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Welcome back to our special Bloomberg coverage live from the Milicon Global Institute Conference in Beverly Hills, California. Armor Romain Bostik alongside Carol Masser and Carol the next guest, really does have a great view on what's going on in the world of credit and private markets.
Steven says yeah, even says that within the.
Liquid credit marker right now, there are a lot of opportunities out there partickling in high yield bonds, I'll leverage loans primarily because he sees those as areas of market imbalance. Armon Panosi and joining us right now the co chief Executive Officer and how to performing credit over at oakh Trey.
Great to see you again, arm Man.
To see it too, Thank you.
Le's start, we got a lot to talk about. Let's start with the liquid credit here, because I am curious about that supplied demand and balance, what's driving that and what closes the gap.
You know, it's a it's an unusually uncertain time because we have a lot of liquidity in the markets, especially after all the COVID related stimulus. A lot of savers have capital to spend and to invest. But meanwhile we have some overhangs. We have the highest cost of borrowing we've seen in many years, we have a slow in growth rate in the economy, and it just no one knows.
You know, should we be really heavily.
Going into the markets and getting that yield that's available in the markets these days, or are spreads too tight and so that vacillation between the opportunities that causes some volatility month to month.
Well, that's what I'm curious about, particularly in the high yield space, like how much risk is there and when you get when you're looking at spreads, is there enough compensation for that risk.
So when we when we think about spreads or total return from pre COVID days, we would always focus on spread. The reason was was because high old bonds were priced at par and the absolute yields on treasuries were very very low, so spread was what you were really focusing on. These days, there's other ways to win in high yield. The prices are discounted, there's convexity, there's higher base rates ten year treasury at four and a half, and the
spreads are not so low that are concerning. They're sort of within the range of historical norms. As a result, total return is more attractive today than it's been in quite some time. Meanwhile, spreads are a little bit tighter, but spreads reflect credit risk, and credit risk in the high yield bond market is actually lower today.
Than it's been in quite some time.
So, having said that, when you look at high yield, does it matter the quality?
Do you want higher quality? Is that how you're looking in terms of the investment.
Play, oak Tree generally in our liquid credit strategies looks for higher quality, and usually it's focused on single B or upper single BE credit quality. There's a lot of opportunity there in the high old bond market. There's about eight hundred issuers. It's about a one point four trillion dollar market, So you could put together a diversified portfolio that will avoid defaults and losses pretty well. That's what we're aiming to.
Achieve it open.
What are the risks that you think about most in terms of having to factor.
In for hygold in particular. Yeah, let's go hi yield. You know, I think high yield is a pretty bifurcated market. You know, half of hygyield today is trading out of two hundred spread.
So when you think.
About that, you say, well, how do I actually get the return that I want? Can't really get it with two hundred spread. That's kind of more consistent with investment great bonds. So you have to look at single bees and you have to really select credit carefully. It's really easy to make make bad decisions. It's easy to make some mistakes, and so avoiding triple c's that have generally speaking shorter maturities. I think those are going to be the locus of a lot of defaults over the next
two years. But within that single bee category, can you really put together a well diversified by industry, by region portfolio that could outperform the markets through a cycle.
You can just push that in.
I know it's a little crazy, no, don'tie. We want to make sure you can hear us.
All right, let's move on and talk a little bit about M and A or A the LBO environment right now. I think a year ago there wasn't a whole lot to talk about there. We've seen activities start to pick up a little bit.
What are you seeing.
Absolutely, the forward pipeline for M and A deal flow is certainly better than the last six months, and I think it's a combination of factors.
First of all, spreads have.
Come in both in broadly syndicated loans and in private credit. Over the last twelve to eighteen months, there's probably been about one hundred to one hundred and fifty basis points of spread compression. Meanwhile, the private equity firms that have dry powder, you know, they have a ticket in a time clock and they really need to deploy that capital, and they took a pause for about twelve to eighteen months.
So now they're back and a little bit.
More realistic to have to pay up a little bit to buy good businesses. And meanwhile the sellers of those businesses, they're also getting realistic because they have investors telling them that they want their capital back too. So the bid ask is narrowed, and the frequency of deals that we're seeing in the market looking for financing solutions.
Has picked up.
That's interesting you say that about the gap, that gap in between I guess realism and just you know, fantasy, because that was a big topic of conversation last year that buyers and sellers were just so far apart. Here who has actually given in on that? Has it been the seller has finally woken up to the fact that maybe this just isn't as valuable as I thought it was.
I think they both moved a little bit. You know, when you when you were near a seller and you own a let's say you're a private equity firm, you own a business, you have it marked at a certain valuation. It takes a little bit of time to move that value down as you kind of reassess the market conditions.
So I think generally speaking, those valuations have been stable to maybe declining, and it allows those private equity firms to transact more they if they could, if they could get a price that's as good or better than their mark,
they're more likely to sell. And by the way they had marked up their positions generally speaking, you know, if they if they paid one hundred million dollars of inequity to buy a business, generally speaking, after a two year period that it marked it one and a half times two times already. Yeah, and so it is a factor of kind of bringing that down and managing that the appearance of sort of your marks and the legitimacy of those marks.
