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I do want to get to our guest. I'm so excited that she is back with us. Let's get to it. Kranima Puri. She's managing director at HPS Investment Partner's large global private credit lender, head of liquid credit, portfolio manager for the multi asset credit strategies. Why do they even let you come to this? Aren't you busy right now? To see you and you're looking wonderful. It's great to see you. Help me put in makes sense about what's going on in banking. I think we just we keep thinking.
We get through a compared of twenty four hours. How are you assessing it in your world?
A couple of things, So I think one is we were asked this question on the panels as well, so you know, in terms of trying to frame what's going on in the market, it almost feels like for some period of time there's been a Q feel to it, right so equity ball has gone down, valuations have gone up, there's been infusions of liquidity. Yet everyone's talking about a recession. So it seems a little bit tricky to square that.
I would say we when we think about the state of the world, we do think there's you know, there's a lot of talk around recession, a lot of talk around hard landing, soft landing. I'm not sure it matters. Our view is that we're going to live in a higher rate environment for some sustained period of time. And now, whether that's five percent or four and a half percent, I'm not sure it matters. It's not two percent, And our view is the road.
Doubt about it, right, no doubt about it.
It seems so, I don't they'd have to have a really, really bad recession to have rates get pushed down that much, which would not be good for credit spreads. So we think that you're in a sustained period of higher rates. We think that you're in a sustained period of elevated inflation. And jobs have been good. So that means that labor market's so strong and we're seeing it in corporates.
Is that kind of a thank god labor market is still strong.
I think it's strange. You know, the S and P as of a couple of days ago is up nine percent, but the vast majority of that that number was a function of seven stocks. Yeah again, so right, four hundred and ninety three stocks were flattered in in the S and P five hundred. So anyway, so I think, you know, sustained rate environment, that's a bit higher sustained margin pressure as a result of inflation, and so we'd think that, you know, it's a little bit of a tricky market to navigate.
What's the smart conversation about FED policy? We go back and forth and we like, I feel like if that's going to do what it's going to do ultimately when it meets, But what is the smart thinking about what the FED says and does?
In your view, I think that it's pretty I think the Fed's been very transparent. So I don't think my view is different than sort of what they've said, which is they're likely to raise rates time.
It is right, it's a kind a few But are they right to in terms of that inflation? Do you think so at the risk of economic fallout or more?
I think that I think they've said it. I think they're fighting inflation. I think that the job market continues to be strong. They've talked about one more hike. Maybe there's a second hike in June. Maybe not so. I think that I'm not sure it matters that much. On the margin, a quarter basis point doesn't really make a difference.
I think the question sort of the outlier questions that we're focused on, and we we don't have good answers to our impact of QT right, impact of debt ceiling, impact of federal deficit growing over time as a result of raid environments. So I think those are kind of the bigger questions and how that kind of kind of kind of plays into what the effective FED funds rate looks like.
It's interesting a lot of people have said, you know, it's not about the debt ceiling. It's about the amount of debt that the US keeps accumulating and the cost of cost and the cost of servicing it. Right, that's right, and dealing with it. I mean, what what is it? Yeah? I mean what could that mean? Ultimately?
The best thing I read recently was a Goldman report and they sort of said, look, you know, you're at a six percent deficit and you could get to twenty percent deficit in ten years because so much of that is the compounding impact of.
Right right, So yeah, but problematic, yeah, potentially economics like, okay, we know the scenarios, all right, so what are you doing in this environment? Where are the opportunity? It's bad news done, so there are opportunities, There are opportunities credit equities.
We think credits far more compelling. Within credit, we traffic primarily in corporate credit, which has been doing really well, which has been doing moment. By the way, equities have to do, right SB nine percent yields a four percent, loans drop four percent.
Yeah.
So but within corporate credit, I think we would bifurcated into investment grade high yield loans investment grade high yield. We think spreads are still tight, Okay, we think that. I mean, there's just a sort of fun fact is over the over the last several of ten years plus eleven twelve years since the GFC GDP has grown and roughly two to two and a half, high yield spreads were north of five hundred over in that growth environment and uh and investments that's remarkable.
Yeah.
Yeah, So highield spreads today are sort of for sixty four seventy over and a zero to one and a half percent growth environment, So we think that hild spreads are not representative of sort of slowing growth. I would say, yeah, we think the loan market at six hundred over is sort of interesting. Yeah, you know, it turns out six hundred over plus a four to five percent base rate,
that's a that's a lot of carry, if you will. Yeah, uh, And so you know, depending on if you can sort of if those companies can navigate earning ten to eleven percent, is a pretty good place to sit. Now that six hundred over applies a five percent of ault rate, so you know, and I would say implicit in that is we don't believe the Fed's going to pivot quickly, yeah, because so much of that yield is driven by base rates.
