Speaker 4 (39:49):
It's another thing if it's twenty five percent of Columbia
for fifteen minutes. But if we end up in a
world where what we say higher for longer, so we
say bigger for longer, larger for longer.
Speaker 2 (39:59):
On on the terrorists, that's.
Speaker 4 (40:02):
Not just gonna have an impact on the individual countries,
but it's going to start to have an impact on
the macro in the United States and rates in the
United States. And you know, unfortunately, I think emerging markets
public credit has been setting itself up for the traditional
When the Fed starts cutting rates, just close your eyes
and by it.
Speaker 2 (40:21):
Well, now you have to.
Speaker 4 (40:21):
Think more about the volatility and all these other factors
that are going on at the same time.
Speaker 1 (40:26):
And to end on a high note, Rolle, what's the
biggest opportunity for this year? What are you most excited
about in global credit?
Speaker 2 (40:31):
Look, I mean, we've talked about it at nauseum.
Speaker 4 (40:34):
I think what I'm excited about is I see what's
happened in developed markets as it relates to direct land
in private credit, and I see that we're just scratching
the surface in emerging markets. And I think it's really
exciting to go deeper and broader in EM as an
asset class with the tools that have proven to work
already in DAM. That's super exciting and it's the way
to navigate all the risks that we talked about today.
Speaker 1 (40:57):
Is this the year you think it breaks through?
Speaker 2 (40:59):
All right? We'll breaking through every year.
Speaker 4 (41:00):
So yeah, on the one hand, I'm excited about it,
but my competitors to get too excited about it.
Speaker 1 (41:05):
We've been talking about a golden age in private credit
in the US for some years now, so emerging markets follows.
There therefore a golden age for emerging markets.
Speaker 2 (41:12):
And we look, I'll joke in aside.
Speaker 4 (41:15):
I mean the story that people used to tell about
emerging markets. It was just x years behind developed markets,
and it was emerging towards and converging.
Speaker 2 (41:22):
Towards what's going on in develop markets.
Speaker 4 (41:24):
Don't know why that won't be the case for private
credit and the strategies that you can build around private
credit and emerging markets.
Speaker 1 (41:31):
Great stuff, Robert Koenigsberger, founder of Grammacy Funds Management. It's
been a pleasure having you on the Credit Edge. Many thanks,
thank you very much, and of course we're always very
grateful to Tolu Alamutu from Bloomberg Intelligence. Thanks for joining
us today.
Speaker 3 (41:42):
Thank you for having me for.
Speaker 1 (41:44):
More credit market analysis and insight. Followed Tolu Alamutu's work
on the Bloomberg terminal. Bloomberg Intelligence is part of our
research department, with five hundred analysts and strategists working across
all markets. Coverage includes over two thousand equities and credits
and outlooks on more than ninety industries and one hundred
market industries, currencies and commodities. Please do subscribe to the
Credit Edge wherever you get your podcasts. We're on Apple,
(42:05):
Spotify and all other good podcast providers, including the Bloomberg
Terminal at bpod Go, Give us a review, tell your friends,
or email me directly at jcrombieight 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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