Hey, let's talk about some of.
The upcoming low maturities that are coming on next year and for the years to come. What kind of opportunities does that present for you guys.
You know, it's a huge market opportunity for oak Tree. We're one of the world's largest providers of capital solutions, and we just see a very large tale of credit risk or just issues because there were a lot of borrowers that took on credit when base rates were near zero, never contemplated five percent or five and a half percent sofa, never contemplate four and a half percent treasury rates. And so the owners of those businesses have found themselves where
there are good businesses. They've actually grown over the last five years, but they have not grown into a capital structure that is now four hundred bases points more expensive than it was to difference, huge difference. So capital solutions, rescue lending, that's a huge part of what we do. Ed OT treat and I expect that over the next two or three years we're going to be very, very active.
There any signs already you're starting to see it or not yet.
Well, we've seen some maturity driven rescue lending, even in twenty twenty three.
We were quite active last.
Year, and so what we're not seeing yet is cash flow shrinkage rescue lending. So in other words, if a company is not performing well and just can't cover its interest expense, yeah, that's a little bit riskier than what
most rescue lenders want to step into. At least at this time, it's been more focused on maturities, and the maturity schedule really kicks in in twenty twenty six and twenty seven, so twenty twenty five sort of a year in advance that maturity is when it's going to be the most active.
But what do you think is going to be the outcome of that. Are we going to start to see basically just sales.
From one fund to another.
Are we going to see a real exit into public markets? Are we just going to have to sort of address the fact that some of these companies are.
Just going to go away.
I think that's just going to be kicking the can. I don't think that.
I don't think there will be exits writ large. I think the best businesses owned by private equity firms will certainly get sold, but it's we're really talking about the sort of the middle of the pack or the worst positions in the private equity fund. They will want some sort of solution to kick the can down the road, and they're not going to want to draw capital from a fund that was raised in twenty seventeen or eighteen to support.
Those But I think it's sort of where the economy is and where rates are. And I know Oachre's always load to kind of make macro predictions. But if we do get maybe a little bit of easing in rates and financial conditions and at the same time growth economic growth holds up at least some sort of sustainable level, does that not offer any relief?
It can, but I think that those two statements are at odds with one another. Seeing a meaningful reduction in rates usually means that some sort of shock has occurred, and then you have to ask yourself, well, how good do I feel about my portfolio, especially my equity portfolio in that type of environment. I mean, what happened to cause one hundred basis point decline. A twenty five to fifty basis point decline I think is immaterial in.
Light of where we've gone in rates.
I think you really need to see one hundred or two hundred basis point decline to really see a broad based relief for some of the most levered in the market.
I'm curious about what you want to do for investors, and Bloomberg was reporting that you guys are looking to do a raise of about two billion for an asset.
Back lending product. What can you tell us about.
That, Well, we don't comment on specific fund raises, but we are seeing some dislocation in markets, sometimes caused by rates being high, in maturities kicking in, and sometimes caused by regulatory changes.
You know.
Regulation.
There's a lot of work being done by regulators and banks to figure that out, and it results in higher risk weighted assets required in terms of capital at banks, which means that they will exit these legacy areas of lending, creating an opportunity for investment managers to step in.
Well, just on that point too, and I know you can't comment on the funding, but at least based on what Bloomberg is reporting the focus have that fun So deals back by like equipment leases, royalty payments, things like that. These all seem like more steady streams of revenue, and they seem a little bit different than maybe what was in the complexion of the portfolio prior.
Is that not right?
Well, the way to think about asset back finance is it doesn't mean hard asset back finance. It just means any contractual cash flow stream that could then be securitized or a series of securities could be structured around them. So that applies to a lot of different industries. It could be medical royalties, it could be music royalties, it could be equipment finance, shipping finance, aircraft finance, and various
types of consumer lending. So it's asset back finance is just different than corporate blending, which is what we really do a lot of it a treat, whether it's on the distress side or on the performing side. But really enterprise value lenders, which is what a corporate direct a corporate lending, whether it's public or private, that's what is the focus there. Asset back finance is attaching to a revenue stream.
Well, speaking of assets, you know you guys do get into the real estate area, and I'm just curious, what's the smart what are you seeing when it comes to real estate?
Some of the concerns that are outher, especially when it comes to office and.
Other Well, I think that we're gonna have several years of maturities in real estate that will result in sort of a rolling set of defaults and losses in real estate creates an opportunity for buyers who are willing to kind of pick and choose the right markets and the right assets. So, you know what, anytime we see risk, we also see opportunity and we're excited about the opportunity part of that.
But do you hear crisis around what's going on.
In real estate?
Like, I don't think it's a crisis.
We see opportunity, But I'm just I don't.
Think it's a crisis other than in certain markets in office, I think it's really hard to find a way through some of those assets without a massive repositioning in them. But even that creates an opportunity for the right.
Investment, and you feel like there are people out there willing to take on that risk, take on that opportunity.
Slowly, slowly, it's not there.