But does that then lead to a lot more defaults? Ultimately focused on my real estate pal yesterday were saying, you know, I think we're going to obviously see more problems, especially in the middle market space, but also talked about
bankruptcies and company bankruptcies. I mean, I don't know how to when when someone says, you know, on an M and A panel SVP felt like Bear Stearns or this is beginning to you Charlie Sharf saying bank shouldn't be unconditionally required to kind of cover the failures of others. All of a sudden feels like the momentum is getting a little bit more negative. But is it just momentum which can change, or is it something more real. I'm kind of going back to that.
I think sentiment is more cautious. I do believe that.
Enough to change actions.
Guess well, the question is, so you've already in credit markets fun flows have been negative, right, So how you and loan funflows have been negative. There hasn't been a whole lot of issuance, so the market's been healthy and strong, somewhat driven by the raid environment by the way, as well, right right, in terms of default. And you asked the question, I think we're of the view that you know, could
fall to increase someone. Yes, there's two hundred billion plus or minus loan maturities in the next couple of years. I think that the bigger issue that we're concerned about is not as much maturities because healthy companies, double B companies, they're gonna get refinanced.
They're gonna be fine.
They're gonna be fine. I think we're more focused on they'll be you know, exchanged. You know, there'll be a lot of liability management transactions. We've started to see those. Those can be pretty darn painful. So that's sort of one bucket, and there'll be a bigger downgrade cycle and that's already started. So there's so much dispersion in the market based on credit quality, and you're seeing that in our markets play out today as it is.
Does this cycle remind you of anything? I mean, we've gone through a lot, you know, I think Great Financial Crisis, dot com boom.
I think what surprises What surprises me the most about this cycle is how spreads have remained tighter than one would think they should be. And I don't know if that's a function of there's a lot of money out there. People are of the view that we can sort of companies can weather the storm. Growth will slow, but maybe won't fall out of bed, and we're not going to have a hard hard landing. And there hasn't been a
lot of supply. So there's a lot of reasons, but a lot of those reasons tend to be more technically driven, yeah, than corporate driven.
Well, yeah, it's interesting in terms of well, so then how much of the negative news maybe minus the deficit in that stuff is already factored in your.
View, So I don't believe that that much of it is factored into credit spreads. And I say that just because credit spreads at a high yield to four seventy over. While it's a good absolute yield, that absolute yield is fifty percent base rate driven, and so I think that you got to get a little bit wider on spreads.
What gets us to representilate just all these things that you just kind of the worry list, if you will.
Look, it takes time for a higher rate environment to flow through, and it's it's early days still and we're starting to see it.
I think someone was reminding us yesterday too, the same thing that we're not there folks, in terms of what the Fed's done and its impact.
Right, Yeah, it takes some time. So I think over the course of the year, you're going to see margin degradation, leverage numbers are still ticking up, downgrade cycles are real, right, and macro things around QT and debt ceiling. And by the way, what if you know, you have a lot of foreigners that buy treasuries, and there's a lot of high rates and a whole different number of sovereign regions. Now what if that money flows back to their own regions?
So I think you have enough stuff floating that there might be some volatility that might push spreads out.
A little bit more, but manageable.
I think so, because the truth is, when you start at eight, nine ten in credit, you got a long way down before you're losing money now, right, there's room for error.
One thing I wanted to ask you, because I know from some of the notes we've got a couple of minutes left here. When you look at earnings that we've gone through so far, how has it been looking in terms of what we're seeing in the balance sheets.
I think it's a very mixed bag. I don't think there's a blanket statement. There's not a blanket answer to that. You know, the S and P for example, earnings were pretty solid, right, so people sort of forget the numbers now like seventy or eighty percent the company sort of either met or exceeded their numbers.
We've been managed well, no, but that's fair. It's a metric.
Yeah, it's a metric. I think that in the levered credit world that we operate in, there's been a tremendous amount of dispersion in terms of numbers and outlooks. And I will say in certain sectors. You know, healthcare is a good example of that, and certainly in the World War Oping, you know, we're still seeing labor costs are high. Yeah,
they're really really high. And so when you look at these numbers and you look at where margins have gotten heard, it seems like it's going to be tricky and it's going to take time for inflation to come through the system or alternatively for top line to grow your way out right, And so we do think that things are going to be a little bit fragile.
Just got twenty twenty five seconds. Do you think a year from now at Milkin will be having a similar conversation It will be more out of some of the stress just quickly.
