Welcome to the Yield Market: The Rise and Rise of Private Credit

[Music] thanks very much indeed everyone for joining us today we've got a fantastic panel to discuss the rise of private credit um it's grown to a $ 1.5 trillion industry in recent years um it's really the Hot Topic that we keep hearing about and before we start discussing why it's rising we're going to talk about what exactly is private credit since it does seem to be a bit of a blanket term so Vulcan um you're very kindly going to tell us a bit more about what exactly do people mean when they when they discuss about private credit thank you um traditionally speaking if a company borrows um capital from a non-bank entity or from a small group of non-bank entities that you would call Private credit however this definition I think just applies historically at this point um the area as you mentioned has grown dramatically and now from spe special situation lending to mezanine Junior Capital lending even distress Landing is going under the private cap private credit definition whenever there's a story these days there's a need for private credit uh I just wanted to read from a news from yesterday Hong Kong stress developers lure private credit as funding Gap looms so usually historically this area was just performing meid Market type of companies instead of going to bankrot borrowing from private companies private funds but it's broaden a lot as you mentioned it grew towards 1.6 1.56 trillion expected to grow certain service say to double that three trillion in the next 5 years uh I think there are couple of causes for that growth one for the borrowers it's appealing uh why is it appealing multiple reasons I will leave my colleagues to speak about that it definitely involves certain of execution compared to bank lending that's on the borrower side on the investor side uh I think that this positions are pretty much hold to maturity they are not Mark to Market every day every week every month they get valued quarterly is attractive for large institution investors who do not want marketto Market volatility maybe thank you so let's move not to Ted uh private credit is very much a US Focus um you have ter um a lot of experience in the market can you tell us why is it so popular what are you seeing in the United States yeah private credit really became an asset class after the financial crisis during the financial crisis every asset class was correlated cash bonds stocks agriculture Commodities Metals everything went down private credit is the one asset class that performed so after the financial crisis insurance companies and Pension funds that needed to know that they had consistent returns turned to private credit private credit is senior secured floating rate so it's a natural hedge against Rising interest rates loan to values probably 50% and throughout the last 20 years it's been a consistent return player so Pension funds that need a seven or 8% return insurance companies that need a four or 5% return over the last 10 years when interest rates and the treasuries went to zero tremendous amounts of money came out of treasuries into private credit and that's really what's Driven the growth of it and it's become today the fastest growing alternative asset class among all asset classes and let's now turn so in the US we see very successful but other regions are catching up and we're lucky to have Michelle on the panel today so he covers Europe Asia also the Middle East um what are you seeing see in these markets and are they catching up or what's the um well Laura to to Ted's Point um it's a very fast growing Market in our regions as well but the basis is much lower we have been investing in private debt mostly in Asia in the last 10 15 years but there's only a handful of funds that do it there are a number of conditions that are required for such Market to develop itself and what you need is the rule of law you need bankruptcy processes you need Creator right which is not necessarily available in every country in the region and as a result governments have understood that and as banks are retrenching increasingly from financing midcap Enterprises regular have come in and have improved drastically drastically at least in some countries the bankruptcy process C right accounting uh regimes and that provides a a market with a large amount of opportunities for private lenders like us you got to be extremely selective in the markets in the countries where you operate and I keep hearing about the the new regimes that are evolving here as well which will pave the way for a growing private de Market but we just at the beginning and the the demand Supply D dynamic means that while for similar investments in United States when you have seen your secure debt you are probably aiming for single digit returns we can uh achieve meanin like returns by buying senior secure debt but that works as long as you're familiar with the market you have boots Ong ground and you can have relationship with the the the the companies in which you you invest sure that's yeah absolutely we'll talk a bit more about returns later but for now um Ron would you be able to tell us you come at this with a very interesting angle with a very Tech focused angle tell tell us a bit more about what you're doing how you how you're doing it what you're seeing sure so uh my colleagues here they they said wisely about the reason behind the rise of private credit but there's also the element of why it happened not just because of economical reasons but because how the world is changing and the world basically is becoming much and much faster uh businesses needs to grow faster they need the faster uh uh service from Banks and from on their lending needs and this is the place where a lot of Technology get involved but the regulation is always much slower than technology and slower than the market and this growing up basically turn private credit as a segment to the only answer to many many many companies in the world and as a result we see that the quality of companies that enter this market and lending through