Even though there's a lot of capital parkland the sidelines generally, especially for credit, we're not seeing a lot of that capital flood into real estate all at once right now. I think it's just the issues, especially around maturities is so significant over the next few years. There's a lot of concern to just kind of put all your exit one basket at the moment.
All right, Arman, we have to leave it.
They are always great to get your insights with you and the guys over and the folks over at oak Tree. You're doing off always really insightful.
Thank you so much.
So, then give our best to Howard arm and Punulsi, and they are co chief executive over.
At oak Tree.
Yeah, I think it's fascinating about the real estate side of things. I've had some conversations with folks here that's saying, you know, maybe the government's got to step in and take take some of these assets and just deal with them because nobody wants them. But it's interesting to hear Armed site. Yeah, there's gonna be buyers.
How long people do want them? You know you still work in office.
I do.
I work at a gorgeous office.
I mean, there's the man out there.
It's just a different type of demand, right, Yeah, maybe it's a little less maybe the complexion of a change.
I don't know.
Some of those properties in midtowm Manhattan, those old properties, I do wonder whether or not you can kind of rework them.
Yeah, we've seen whether they can repurpose them and find purposes.
I'll some juristicans doing some interesting things.
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We've got to have up some pretty good discussions today.
Obviously there's been a big focus on what's going on here domestically, but I had a chance to catch up with a few people who are really investing internationally.
Now Runo along.
She's a co founder and the co founding partner of a company called Development Partners International, and they just focus on companies in the Pan African region.
I love this because we've been so I feel like a lot of US centric, if you will.
So it's interesting to see what she.
Has to say.
And this gets back to the old idea. Everybody's looking for that next big opportunity. She was on a panel this morning. They really talked about digital transformation, how that could actually.
Close the global growth growth.
Gap, and she talked a lot about how these African companies they're not looking to export their skill set. They want to kind of keep this internal here. It's an interesting dynamic. Let's take a listen as to what she had to say.
The opportunity in this space is the pure demographics and all the secular trends. Huge population growth, one out of every four humans in the world by twenty fifty will be in Africa. Huge urbanization eighteen out of the thirty biggest cities in the world hoping now Africa, huge digitization, and really great opportunities for a private equity investor like myself to invest there. Am I finding it en nothing absolutely.
There's a lot of talk about digitization. There's talk about the Global South, so it is being worked in all of the discussions here.
So to break up, I mean, gen you mentioned the Global South because when a lot of people talk about it, you hear a lot more in the context of some of the Latin.
American nations as well.
As some of the Southeast Asian nations break it down as to how some of the African countries fit into that, what's the hierarchy.
I do think the great investment opportunity in Africa is the lack of discussion about Africa. So how does it work? Yes, Africa is probably developmentally a little bit behind East Asia, but it is interesting to note that in the next five years Africa will grow as fast as Asia by five percent a year. And because of the low level of legacy assets and the low level of growth, the
investment opportunities are huge. One said, before you see a town where the kids have no shoes, you can either be kids have no shoes there, this is batter you can say, I can sell them shoes. In Africa. The amount of demand for consumer products, be they pharmaceuticals, be they a bank account, be they agribusiness FMGG, all of those things huge unmet gap compared to the rest of
the world. Other em bigger demand. If you look at China, Africa actually will have a bigger working population by twenty thirty five than either China or India.
A young population.
China is leveling off of that, so all of that will lead to growth and opportunities.
Is that exportable growth or opportunities or does that even matter?
Well?
I think that Africa, as McKenzie called it, we call it the African Lions. They are more about intra Africa growth, intra Africa trade, rather than ext morning to the US and Europe. So it doesn't matter in the sas that it's still least to growth. It does matter to investors in the US if you want to hedge. The correlation Africa to the US is much less than East Asia, It's much less than Latown. So if you want something that hedges a bit the US, Africa is the investment destination.
You're coming off a panel this morning that was about digitization and that closing the global growth gap. When you hear about African industries and particularly the companies that have been successful, a lot of them seem to fall into that space, whether it's telecom, internet, etc. Here is that the primary investment opportunity there now?
I think because digitization goes across all industries, it's an opportunity in different segments. With the theme of digitization, what do I mean by that? In our fund, we're doing three things. First, investing directly in fintech companies. We have a company called Optasia, company called Ukes that covers all of Africa and Southern Africa. We are doing turnarounds of legacy assets, which is really one of the most interesting things happening in Africa. Look at a company like Mmantemhlan
in Egypt. A few years ago they were leasing toktoks, handwriting microlos. What they're doing today is purely fintech. Millions of customers. Only Unicorn in Africa for several years and
it's a Pe company. And then finally embedded finance where we're taking our company that's in a different area like specialty chemicals level in West Africa, home Choice in Southern Africa, and by putting a digital part to that, we're actually growing the valuation, We're growing number of customers, we're making
them more efficient. So in Home Choice selling home goods to women, primarily they had a side of the company that was giving credit to these women's That side of the company became really a lender is much much bigger and fintech through digitization from the original company.