I think time is your friend, and I think a year from now is a long time from now. So there's a lot that can happen in terms of sort of normalizing the world.
Or a year from now just look at like the last year, right, and stuff thank you, Thanks for your patience while we talked about the craziness in regionals. It's always good to talk.
With you too.
Prinima Priori. She's Maaging director at HPS Investment Partners. Joining us here at Milkin.
You're listening to the Bloomberg Business Week Podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business App, or watch us live on YouTube.
First Republics troubles. You know, we thought that that was all taken care of following the takeover by JP Morgan. We've been talking about the regionals today under a lot of pressure, which we know kind of complicates further the plan for what the FED needs to do tomorrow at its meeting. We've been talking a lot about a credit crunch here at Bloomberg. So let's get to it because our next guest sure to have some thoughts. Armand Panosian.
He is head of Performing Credit and portfolio manager at the alt investment manager oak Tree Capital Investments, roughly one hundred and seventy two billion in assets under management. Welcome, Welcome, How are you great?
Great? Thank you for having me here.
How's the environment and what are some of the conversations you're having or wanted to have or ask people here at Milkin.
Yeah, the Milkin Conference has been quite balanced in terms of perspectives on investors as to whether they should be bearish or bullish. I think the consensus appears that there are more reasons to be cautious or bearish in the short term and probably optimistic in the long run. About the US economy, I think not enough conversation has had about the benefits of inflation in the long run, and I think some businesses and sectors are going to do well in the US and the medium to long term.
Meaning what the ability to raise prices or what.
The ability to raise prices inflation in a short period of time causes volatility and performance, But in the long run, the dollars of profit of businesses that are strong and are able to pass through those cost increases with enough time results in an increase in the actual nominal dollars of profit when you actually do have inflation, which means that if you have fixed liabilities in terms of quantum, then you're able to repay those liabilities easier over a
three to five seven year period. In the short run, obviously, with the higher cost of borrowing, there is an expectation of elevated default rates there.
Well, let's talk about the implications of what we're seeing after the collapse of Silicon Valley and two other banks, and then first Republic of course of JP Morgan, seeing PacWest Western Alliance. I'm sure people have been saying this to you, just really under a lot of pressure. How do you read it? Is it? Have we moved from it's just a few isolated banks a crisis of banks, to a bank crisis.
I think it's very early in that process. Unfortunately for the banks. I think the behavior for especially some of the smaller and medium sized regional banks is going to become more volatile and more pressured over time. We're seeing it in real estate. Initially a lot of those banks are heavy borrowers and small balance loans and commercial real estate.
There are leasing issues, there are completion issues, and I think that as those banks test the waters to see where they could transact in those loans, where they could clear a portfolio of those loans, they will find that opportunistic investors want cheaper prices than they're willing to offer than they're willing to get. Reset on valuations, there will be a big reset and there will be a hole in some number of those bank balance sheets as a result of that trend.
Actually, that's what I was going to say. Who eats the reset?
It would be the banks. And then the question becomes whether they're regulator Not all of them are Federal Reserve regulator banks, some of them are occ banks. Their regulators will have to decide which they allow to fail, and they which they save or plug.
The gap arment, does it only get worse? As you know, tomorrow's the FED meeting, right we are expecting the Fed to raise rates again. We'll see what A. Powell and company have to say about monetary policy going forward. But they've also said we're going to keep rates high for a longer time. So that just exacerbates the situation.
It does. And if you look historically, when you have seen periods of rate rises, which haven't been many in the last thirty years, but if you look historically, usually it takes twelve to eighteen months to feel the pain of that rate increase.
Same thing we were just talking about with our last guests, and you're minding us. It takes a while.
It takes a long time. And in fact, if you look at the pace of the sofur curve, which we look at a lot in corporate direct lending, as it's usually corporate direct lending is priced that a is spread
to sofur. Sofur didn't get to four percent until about supt October of twenty twenty two, so we're only about six seven months into that impact on the corporate directs got to move up, right, It's well, the pain will be felt more and more and more as as you do have sort of tepid growth and performance of businesses.
A lot of businesses are challenged still in terms of their cost structures because of inflation, and so the higher cost of borrowing for floating rate borrowers, like in real estate, like in some corporate direct loans, will create elevated defaults and issues in the next few quarters.
What does it mean for opportunities in terms of you guys, right, you're known for looking for value.