uh uh these sources is getting better and better so it when people say private credit they tend to think distress they tend to think relatively uh uh uh Low Places on the capital structure but today actually private credit is available at scale across the entire capital structure and again that's because uh the the market gap between regulation Evolution to technology Evolution that enable much faster due diligence deployment monitoring it also changes the the boundaries of Securities so Securities are no longer solid assets it can be potential right everything that I can measure can serve as a security as long as I understand what's involved with the value the future value of the asset and that's by itself change the market as a result also we see a lot of uh late stage technology company that prefer to take debt than Equity right and the reason is that traditionally The Venture that business was all about what was their last round valuation who are the investors this is the this is probably the how I can hedge it and it was a lost leader for many banks to take the banking activity but these days where it's more tangible to understand the potential of the business we can actually lend those guys not against asset but against their potential mhm and this is where it's become scalable so suddenly companies that used to be able to take $10 million from a bank and come to us and take $100 million as long as the potential is there and we can track it and analyze it so yeah maybe maybe I can add a few uh on run I mean historically speaking when you see private credit people think of midsize companies this has dramatically changed over the last three four years we are talking about4 five billion doll loans which can be taken by three four five private credit funds so as private credit is rising bank loan syndicated loan business is getting smaller private credit is eating into that area and I do think that Trend will continue a few key things about private credit if you're a Growth Company there are certain when you want to borrow money there are certain things that you do not want to uh deal with you know for instance is the credit going to come certainty of execution is it uncertain how about rating if I borrow from a bank I need to get a rating maybe private credit fund I do not need to get that so a lot of appeal uh and uh you also start thinking if I have this two three private credit lenders in three four five years I become a bigger company I can borrow money again so it's very appealing to the borrowers uh but of course you know this is still a very fast growing Market it will come with its problems in the future absolutely sorry yeah the the reason reason why private credit started in the US was buyout lending leverage buyouts banks used to do all leverage buyouts after the financial crisis in 20072 2008 The Regulators came in and required the banks to put very high Capital charges against leverage buyout loans once the banks had to put High Capital charges they stopped when I started this business 25 years ago 90% % of the buyout loans were in Banks and 10% were outside of banks today 90% of the buyout loans are outside of Banks and 10% are in Banks so what's happened is the entire industry private credit didn't just blossom and grow it took market share away from the banking system and in The Regulators wanted to push out all of the risk loans out of the banking system and into the institutional market so since then what's happened is private credit is developed across all asset classes real estate software technology Health Care Venture debt every asset class now has private credit and it's because institutional investors are far better at underwriting and selling and closing with certainty these loan assets than regulated Financial institutions it started in the US it went throughout Europe it's in the process of becoming mature today in Asia it has not happened in the Middle East yet but 5 years from now when we come back private credit will be the hottest asset class I in the midd East absolutely I I would like to add to that something I think that it's also the fact that the banks discover that it's way more efficient for them to focus on wealth management type of activity and push this type of risk away from the balance sheet so basically they still do it but they just do it through a external financial institution okay so so we've talked about why it's so popular with borrowers with investors um can we talk about return expectations um within the Michelle maybe we can start with you um what what are you seeing in that sense so so for us in terms of of return expectations because we are at a stage in the development of our markets as de pointed out which is still very early stage and at the same time where we have commercial banks that are retrenching heavily because of the regulatory issues that have been pointed out but also because of the market in which we operate where banks have moved from being Global to becoming Regional to becoming National and that means that they only cing catering to their very large clients it means that we can be extreme extremely selective about the companies that we work with and we can also dictate our conditions and as a result you know we are not going to do deals unless we can do meting stab of return and again with senior secured type of uh structure and in jurisdictions that are very efficient and very crators friendly we're not talking about emerging market like because the the Regulators the banks every understood that this is a need and and a need that's now slowly coming to do to this region as well absolutely and um Ted what would you see in terms of in the US um in terms of returns so private credit historically has been a liore sulfur based floating rate plus a spread historically it's been liore plus 450 to 500 when interest rates were zero that translated into about six to 7% unlevered 10% levered today because interest rates are elevated we're getting about 10 to 11% unlevered and 14% levered for our funds so in the 25 years I've been in this business