For investors who want exposure to that, are there relatively easy avenues. Obviously they can go through somebody like your company at Development Partners. But are there enough of those companies out there for investors who want that type of access.
There are opportunities, and that I would say that the opportunities are through direct investment or through funds like ours, because a lot of these companies are not yet public, so they're not reflected in the twenty three stock exchanges in Africa quite yet. There are some you will see in the future that they will be.
Some of our.
Companies, frankly, are not only just listening in Africa and in London, but actually they're going to the Middle Eastern stock exchanges because of proximity. So eventually there will be opportunities on the listed side. Right now, it's direct investments and private equity.
Runa Alam there the CEO and co founding partner over at Development Partners International. She has her primary focus really on African companies.
Well, I feel like some of the you know, earlier conversations we talked about how much investment into Africa specifically has come out of China, but they have really pulled back over their own concerns and slowdowns, if you will. But also, you know, you think about Africa more broadly the higher global interest rate environment that's been problematic for them to really tap into.
The capitol art problematic for them. So has the stronger dollar as well.
But at least in her optimism, she looks at some of the demographic trends, the young population, the rise, of course.
And they have.
And then some of those countries have great educational systems too, so they're building a great skill set as well.
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Let's get right to it now, we're able joining us right now. Really, there's no introduction.
The CEO overhead Kane Anderson one of the top alternative investment management firms, a big focus of real estate, credit, infrastructure, and energy.
Out.
Great to see you, great to have out, great to be here, object and great to have you. And I do want to te to talk about investment strategy at a time where I mean things are stable, certainly a lot more stable than what they were a year ago, but there's still a lot of dislocations out there, and I just want to know what kind of what your thought process is in navigating that.
Our thought process is this is this is a time of dislocation and one that I think is going to take a while to work through. So we're incredibly excited because we've actually built our platform for times just like this. So we want to be relevant in all in all cycles. But really where we want to be buying is times
of dislocation. And that's the reason with intentionality that we've built the real estate platform to invest in in elastic demand sectors so medical, office, seniors housing, student housing, class being multifamily often referred to as workforce. So you know when you know when the macro economy falters or enters a more difficult period of time. And I'd say we're in one right now, and I think this will be the case for kind of the next twenty four months.
It'll be choppy at best. I've been in the hard landing camp for a while. I still sit there throwing a hard landing. We've had This is the ninth time that we've had inverted an inverted yield curve since nineteen sixty two. In seven of the eight previous times, only exception being nineteen sixty seven, we've had a recession, so there is a great deal of historical precedence for the fact that a recession follows an inverted yield curve. I also think that bank balance sheets are in a very
precarious position at the moment. I do think that that means that I think effectively Powell eased rates last month by by essentially saying that the FED was comfortable with a bigger balance sheet. That was an effective ease. I do think that we will see two to three rate So you.
Didn't interpret that what he said as hawkish.
I did not.
I interpreted it as dubbsh and I think that it took the market a little bit of time to digest. But now we've seen sort of seven of eight up days. You've seen the ten year treasury drop from four to seventy to four forty four to forty five. So I think the market digested what he said, and I do think that he's looking for.
A reason to ease.
I think he understands that the bigger risk between price inflation and asset deflation is asset deflation because bank balance sheets right now have the greatest amount of unrealized securities losses that they have ever had in history, and they have one point six trillion, well, not all banks, but there's one point six trillion of real estate that comes due by year in twenty twenty six.
Most of that sitting on bank balance sheets.
What I think he does not want to do is risk a contagion and have another financial crisis on his hands. And so I think you're walking that fine line.
Is that why we get the heart landing?
Help me understand, Because you see the growth, you see the metrics, consumer still spending, How do we get that heart landing?
I think that the economy is doing fine, but you already see deflation happening. If you take the jobs numbers absent government spending, you have a massive decrease on the job front side. I think things slow, demand for goods and services slow. And I'm not predicting a catastrophic inflation. I certainly I think stagflation is pretty much off the table. I think the economy is too strong for that, but
I do think we experience a recession now. Regardless of that, I would say our focus is on the asset classes in which we invest, and really I'm focused on the massive opportunity that exists.
Sorry, go ahead, and I.
Want to get into that, but I want to You know, you do look at justlocation as an as opportunistic. I know you don't play in the office area, but you're smart and you follow real estate and you follow cycles and talk about dislocation. You had Barry Stern Looks saying here at Milkan.
There's a huge distress cycle ahead of us.
And then you had Kathleen McCarthy a Blackstone saying the shipwreck has already happened. Dislocation in terms of views, what do you think is the view when it comes to office real estate?
So office real estate, everybody wants to know.
I mean, we haven't played office and have never invested in office for a very specific reason. It is the opposite of an inelastic demands. It is highly correlated to the macro economy and obviously the pandemic. Not many people underwrote that, but office is an asset class in which you put all of your capital in upfront. You hope the economy is good enough to lease it up and get out before you have.
A down cycling.
We've been running in ten year recession cycles for the last five decades, So that is a timing game and one that is highly correlated to the macro economy.
So where do I think we are with office.
