Innovations & Strategies in Private Markets

Um, we were having a great chat back there. Um, I mean, where to begin really? We've covered so much on on private credit at the moment, but I think maybe we'll go out global before we come back regional, particularly for you, Sam. And if we look ahead um how we're seeing these private markets evolve on a global scale, give us your sort of take on that first off. Well, we're looking at it from the perspective of the allocators in this region.

Um who are quite significant who've been building up large portfolios of private credit in the US uh in Europe and and more so in Asia. Um we're seeing obviously um uh you know sort of keen interest in diversification amongst different asset managers um also um diversification in terms of who's funding that business. So we're sort of uh ADCB is one of those sort of funders uh but they're they like to sort of diversify uh the risk to a multitude of banks. And we're also seeing um different types of asset classes. So moving from sort of what we call sort of middle market uh PE sponsored uh credit to smaller uh non-P sponsored to tech company loans to infrastructure to real estate backed and so on.

So Stan, you got a at last count, obviously you can update this about 66 billion US dollars. Not an insignificant amount to be in control of. You've move evolved though during that time with that cash from a single strategy boutique to to a multistrat uh global manager. Now how are you integrating this private credit into that and also other private uh strategies? Yes, for decades we've been managing public equities across the globe, really seeking to produce mid tease returns for our clients.

But in 2022, we decided to diversify the firm and enter the credit markets in both public credit, private credit, and in structured credit. And when we were looking to acquire a firm, we were looking for the skill set with the ability to produce mid- teens type returns for our clients. So in other words, we could present compounding on the equity side, be great cash flows on the credit side to help our clients, help the asset allocators who are allocating through us, and improve the overall diversification of the firm. And Justin, I mean, you've seen things from a very great height from the US Treasury point of view, but when we think about that private credit platform, it's been growing very quickly. But if we think about how companies have been accessing that, particularly the midsize ones, in terms of when we look at that segment of the market versus traditional bank lending and public bond markets, how are you seeing that evolving?

Sure. Um I mean it's evolved hugely over the last uh last decade. Um you know private credit globally uh has has filled a huge need for private companies. If um you know you think after 2008 as banks had to reduce their balance sheets. If private credit had not been available growth in the US and globally would have been a lot slower.

it's really played a a vital role in in in the growth of of um of of the US and and and other countries and uh you know what's been interesting to see happening is that as the market has matured it's more and more competing with uh traditional uh broadly syndicated loans and and high yield which I think has been good for companies. If you look over at at Asia, uh it's uh it's really filled a need over there, especially over the last few years as especially as high yield markets haven't been issuing as much. Uh private credit has been very important over in Asia.

So there's no doubt obviously as you said it's been adding that very necessary level of liquidity. Obviously the liquidity within the US markets is deeper um Sammy but um we do have a fledgling market here and maybe a slightly different approach at the moment in terms of banks such as yours partnering uh on the private credit side with private equity managers. Um, so we obviously have a a very active fund finance business which we've developed a couple of years ago. And so obviously one of the ways we partner with private credit is we provide different types of what we call fund finance. Um, that takes different forms.

Um, for example, we do loan on loan uh leverage. Uh, we do what's called uh sort of NAB financing against LP stakes. We do uh what are called subscription line financing which is lending against uncalled capital commitments and we've managed to grow our book significantly uh over the last uh few years. So that's the obvious. Um when we talk about private equity um we are also an active lender in this region to uh sponsors that are either growing their businesses uh for example in data centers.

We recently financed a company that was uh sort of co-sponsored by KKR uh in in uh in in the UAE. Uh we've also sp we've also financed the acquisition of Network International by Brookfield. So we are working um sort of handinhand with private equity. Um and where that's going is potentially uh to the smaller more middle market type companies where banks and private credit can sort of work together in different parts of the capital structure. So what I see potentially happening in the future is we sort of you know work where the the bank takes the senior debt and the credit fund takes for example more junior piece in the capital structure.