Yes, well, if you have dry powder, the investing environment over the next year or two is going to be more attractive than what it was in the past five years. Now, this is specifically about credit, not necessarily about equity. I think actually credit probably outperforms equity in the next three to four years, and that's just not been true over the last you know, fifteen years of easy money. So I think when we look at our portfolio, the higher
cost of credit because of the higher cost of credit. Yes, the lower cost of credit since the global financial crisis has really inflated a lot of asset bubbles, including in private equity, technology, real estate. Obviously, as you see rates rise and stay higher for longer and even persistently longer, like in multiples of years, potentially you should see a
deflation of those same asset bubbles. And that creates an opportunity for I think, well healed credit investors that structure debt appropriately, that invest conservatively, find less cyclical businesses or even countercyclical businesses, And with the banks stepping away and the regulator stepping in, it's creating an opportunity for private investory.
Is it just in banking where those asset bubbles will burst? I mean, in many ways we've already had the crypto bubble burst. We're seeing it in regional banks. Is there real estate we're talking about? Is there something else? Potentially?
I think we're focused on the banking bubble. We're focused on the asset classes that are rate sensitive and therefore have benefited from that environment over the last fifteen years. Yeah, Obviously globally there are going to be other sector specific, commodity specific bubbles, possibly bursting for different reasons, but from a rate perspective, it's really a banking issue.
You guys recently launched a new fund, right, a private credit fund, about ten billion dollars. How are you putting that to work? How quickly are you putting that to work?
Well?
As you said, those who have dry powder, sounds like you guys have a fairminat truck.
We do have dry powder in private credit. It's some of the best environments that we've seen today versus in the last five years.
So now the golden age. It's so funny because last year people are like, it's the golden era of private credit. I'm hearing it this year.
It was possibly a little early to call it last year, but this year, you're generally speaking, first lean privately negotiated loans to companies that have a really large equity investment from a well healed private equity firm. They're yielding eleven to thirteen percent, and you know, appropriately capitalized and cash
flowing even with the high base rates out there. So given that type of return profile, that type of support from an equity perspective, it is I wouldn't say necessarily the golden age, but it's far better today than it was three years ago or two years ago.
Even And that continues for a while because we still haven't felt the long runway or the runway of the FED move.
I think it does continue for a while for a few reasons. One, I think the banks have taken a step back just given the well, you know, the well.
Public you see it directly, right, thanks, right, Oh, of.
Course I think that. I think the only thing saving the publicly traded bank loan market from really moving step changes down is that there hasn't been a lot of new issues. LBO deal volume is down, so the banks are kind of not needing to put out capital in support of private equity activity, and that's creating a balance in the market. That's that has resulted in prices of
broadly syndicated loans staying near par. But I think if there was a sudden need for capital, the banks would have a tough time placing it, and as a result, the direct lending environment, the direct lending competitive set is more actively engaging with private equity sponsors on providing them very, very sizable solutions.
I just said, you've got this new fund ten billion. It's a lot. Is it the possibility if it's so opportunistic that you guys could do another fund or because there's so much out there?
Yeah, I mean, based on what we're seeing in the market, we think we could deploy that capital in a very responsible way over about a two to three year period. Three So beyond that, it's hard to know. My crystal ball is it's decent, but it's not.
Like, let me just put this to work.
Hey, yeah, I'll focus on this, and I think it's going to be a great vintage.
But it's all going into finance banks.
Specifically, it's all going into financing, mainly leverage, buyout, takeovers of businesses, really stepping in where the banks are stepping away.
What and just twenty seconds twenty five? Is it certain industries or it's a cross section.
It's sector agnostic, but there are certain industries that just underwrite better using our very conservative underwriting methodologies. Things that are less cyclical, less commodity sensitive and not retail sensitive. So we like life sciences, we like healthcare, we like certain types of aerospace and defense businesses, industrials, consumer, nondiscretionary products. And you're busy, very busy, looking at a lot of different types of deals. And it's an exciting time for credit right now.
Interesting. I'm so glad we could get some time.
Thank you, Thank you so much. Good to chat with you.
Same here Arman Panosi, and he is head of Performing Credit portfolio manager at oak Tree Capital Investments.
Here at Milkin, you're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Easter on Bloomberg Radio, the Bloomberg Business App and YouTube. You can also listen live on Amazon Alexa from our flagship New York station just say Alexa playing Bloomberg elevel.
And we have a great guest with us Ida, Global head of City Private Banks. She's a member of the Global Wealth Management Leadership Team. There, so good to be here with you again. You were saying it was your seventh year at Milcoine.
Yes, it is.
How I don't know do you go from year to year? And the pandemic was certainly an interesting time, and I don't know, how do you kind of compare it to last year in terms of some of the conversations, the worries we're still talking recession. I don't know, give me an idea.
Well, you know, it's interesting because the energy level here is incredibly high. We've had a huge amount of people here at the conferences here.