I think it's going to be a rough slug and I think it's they're very disparate outcomes. Office in West Palm Beach is fine, Office in San.
Francisco not so much. So it's not all bad, but I don't think.
I think the tastes of the nation have changed and they're not going back to pre pandemic dynamics anytime soon. And we've been slower on the return to office than really any other large economy.
So I don't see it in New York.
I mean on a Monday or Friday, right, it's kind.
Of I agree with Kathleen, though, by the way, on the we're in the bottoming phase, I do.
I you know, I would never believe.
That I'm smart enough to call the bottom or say it's this month, it's this day. But we're in the bottoming phase. What I'm saying is we understood and we were very disciplined with our capital in twenty one and twenty two when we thought we were much nearer a peak than a trough. Because you had massive acid inflation due to what the Fed did. They injected a tremendous amount of money into the economy, took treasuries down tenure treasury down to eighty six phases points.
So you had.
Massive asset inflation that is now winding its way out of the system. I'm not saying we're at the bottom, but we are definitely in the bottoming phase, meaning we are much closer to a trough than a peak. So now for investors who have been disciplined, who have access to equity and debt capital, who are.
Not dealing with problems, this is to me.
I believe this is one of the three to four best buying opportunities I've seen in the last thirty five years.
We'll talk about those opportunities and particularly when it comes to new projects. Is it better were well, is there a better risk return by building that or buying it?
Well, it's a great question. I'm saying we're doing both. It is a very difficult building environment. The benefit in our asset classes, as I said, you sort of have the trifecta in medicalovist, senior student, affordable housing, and that is that you've got demand tail winds because you have massively escalating demand, you have an aging US population, you have supply tailwinds in the sense that you have massively constrained new supply illiquidity in the market's high interest rates.
Supply is way down, and you have a buying opportunity because the rapidity with which rates rose was unforeseen by many and put and made structural leverage unworkable for many. So you've got demand tailwinds, supply tail wins, and a buying a buying opportunity. So I would say from a risk perspective, our preference would always be to buy fully stabilized askets at deep diss counts to where they have historically traded. Now, there are some opportunities on the development side,
but obviously you're deferring cash flow. You've got construction costs, you've got labor dynamics, etc.
But it's interesting when you talk about those dynamics that the valuations have gone up, right because the supply is down. But you can't start to create new opportunities right that are investable if you can't, if it's difficult to build out.
You can't.
I mean, listen, there are development deals at work, and we are active on the development side of the business. I'm just saying that the opportunities set that exists for us today, and it existed very briefly in twenty twenty and the last time it really existed before that was just POSTGFC, and that is buying super high quality, fully stabilized assets at what I'll say are discounts to intrinsic value because you have forced selling. By definition, any seller
today is a motivated seller. There is no seller who is sitting around saying, hey, May twenty twenty four, June twenty twenty four, this is when I absolutely want to sell.
We all know that, So.
All right, have your energy.
I love that.
One of the smartest guys out there.
I'll rabel over at Kane Andersen, seal over at Kane Anderson. Any's right, I mean, look, I mean this is kind of is what it is.
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All right, everybody, we are back at Milkin and Harvard University professor of public economics, Laws Shetty was one of the conversations we have.
What are you laughing at you?
No, I'm going to get move cal We're almost done.
Well, I have to say we had a great conversation. We had so much we wanted to talk to him. The tense discourse on college campuses regarding war geopolitics partly fueled by economic disparity.
And that is something he said that really stuck with us. We spoke to him earlier.
He says improving the US education system depends on better pay more successful teachers.
You know, I think at cornerstone aspect of the American dream is the idea that through hard work, anyone has a chance to rise up in the income distribution relative to their parents. Historically, America was very much a land of opportunity in that way. Our studies showed that for kids born in the middle of the last century, virtually all of them, ninety two percent of them went on
to earn more than their parents. But if you look at the data today for kids born in the nineteen eighties who are turning thirty around now when we're measuring their incomes as adults, it's become a fifty to fifty shot, a coin flip as to whether you're going to do better than your parents and achieve the American dream?
Why is it happening?
So why is the American dream faded? You know, we think there are lots of different trends that are driving that, from increasing segregation, stalling, and levels of education. So in the past, as technology progressed, as we had more global competition, American workers were becoming more skilled, getting more education, getting more advanced, knowledge able to compete with machines and with other people around the world. Around nineteen eighty that progress
basically stalled. We started to lose the race between education and technology.
I come from a generation where the idea was you went to college for your university, maybe.
To grad school. That was all part of that upward mobility promise.
It seems like a lot of frustration, particularly with the generations behind me, the millennials, etc. Have now said, look, that value proposition isn't the same, but you're still pushing us into those areas.
Is there's still an argument.
To be made the higher education can afford you that upward mobility.