I see that uh and people have talked about future flow partnerships. um where banks um sort of help originate product uh or lending opportunities for uh for private credit. Uh we haven't really seen that in the region. I'm not sure how quickly that will happen, but it's something that's uh that's definitely discussed.

Justin, I can see you nodding away there.

Sure. No, I think that's exactly right. I mean the uh I think one of the most interesting parts of private credit are these bank partnerships and it's something that we've been doing sort of extensively in in Europe. We now have partnerships with 50 banks to uh to source private credit and um and I think uh it'll be a big part of the future of of the private credit markets.

Stan, do you want to add to that? Yeah, from from our perspective, we're using the banks much more around structure credit around the warehousing and the lending to create things like CLLO offerings for our clients and we play more in the lower middle market direct lending space. So, we're not seeing as much of that in terms of origination coming from banks. That's where the banks aren't participating as much and we're stepping in to provide the capital that these small businesses need in the United States. And you kind of touching on access to capital there and I wanted to build on that with you Stan because there's no doubt there's been a wave of innovation uh for access and liquidity as well in secondaries.

Which structures do you think are genuin genuinely improving that access at the moment and perhaps liquidity to private markets?

Yeah, I think that's very interesting in that there's different forms of potential liquidity that you can get in these markets. uh probably the most uh transferable in liquid terms is the secondaries market which is very robust in the United States. You know the LP can actually transfer their ownership interest to someone else. Uh I say the second is continuation vehicles. That's more the GP putting things into continuation in a position they want to hold.

So that's has a liquidity component to it. And then the third option and we actually have one of these funds are the evergreen options uh which are semi-liquid and they're not as liquid and they do have that liquidity mismatch because you can have if you have say a 5% quarterly gate investors can ask for 5% out each quarter and just because they're asking for 5% out each quarter doesn't mean the underlying asset is liquid. So you have to manage the portfolio to have uh a combination of liquid assets, annual liquids to be able to meet those draw down demands. So it's a it's a delicate balance.

Yeah. And and I wanted to come back to that challenge. We can dig in a bit more there. Um and Justin with you really the borrowers and investing, you know, supporting that growth. How how do you manage that and what innovation you seeing as well as waiting to be able to manage that sometimes tricky relationship?

Yeah. [clears throat] It's uh it's just very very important that uh that you match liquidity as we were just talking about and I think I think the current structures you know most semi-liquid structures have 5% liquidity a quarter you know for what we do in private credit uh that works well there's national amortization but I think the risk is that investors you know when times get tough they'll want more than 5% a quarter even though you've been you know clear that there's just 5% a quarter. And if they ask for more than 5% a quarter and can't get their money back, they'll say, "Well, a manager is gating." Even though it's not really gating because gating is when you do something which uh when you when you tell people they can't have liquidity, which you've said they can have, but here it's semi-liquid. And so I think there's just this reputational risk around it.

Uh even if um you know, even if you've been very transparent. So I think you know managers just really have to communicate make sure investors know that there's this limit of 5% a quarter otherwise there are these you know you risk reputational issues. Yes, you have to be very clear when they're going in. Uh, obviously term terms and conditions and it's something we've touched on about all kind of morning and afternoon. And I'm just going to get your point of view because you're two massive investors as well, is the sort of slight mini miler, let's call it, um, about private credit and the fact that, you know, suddenly there was this deep concern about it.

And we've heard many people, not least Black Rockck first in this morning saying, you know, I think that's one of the biggest mistakes in the market. So maybe I I'll carry on with you there, Justin, in terms of where we are now with private credit at the market in those private markets and let's call them how safe they are.

Sure. Well, I'll make two comments on it. First, I think if you're being honest about private credit, you have to admit the markets are a lot more crowded uh than they were five or 10 years ago. We got into the business in 2013 and there's a lot more capital chasing deals and spreads are lower. So, I mean, that's a backdrop, I think, for private credit.