today is the single best time for the market the vintages of private credit 2023 2024 are the best vintages High price lowest leverage and best documentation I like that vintages of private credit so we've okay we when we talk about returns um the natural next question will be risk especially now we're in a very like interesting environment obviously a lot of risk in the public debt Market um Ron what would you say in terms of the risk that you're seeing and and like default rates and at the end of the day we're in a business of understanding risk we're not in the business of pricing loans right the pricing of the loan is a is always a byproduct of understanding what risk you're facing and I think what unique about our segment is that as a segment it's better than other segment in the in the space with with understanding different risk levels different assets and how risk change over time and I think now that more and more real time Technologies get into this space you can become more and more creative on the pricing and the pricing become um much more agile and on the go with the product than it used to be before so it doesn't matter where you target you if you have enough visibility into what risk you're facing and how it's going to evolve over time because risk in a specific moment of time is it's just a specific moment time it's always a an evolution over time of a risk you see a company you want to see the evolution of the risk of the capital you provided and according to that you can escarate with different type of of financing mes Junior Senior all these type of hybrid structures um okay yeah and think what would you say to the point of risk uh vcan um I mean Public Credit or private credit at the end of the day this is credit risk uh so if the borrowers the companies who are you are lending money to do not perform there's a good chance you might lose money so um that's what credit risk is it doesn't matter if you call it private credit or special or something else that's just a name it's credit risk so the com we have to ask ourselves how the companies will perform in this uh Global Market environment uh that risk has risen in terms of like you know underperforming potential defaults this risk is rising we got to be honest about it we cannot turn a blind eye we have to be diligent about it um however I do think institutions like my friends here they spend a lot of time underwriting this credits especially in the case of non-sponsored credits uh I will think you know sis parus if everything is the same a traditional Public Credit Recovery might be lower versus a private credit where there's much better documentation Etc so I will bet that private credit recoveries especially might be higher than public and other risk in private credit specifically is these loans are pretty much hold to maturity public loans you can trade you can just put it out there somebody else wants to buy it maybe you can exit at 95 cents in a private credit situation that's not the case you will have to hold it ride it through and uh see if you can get your money back and more so we will see that these risks will developed I but I do remain positive risk versus return wise private credit to Market to grow uh more uh hopefully it will evolve into the right direction yeah it definitely gets I can give you some perspective So for 50 years credit 2% default rate very long time during the financial crisis 6% default rate so went up 300% however senior secured private credit recovers 75% during the financial crisis second lean or mezzanine debt recovered 35 % so when you look at a 2% default rate and a 75% recovery rate you've got maybe 40 basis points 35 basis points of loss that's why the asset class has been so exciting over the last 10 years M what do you sorry I have to relate to what you say I think slowly but surely the market is going from recovery to prevention I think today we have enough uh machine power sorry to get back to that to generate r on the flight prediction that you actually prevent the default event when you integrate uh uh um prediction methodologies together with legal methodologies to how to act when you predict a default around the Horizon so what we're going to see in my opinion is the trend that move from how can I secure the recovery to how can I can generate a prevention of the default then I I'm I'm less supported dependent on Securities Etc the best the best risk management in credit in credit is done before you lend the money right I mean you do the right work on predicting the future of the company that's the best way to avoid losses but as also Ted mentioned where you attach in the capital structure is the biggest determinant of your recovery what about uh what does Michelle think about um yeah risk I I think risk it's all about margin of safety in our for in our business it's about understanding the various risk understanding what you do when things go wrong and if everything goes wrong for you and the company does doesn't do well if the promoter is trying to walk away from you what can I do and in that scenario do I get my money back if the answer is yes then you can lend if not it doesn't work and it's it's all about building that margins of safety because sometimes something will go wrong and you need to be equipped to get your money back when it does thank you yeah that's an important Point most people people don't understand private credit is an actively managed asset class liquid credit is passive you can push a button on a Bloomberg terminal and sell liquid credit private credit there's no market for so you have to be a manager that has the resources the infrastructure to enforce and collect your loans if they go bad it's a very important point that he made that most people don't understand about private credit you put it very well private credit is active Public Credit very well all right well I think unfortunately that's all we have time for uh but thank you so much to our panelists I think we had a very interesting discussion varied views so please give a round of applause for our wonderful panel