Yeah, so I continue to think, and I think the data show clearly that higher education can be a great pops upward mobility. But it matters what higher education we're talking about. There are some colleges in America where we see very clearly if you manage to get into a highly selective college, it totally changes your trajectory in terms of what you're able to earn, the types of jobs
that open up, the doors that open up you. But there are other colleges in America where if you look at the outcomes follow people over time who went to those colleges, they're not doing any better than kids who didn't go to college. So the value proposition is not there. And so I think what makes this challenging is that just saying college for everyone, we need everybody to get
a higher edufiction, It's not clear that's the solution. But that doesn't mean that education is not a pathway outward mobility. We need to figure out how to get more kids to colleges that really are engines of upward and mobility.
How do we do that, Because for a while, it didn't seem like there was an alternative. Right either you went to college and maybe prosper or you didn't go to college and you ended up in just kind of a wage job and maybe if you got lucky, you had some upward mobility. But is there an avenue, whether it's vocational schools or whether it's a return or the resurgence of community colleges and do your programs.
Yeah, so I think vocational schools can be part of the picture. We're finding evidence that certain types of job training programs that give you exactly the skills you need to do it or maybe in the future to do certain effective AI tasks can provide a pathway to really having significant growth and earnings without having a college degree. So I think targeted training for skills that matter can be an important part of the picture as well.
You know, Ros We've done a lot of recording at Bloomberg about the shortage and plumbers shortage and electricians. You know, here we are at NOKIN talking about the infrastructure build out.
We need a lot of people who can do these things, and they're just not out there.
So I'm just curious how you kind of roll that into and how do we get to a point where as an economy, as a society we actually respect those types of jobs.
So I think part of what you're bringing up here, Carell is that the issues here are deeper. It's not
just about our higher education system. What we're seeing in the data as lots of kids, you know, let alone going to a four year college, they're not finishing high school or not really motivated to get those jobs as plumbers or electricians, may not have the skills needed to navigate the labor market, the social skills, the kind of ability to adapt to the concerts, and so my view is a lot of the way we fix these issues is going back to the roots of where the problems originate,
in elementary school or even before, in the communities where kids are growing up.
Well, do you feel like elementary, middle schools, high schools.
Are failing us today? Because it's really interesting.
I mean, I grew up going an incredible public school system in New Jersey. My daughter I had to do private schools because we were in an area where public schools were horrendous. And increasingly we see people, you know, paying to get their kids through school. So is our public educational system in some way failing us before the kids even.
Can think about college?
Yeah?
I mean I think there's serious issues in our public education sym Why aren't there serious some of you which have to do with funding, but some of which have to do with constraints in our system. So if you look at the data, there's certain types of charter schools, for example, that show really good records of success where they have high quality teachers, they're bringing kids into smaller classrooms in a bit of curriculums where you're seeing really
good outcomes for those kids. But then there are other charter schools where you're seeing much less progress, And so the details really matter. We've got to get an education system that is prioritizing high quality output. Just like in the private sector in America, businesses that succeed, you know, end up doing really well in gaining market share.
With no offense.
They succeeded when I went through and I mean public education, went to an Ivy League school, So like they did work before, how come they're not working anymore.
I think part of the issue is that other options that people have. So if you think about thirty forty years ago, many highly qualified women became teachers. Now many highly qualified women go into other careers that are much more lucrative in a relative sense than education. It becomes very challenging to retain talent in our public school system. If we pay people enough to reward them for being in education, and that influences the next generation.
Well how do you fix that? I mean, this has been a problem we've talked about for a while. I always joke I have a family full of former teachers, and with emphasis on the former, because it was not a career path for a lot of them, primarily because it was not financially sustainable and there was just a lot of stress involved in it that for a lot of them just.
Wasn't worth it.
Yeah, I mean, I think finances are part of it. I think part of it is somehow making teaching more of a prestigious profession where people feel like this is something that I really aspire to do. But I also think part of it is just about flexibility and the way we pay people. So in most public schools in America, there's a lot of rigidity where your pay is basically set as a function of how many years you've talked.
If you've got a star teacher who's really inspiring your students, there's no way to reward that feature and say you know, we're going to pay you extra, give you that bonus, really work hard to try to keep you. And most of the jobs were all in outside education. If you've got a star employee, we're going to try to keep that employee. And I think giving schools that latitude can make a difference.
Rush, I do want to go back to colleges and universities and the process for prospective students to get into those universities. There's been a lot of back and forth over admission requirements or the standards.
Whether you don't, I know, Harvard has gone back and forth on this.
Here what is the best barometer to measure whether a student is acceptable enough to be part of your university.
So our team has been studying these issues recently. Last year put out a paper trying to understand who gets into highly selective colleges Does it matter how you should evaluate students. Part of what came out of that paper is very clear evidence that standardized tests are actually some of the best predictors we have of how well kids
do in college and after college. They're not perfect, and we worry that you know, you can prepare for tests, and you can take the test multiple times and there may be certain biases inherent in those tests, but the issue is that the other things that you might use if you don't have standardized tests, are even more prone
to those biases. So if you put weight on things like high school grades or extracurriculars or your wreck letters, kids with more resources have more of an opportunity to credential themselves on those fronts.
Of course, was Harvard University professor of public economics Raj Shetty, and I feel like that conversation you and I walked away and just felt like there were so many things that he hit upon that were so important and maybe thinking about it a little bit differently, especially when it came to the protests and the thoughts about the economic underpinnings of maybe why there are so many protests.