Um, and my sense is for down the middle, upper mid-market, core mid-market private credit, returns are going to be lower than they have been historically because the market's more crowded. That said, uh the two deals which you know everyone is focused on first brands and triricolor I don't think it's really fair to read across from those to traditional private credit because basically there was fraud in both deals and unless your thesis is fraud is uh widely spread in private credit. I don't think those two deals are are particularly instructive.

Yeah. People were suspicious because it wasn't listed and didn't think the regulation was necessarily there. Stan, I think that's an old-fashioned concept, but Stan, from your perspective, what kind of questions do you get asked?

Yeah, we often get asked about u the cockroaches that Jamie Diamond referred to. But when you when we look at our business in across the US high yield market and we go down into the triple C market as well, uh we don't we haven't seen default rates increasing. We've heard about defaults increasing, but we actually haven't experienced it yet in our own book of business. And then when you go to extend into uh the BSL market in CLLO's, we're also not seeing that. And that's where uh first brands actually did have an impact in the CLLO, but CLOS's are broadly diversified.

And then in private credit, um we're seeing the economy in the US still being fairly robust and not seeing as many problems there. So, uh, there's a lot of talk about distress and or the forthcoming recession, but we're not seeing it at this point in time in our book of business.

No, and in some respects, it can be absolutely safer than necessarily just investing in the market. And Sammy, bringing you back into that, obviously, we talked about the depth of the market and where we are here in the Middle East, here in Abu Dhabi. Do you think there's a process of education with private debt and people investing in it in this region or do you think they've got it? It's just maybe the opportunity to invest isn't quite there yet.

To invest in local assets, you mean? Yeah. Um,

no, that's interesting. That's something we've been keeping our eye on for the last um really a couple of years since I've been in this country. Um,

we um we're certainly uh as ADCB obviously a large corporate lender in the region. We're also a middle market anme lender. Um these are regulated businesses. um they don't preclude the existence or growth of the private credit industry. Um I think what's to just sort of answer that question, one has to sort of take a little bit of an understanding of what some of the key if you will drivers and enablers are.

Uh one is of course a massive capital investment program uh that they've embarked on in the UAE and and uh in Saudi Arabia. Um that's created uh of course um uh that's driven if you will by by local uh allocators uh who have become obviously very sophisticated along um industry verticals and specialization and that's created of course national champions uh that are able to compete nationally internationally. And so this um in addition to if you will um the uh legislation regulation that's been introduced uh everything from visa rules to um to securization uh uh uh regulation to um uh to to um to to many other forms of regulation has introduced, if you will, a very positive environment for private credit and private capital to thrive. Um, and so we're we're we're seeing uh we're starting to see a lot of uh deployment uh both in larger type companies like uh you probably heard of Property Finder uh raised obviously both uh structured uh equity and then subsequently raised structured debt um but also uh larger companies as I mentioned before like uh Global Data Hub which uh raised private capital and um and and and other sort of large companies. companies in this region.

So we we see um certainly an opportunity for growth equity. Um we see that developing and that comes as I said in different forms. So it could be sort of minority infrastructures, debt plus warrants type structures. Um and we also see um um infrastructure type either social infrastructure like education companies or uh digital infrastructure like like I mentioned before. Um and and and also uh we see uh the use of sort of securization technology um both by private credit and banks to uh create more capital uh for for smaller growth companies.

And I'm guessing as well, we won't drill down on it now, but the increasing um public private partnerships as well, there'll probably be a role tuxed within there uh for maybe a bit of private credit as well. But you also mentioned something else which is interesting which I want to take out to Stan and Justin as well and that's the guardrails, the regulations. Is there anything that you should think should be out there or anything that you see that is out there that you think is keeping that market safe or could keep it safer? Maybe Justin, I'll start with you.

