Why Private Credit Continues to Thrive

[Music] thank you welcome everyone um over the past 5 years private credit has grown into a $2 trillion Market it's 10 times larger than it was in 2009 and it's projected to reach somewhere between 2.8 trillion and 3 and2 trillion by 2028 depending on which sources you consider to be most accurate um today we're going to explore why private credit continues to thrive and will alternate between our distinguished speakers um I'm Ellie saffron I run an advisory firm here I've lived in lby 17 years and we help companies and funds connect with this part of the world and uh here we have over $300 billion do of private credit managers um to talk to about this about this topic I'll kick off with um Lawrence from goab capital A $70 billion private credit fund um golb capital is celebrating its 30th Anniversary this year that's right 30 years which means you have experienced the rapid growth of private credit and perhaps driven most of that over that time could you take us back to the early days of private credit and discuss its Evolution to where we are today and where way you are delighted to so I started the business in 1994 and at that time Banks were really starting to have struggle with senior debt but there was a very developed subordinated debt market and just an incipient Market of non-bank lenders developing we we really had our growth take off in the early a and mid odds as we developed uh a the One-Stop loan product which was very very valuable to private Equity firms as they were buying businesses because it was simpler higher certainty better partnership better alignment of interest and something that private credit when done right brings to both the investor and to the Borrowers is this uh better solution it's not just a cheaper form of money or more expensive form of money depending on which side you aren't it's about designing a business designing competitive advantages that really address needs that each client base has and as private creditors grown with private equity in the case of direct lending which is what we do direct lending has grown in its capacity to do larger and larger transactions so direct lending has grown with the size of the private Equity industry but it's also grown taking over more and more of the capital structure great and we actually have a bank on the panel today so we'll be touching on that in a little while as well so some investors um perceive private credit to be risky and carries a lot of default risk um when in fact you can generate Equity lack returns with a lot less risk than Equity um in some cases as well um how do you guys protect yourself from losses and and what are your thoughts on that well I think the lending business is hard actually making loans is easy getting paid back is hard and uh there's an inherent conflict between our private Equity Partners who want less expensive lower documentation easy terms and our investors who want alignment of Interest higher returns and above all else resiliency so we've addressed that through specialization we are the best we aim to be the best in sponsor Finance we're very specialized even though we we now have over 70 billion of loans outstanding of of the scale US Direct lenders we are by far the most specialized so for private Equity firms we don't charge extra for our reliability and our partnership but we are more selective and for our investors being more selective and being focused in certain industry sectors having the alignment interest of ourselves having a great deal of money invested in the funds provide steady returns so we're trying to deliver premium returns which we've done but also with resiliency across all the different crises that come up every six or seven years okay great and um ven from VI Capital Partners um you you sort of focus on both private credit and broadly syndicated credit um what are your views on private credit and being a risky investment and in the areas of growth yeah thank you very much uh this is the third ABAB Finance week uh I'm proud to be uh three years in a row part of it with very distinguished speakers um I think both uh private credit and Broad indicated credit spaces are growing private credit is growing very fast due to demand the last three years I'm observing everyone is talking about private credit everyone wants private credit why I think we should a little bit touch upon that when you are in a actively traded priced every day broadly syndicated credit uh day-to-day risks of the economy Etc reflects to the price so you get volatility so Institutional Investor looks at it and says like well if I'm going to invest into credit I'm going to get so much volatility like Equity markets why don't I just invest into Equity markets if I will experience this volatility so most of the investors that I see they do not want to have this volatility in credit space they just want to income and relatively stable pricing private credit as you know is illiquid it doesn't trade so the price day-to-day volatility doesn't reflect its price uh this has driven a lot of the demand to this area but I do want to say that private credit or Public Credit it's the same economy it's the same companies so therefore I do think we should be careful when we are allocating you know very very aggressively to private credit I do see the next couple of years continued growth B in private and broadly syndicated space but I do see a little bit due to this excessive demand problems slowly appearing when demand peaks in a certain area in general underw writing standards starts loening up uh I don't see that becoming a problem the next two years but maybe 2027 in the same panel we might start talking about some serious problems thank you um and Ron Daniel you're the founder of liquidity group um you're a double disruptor in a sense you're um in private credit but also using Ai and Technology to create something really unique in that area can you tell us a little bit about that um and and also talk about how AI is working working within this space and what you're doing with that sure so I'll begin with uh the fact that AI is on the way of being a good tool to uh make decisions on finance but it's not yet there uh I would more say it's machine learning algorithm that you have to perfect and perfect again and then you can translate it to something human being can understand through AI uh so AI is still a buzzword but we are getting there and I think the Mr G here said they are highly specialized even there are $70 billion asset managers and I I think in this sentence you see the exact challenge of private credit because it's getting harder and harder to get the right decision at scale right it's one thing when you need to get 100 decisions a year completely different things when you need to get 10,000 decisions a year which are not statistics when you want to deploy a lot of capital fast you need to be able to sustain a level of decision science and you don't have enough expert in the market to do that so the only way to bridge this gap which is growing is through technology that's what we're doing in liquidity it's a stepbystep effort we deploy based on our technology and we expand the scope of what the technology can monitor and do diligence great thank