Yeah, I think that sort of gets lost in it.
We focus on the here and now what's happening, but we forget what sort of led us here, And I think being able to address that, particularly as college administrator, it's going to be really important.
Really really important, really tapped into a lot of things. Education right seemed to be the door that opens up opportunities for people.
But then you get a little worried. If it's not there, that's for sure.
You're listening to the Bloomberg Business Week Podcast. Listen live each weekday starting at two pm Eastern on Apple car Play and Androyd Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
All right, everybody, Well, speaking of the environment, we've talked a lot about M and A. We are live here at the Milkin Institute. Let's talk about M and A. Volume in the first quarter totally about three hundred and fifty two billion dollars. That was up seventy percent from a year earlier and the highest for the period since twenty twenty two.
This is according to our data here at Bloomberg Now.
The rebound of deal activity after a prolonged drought has been boosted by the comeback of mega deal like Capital One buying Discover our next guest, saying earlier on a panel at Milk and moderated by my co host Romain Bostik, that emanation top two and a half trillion dollars this year, but not the record amount of five trillion that company spent on M and A back in twenty twenty one. With more on the deal environment, we're joined by Andrew Bednark.
He's partner in CEO of the global investment banking firm Corella Weinberg. So nice to have you here with us. Let's start big and broad. How is the M and A environment today?
Yeah, so just the level set on M and A markets. There are some very observable and enduring characteristics of M and A markets. One they're large, Two they're growing, and three they're cyclical. And so we do have movements from
year a year, quarter to quarter. We see peaks and troughs really throughout the history of when we've been recording M and A volume, but we are seeing higher troughs and higher peaks, and so therefore you get the dynamic of long term secular growth which has been persistent in the M and A markets. Now we're today on a pace for about two and a half trillion, which is what I mentioned in the panel yesterday with Romaine. I
don't see five trillion in the near term. Usually when you have these peaks and troughs from a peak usually fall down the elevator shaft. You go down very fast and then you walk your way back up, and we're walking our way back up. So we've got a lot of encouraging signs. You've got larger deals, you've got some significant stock for stock deals. The boardrooms are very active, and I do think that's a harbinger for future activity. But it's a slow walk back up, but it's an encouraging one.
Andrew Wire companies doing deals because they have to or because they want to.
So strategics are eating us out of this trough in M and A, so it's clearly a strategic lead market. I think sponsors will follow. Strategics are faced with the same pressures they've typically had, which is growth, so they're looking at how much can they continue to grow the top line in a late stage economic expansion. Most economists will say GDP is probably a single digit for the USA, and emerging markets may be a multiple of that, but
most of the developed markets are single digits. A lot of action has happened in the middle of the P and L cost cutting and other supply chain improvements that have been made post COVID. You have capital going back to shareholders for dividends and buybacks. But that's not enough to satisfy equity investors who want twelve thirteen, fourteen percent
equity return. So how you're going to get that you have to look externally, and that's where M and A becomes this permanent part of the discussion in a boardroom about how do we grow, how do we adjust the transition, how do we adjust to transformation? All the things happening in the economy around AI energy transition. What was globalization now seems to be a bit of a shrinking globe
where certain markets are uninvestable. So that presents new challenges as well, because some of the historic markets for growth, like China, for example, many companies find that to be uninvestable.
Now interesting, I have cried about the strategic buyers. I mean, what type of premium do they have to pay in this environment in order to gain that type of growth?
Is it much higher than what it was in the past.
So valuations are elevated. We have a very large and liquid market in the United States. Globally, there's about one hundred and ten trillion dollars of equity value and I mentioned this yesterday on the panel. There's forty seven trillion in the US. Part of that is because we're a very large and liquid market and that's driving more capital to this market, which is increasing valuations, so we do
have a higher multiple environment. Premium is largely an output in what we do as M and A advisors and
thinking through complex transactions with our clients. We're not thinking about what premium do we have to pay, but we look at underlying cash flows, We look at synergies, We look at strategic value and enhancements that a new buyer can bring to an asset, and determine what we can pay that either is a premium or not, and then that premium either clears the market, satisfies investors, or it doesn't. It hasn't been the premium that's been an inhibitor to these transactions.
I want to look at the other side of the equation.
We had a guest on earlier on the show who talked about the idea that you're going to see a lot of forced selling in this market, and that's actually going to be a driver of a certain pocket of M and A. Talk about those folks out there, those companies that are struggling that are really going to have no choice about to find somebody. I mean, what are they going to be able to get in the market.