You know, I think regulators overall are uh being quite thoughtful and careful. I mean when they're accepting um retail or private bank uh money you know they're they're it's being quite carefully regulated. Obviously insurance money is uh obviously uh you know heavily uh heavily regulated. I will say on the fund technology side I think there are uh what what's uh a very positive development is this move towards evergreen structures sometimes with runoff sleeves sometimes uh really truly uh evergreen and that you know allows fund allows funds to get invested much more efficiently and then not have the the ramp up and ramp down periods and so I think that's a sort of a good development in the space We we think about it in terms of the evergreen structures as well. Uh particularly getting a tender offer fund or interval fund structure or an LTI or an LTAF u because the the regulation around trying to get an illquid asset to a mass affluent or to the retail market.

The democratization evolves. uh there's different regulatory regimes in each location around each specific u jurisdiction and even within the US do you have to be a qualified investor or credited investor type fund or not and then how that gets pushed through and then when you tell someone that they have a 5% gate and they say that gate doesn't apply to me and they file for litigation uh it can cause issues so I just think uh the more that the market develops and the more these uh vehicles become commonplace uh that and the regulatory regimes uh from uh Singapore to the UAE to Europe to the US, the more that they're aligned around these type of vehicles, the better it will be for accessing the markets in total. Well, I've got you both in the hot seat because you're so experienced, Sammy. I know you're not allowed to predict the future, but you've already given us a really good overview of where ADCB is looking in terms of where you think private credit is going to be utilized possibly. But, uh, Justin, if we're looking ahead to 2026 and beyond, as you said, maybe the returns are being compressed.

Yes, there's more competition, but if somebody out there is thinking of dipping their toe into these private markets that they haven't been in yet, um what do you think we should be looking for in 2026 and beyond?

Sure. I would look for areas of private credit uh that are less trafficked. I think there are great opportunities in private credit, especially around bank partnerships for really attractive uh riskadjusted returns. You know, one of the nice things about the asset class maturing is that it's not all one thing anymore. There are subcategories of private credit and for sophisticated investors like you have uh you know in this region uh I think are lots of interesting opportunities if you really sort of um can parse the private credit markets a little bit.

Yeah. So it's not just exclusive to institutions which is what I think a lot of people are thinking. There is the possibility for for retail involvement as well. Stan, from your perspective, 2026 and beyond, um, where where are you seeing private credit maybe the hot spots and maybe things to avoid?

Yeah, I agree that uh there's there's spots within priv private credit that look more attractive. We think that lower middle market uh private credit looks very attractive. Some asset backed financing looks very attractive. Uh but if you look where uh spreads are today and how tight they are in the US, uh the most attractive thing from my perspective is actually in the CLLO equity realm because you can structure the credit, lock in your borrowing costs and then when spreads widen, take advantage of that and get a really nice return for your investors with a cash on cash return paying out quarterly. So I would lean more towards structured credit over private credit at this moment.

That's how they do it. And Sammy, I'm going to leave the last question to you. a little bit of a one that we've been hearing all all along this morning and that's AI and technology within the bank. What kind of systems and processes we hear in the last two panels how they're being integrated into those systems for productivity gains. Is that something you're a big believer in that you're adopting?

We are in Abu Dhabi.

Yeah, it's funny you ask. Um, and I didn't I didn't place that question, but um, we are obviously with the size of our portfolio and our exposure going up, we're we're obviously making sure we have sort of state-of-the-art credit monitoring systems and we are in the process of um, sort of upgrading all of that as we speak and uh, of course AI has become uh, AI and sort of enabled sort of uh, uh, technologies have started to seep into this business. Um so yes we we are looking at uh AI more from a credit monitoring perspective and uh uh and eventually it'll be used much more broadly I think.

Yeah brilliant and I can definitely guarantee I didn't plant that question. But I didn't ask you if you could answer it, but thank you so very much for indulging me today. And gentlemen, uh, no doubt bringing your depth of experience and market knowledge to this panel today to talk about an asset class that is definitely looking more in interesting for the individual investor as well as the institutional investors. So, thank you so much for joining us today. Sorry about the music.

I think we should be dancing out to this one. Thank you very much, Justin Musanik, Sammy Tabara, and of course, Dan Moss joining us here today. Gentlemen, thank you so much for your time today. It's been an absolute pleasure. Thank you.