you um and last but not least borha um you're from Sanda asset management and um Sanda has a unique position in private credit given uh the global banking Roots how do you view the role of banks as Originators compared to the trend of dis intermediation in the private credit markets we've got um market shares in the US and Europe of private credit somewhere between 35 and 50% in Australia it's a lot less it's only 15% at the moment but where do you see the role of banks um in addition to the role of Sanda in the shift and do you think that banks will start to claw back some market share or how do you view the the Outlook thank you for the question and thank you for having me um look I think when we talk about private credit we need to put numbers into perspective no you've mentioned a few percentages but also let's face it the private credit is around a two or three trillion Market no the biggest banks are 100 trillion of balance sheet in among them so there's a huge space within the private market dominated by banks no and now we're seeing how different asset managers are joint venturing with private Market um players in order to get access to that origination that banks have no and the banks have an excellent origination capacity and excellent relationships that have last for decade if not even centuries that now ASM managers are trying to uh get into and there different ways in where they're getting into some ways are just doing joint ventures for originating directly the loans to the banks and others are instruments that are in the market that The Regulators have approved like the synthetic RIS transfers which asset managers come by getting access to pools of credit RIS within the banks whilst leaving the uh the origination and the daytoday management of those loans with the banks at what they do best thanks Ron you um your firm has invested in 35 countries globally uh what trends are you seeing and what countries are you seeing the greatest opportunity in in growth it's a good question um so I I think what we see and we're going to continue and see that that there's a growing gap between how tangible an asset really is and the ability to lend Capital against these assets and I think this is exactly the Gap where Bank struggles and that's the source of the strength of private credit right because if the underlying asset is is not tangible it's very hard to know what the risk level at any given point and this is where um opportunistic asset managers can step in and this is a growing Market because when you look at the market today most of the assets are untable right IP of technology companies how do you estimate the value of this asset this asset can move billion today and zero tomorrow right so all these different areas where uh the assets are not tangible enough and volatile this is where the big opportunity for the future growth of private Credit in our perspective um it's a global Trend but we see a lot of growth Focus around of course Mina region uh we have a big office here uh uh because of that uh we deploy in in the region um but also across all apak and IMA uh we see more of a red ocean type of Market in the US right now and we think it's going to get just more bloodier over time so uh yeah okay um and Lawrence with with this growth that we're seeing um global out of private credit what risks do you see emerging in the market and how are you guys positioning yourselves in that regard well I'll give a a little bit of a counterintuitive answer I think one of the biggest risks in the market are the investors and our investors not our investors necessarily but all of our the whole private Market world when you start looking at an asset class like private credit and saying well I can get a higher interest rate that's dangerous because really as an investor you want to think about what is your net return after credit losses going to be not just this quarter not just this year but over it's an a liquid like asset class over the Cycles we went through in 1998 the Asia crisis 200201 the internet Telecom bus the great financial crisis covid it's not good enough to earn great returns in the easy years you lose all your money on the outliers in the bad years so alignment of Interest focusing on net returns not gross returns thinking about and there are many different good strategies but if your asset manager is publicly held and has a quarterly conference call and the CEO talks about how much their fee paying assets under management have grown you know what their priorities are for us you've asked what we do we focus on our net returns we focus on being premium return across the cycle great um and just as we wrap up just a question for each of you briefly quick answers we've seen a really uh large amount of increase in RSV rfps this year from The Sovereign funds in particular in the space what's one piece of advice you'd have to investors particularly new investors entering this space I'll start with you B so the the way we think about credit and I guess most of us do the same way is uh implicitly that you can have limited upside but a lot of downside so I would encourage as Lauren said before to look really into the downside of events that you are not thinking that may happen but could happen and for that either a very Diversified pool of assets or as we like a lot hard assets because at the end of the day the hard asset has an intrinsic value unless you're you know lending to something that really doesn't have value it's a strategy that we do like for those Black Swan events that may come and we're not counting on them or we don't predict them right don't make the loan if you can't do the workout and if you're going to be an investor figure out how the manager handles workouts what their track record is and if they can't answer the question of how they did workouts two recessions ago pick somebody else right yeah well private credit became a very big definition we're talking about $2 trillion Market but you know these credits are not looking the same some of them are really large competing with the broadly indicated Market the covenants in that area are weakening the maintenance covenants Etc the bigger the loan the bigger the demand and the bigger the competition uh Lawrence has been there before this area was called private credit he's one of the Godfathers of Middle Market Landing actually I do think the origins of this business where it was focused on Middle Market companies it's healthy under writing is strong the bigger the loan I'm not sure if you know you're getting paid extra for the risk you take it's very close to broess indicator great and iron uh for me it's uh mainly two main points one is make sure you really understand the risk reward you are acting in and if the risk change the price needs to change and vice versa and second enforcement make sure you can enforce the agreement if you cannot enforce the agreement don't let the capital some great advice uh thank you so much panelists for sharing your insights on why private credit continues to thrive uh it's clear from from your responses that there's much to think about and um and it's helpful to have people that specialize in this area to give us insights on it so thank you for joining us and and all the best [Music] what