Yeah, there's always Even in a very strong marketvironment, you're always going to have some companies that just run into trouble. They're going to be over levered, They're going to have some kind of disruption to their business, maybe they have a life threatening lawsuit, something that just fundamentally changes their operations, and those companies can seek to raise new capital to hopefully recover out of a difficult situation, or in many cases,
they look for a merger solution. And so whether it's a forced marriage or whether it's forced financing, you do see many of those transactions playing out, not full on bankruptcies, So not calling nine to one one I've got to go bankrupt, but we're in trouble. We need a new partner, and that partner could be a merger partner. I don't see a watershed event coming where you have a lot
of forced sales. Rather, I see, and this was mentioned again in the panel yesterday, thousands of companies held in private hands that are not really what they're natural perpetual owner. Those owners are there as custodians for a time period. Private equity and otherwise to help enhance value, deliver returns for their sharehold for their LPs in that case, and then reintroduce them to public markets or sell them to
another party who's a better owner. We're going to see more of that, and those assets held in private hands I think will transact going forward, but there's still a valuation problem there. A lot of those assets were bought during a high multiple period and a lot of owners are waiting for those multiples to come back.
Do you think most of those properties that are held in private equity hands it's a case that that will be acquired or is it a case of going ipoing or something and coming to the public market on their own.
So for the last two years or so, we've had almost no IPO market, and so that's been an alternative that you typically look at for monetization that just hasn't been available. Now we've got some early signs of opening of that plumbing, which is encouraging the reasons by making IPO is very well received and I think is a good sign of maybe an additional IPOs that will come to market. So I think the IPO is definitely back on as an opportunity for modernization but also for outright sales.
But again, you do have this one immutable trait that you have in the private equity business, which is and it's true for strategics as well. What is that that they can't change the multiple they paid on entry. So the purchase price is the purchase price. There's a lot of things they can do once they own the asset, but they cannot change the purchase price. And some of these assets were bought at a higher multiple where there's
more leverage and also much cheaper leverage. So one of the issues with today's higher cost of capital is that the evaluation equation, the mathematics just don't work. So I think it's going to take some more time for private equity come to the table, but they're going to come back.
It's geology, time and pressure. It's just a matter. It's going to bring those two together, and they're going to come to market with assets and they're going to redeploy four trillion dollars at some point because that's what's sitting in private market.
Hands got it at some point. I don't know if he asked you this on the panel, you know, I know he does a good job, but I am curious that if you had to pick one sector, You've done a lot in retail, you've got transportation. Is there one sector within the M and A environment where you're like, wow, there's going to be a lot people.
Are asking, I want to do stuff right now? Where is there?
Well, first of all, Romaine did an A plus job on the panel yesterday.
I'm stripped to.
Rip a colleague every once in a while.
Is there one sector? It's an interesting market. Unlike ninety eight ninety nine it was all about telecom and tech and media. You had twenty sixteen larger because the stress was a big energy market for consolidation. I'm seeing this activity really in every sector.
Wow.
Because as I said yesterday, also, M and A is not a market trends, it's a and it's not a short trend. It's a long term corporate strategy. So these are the best allocators in the world within private equity and within private credit and infrastructure in real estate, those are going to be very, very active. Again, there's four trillion sitting there without leverage, so the purchasing power is much higher. You have four point eight trillion dollars on
non bank corporate balance sheets. There's only so much dividend and buy back you're going to do. There's only so much build versus buy. And I would say in many industries, build versus buy is really dead because it's not practical. So in certain industries you'll always have it, like tech, But in other industries, by the time you build, it's another market and so buying becomes necessity. And so again, I just think this is a matter of time. We have to be patient and continuing the walk up.
I'm curious Andrew about the regulatory environment. There's been a lot of pushback at least on the big mega deals, particularly in tech here in the US and in Europe. How much of that regulatory trend affects what you do and the type of companies that you're involved with.
Very meaningful change to our business and very meaningful change to how we map out a timeline for our clients. So what used to be, you know, a fairly routine. You know, if you're not in a particularly sensitive area from a competitive perspective, you would estimate a few months to close. You'd probably request early termination, but maybe go through a short process if you didn't get that. Today there is no concept of early termination of the HSR
waiting period, so that's off the table. Many, many industries, including that are not particularly consumer sensitive on pricing, are being reviewed by competitive authorities.
Not just in the United States. It's happening in.
Brussels with the with the with the competitive authorities in Brussels, as well as the CMA in the UK. So it's not a US alone phenomenon, but it's very real. It extends the timelines, it makes it more costly, which then I think ironically feeds into the need to do larger deals because the entry price right, well, right, if you're gonna do it, I might as well do it where it has consequence. So it's the entry price to M
and A is higher because of longer duration. By the time I signed something, If it takes me longer to close, I don't know what I'm getting it closed. Yeah, right, I've got to make it meaningful. So it's really interesting dynamics.
One of those things.
If you're gonna do it, go big, right, it's gonna it's the same kind of steps, So just really go for it, and thank you so much, really appreciating you.
Great perspective.
I mean, listen, we always talk about different metrics and what it says about the health of an economy. What's going on in the deal making environment is an important one.
Yeah, I mean it really is kind of the greath of this economy here. But we've heard from I mean, not just what the Andrew said, but yeah, a lot of the other folks I had on that panel yesterday. They're seeing a lot more opportunity, much more than maybe just a year, year and a half ago.
I think it's fascinating, especially across so many industries.
Again, or thanks to Andrew Bednar.
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