It seems a lot more attendance like the pandemic.
Finally, yeah, exactly, finally back to sort of bau pre pre pandemic levels of attendance. And it's really wonderful because we are talking about so many topics that are on everybody's minds, you know, everything from geopolitical risks, how to invest, how to navigate the capital markets, is there going to be a recession, all the way to topics like environment and healthcare and.
The cross sectionuality.
I love the cross section and the intersectionality of all the different topics as well, like very important.
Well, it is funny too that we're you know, I want well, we're going to talk for session and I want to get your outlook the concern again about regional banks, because it felt like things had calmed down yesterday, and then we looked at things like Western Alliance pack West today and again there seems to be nervousness back in the market, and I do feel like the tone changed a little bit from yesterday here at Milkin. How do
you see it? How do you factor it in? And also the concerns are about commercial real estate, like that's kind of the next leg.
Yeah, well, look, I think we need to let this situation play out over the next few days. I mean, we're super confident. I think it's just the next few days.
Well let's see, let's see.
But we're super confident, and that doesn't change our conviction in our banking system, the health of our business. We are one of the most global banks in the world. We're a globally systemically important bank. We have diverse sources of revenues from different businesses around the world, and a very very strong balance sheet. So from our perspective, you know, we're we're obviously still in very good shape and to make sure that we're helping our clients and advising customers.
It's good to be a big bank right now. I say that with all respect. When you look around the world though, us versus let's say, outside the United States, and I hate to just do those big buckets Europe Asia, tell us what you're seeing.
Well, you know, it's interesting because when you look at the emerging markets, they're trading at about a forty percent discount to the US. And you think about where the US has come over the last decade. It's been a ball market, as you know, absolutely, and so the question becomes, how do you achieve the growth in the future. Is it going to be from the US or is it
going to be emerging markets? And we think it's a balance of making sure you have a global diversified portfolio, especially with some of the emerging market opportunities.
Yeah, and it's funny because I do feel like there's some momentum around emerging markets. Again, like for a long time, everybody had kind of forgotten it, but it does seem is it some of it maybe dollar weakness to some extent or what is it?
Part of it is dollar weakness, and the other part is the split and the ongoing bifurcation of the United States and China, and that G two bifurcation is creating
a lot of opportunities for investors around the world. Right because as China is growing and continue to grow and doing everything they're doing on the digitization and the clean energy side, and as the US continues to sort of try to be more self sufficient on many of the different areas as well, different partners around the world are going to benefit from this new global supply chain that's going to happen right now.
That's a positive, you see.
It is a positive because think about it, Mexico is going to benefit from the US, and in China, Southeast Asia, I think Thailand, Vietnam, Malaysia, some of those countries are going to benefit from the difference in trading patterns, as well as India. So you know, you're going to see some shifts in the global supply chain, and I think that that's going to present some interesting investment opportunities as well.
I love that you went there because I feel like everybody's like globalization it's dead.
It's going to be different. No, it's going to be different. Globalization isn't dead. It's just going to look different. So in terms of how investors play it, it's going to be different.
It is going to be different.
I think it's really important for investors to consider having a very global portfolio because those that have been US dollar centric and US centric may not be able to achieve the same level of returns going forward the next ten years. If you don't have those global exposures that I mentioned.
Well, you and I don't know how much you can drill down. But when you do, look at Asia, because you mentioned you know some of the Southeast nations to this, China, there's India. How are you guys thinking about that? Investors should play it?
Well, it's interesting because in China, when you think about it now, they just announced their first quarter GDP numbers four and a half percent, beating the analyst estimates of four percent and estimated to achieve almost a six and a half percent GDP growth this year. So the momentum
in the reopening has been extraordinarily strong. Not to mention that travel within the region is already back to pre COVID levels, that the consumption story looks very healthy with the middle class which is several hundred million people, so that consumption story.
So play Chinese names or play names that are going to benefit from that Chinese growth in both and that's how we're doing it for our clients. Where don't you want to be right now.
Are you don't want to be?
You know, it's interesting because we're you know, we're fiduciaries for our clients, right, so at the end of the day, we're risk managers. Right, We're trying to make sure that we construct really global, really diverse portfolio for clients. And you know, right now, our view is that the client should be forty forty twenty, so forty percent in equities and in high quality, divid in paying stocks and specific industries that we like.
I was just talking about that on TV. We were talking about strategies, and more and more investment managers are looking at what divid in paying stocks, but.
Divid in paying stocks, also looking at that fixed in commonit because the fixed income yields are still incredibly high and very attractive, particularly on the enhanced liquidity municipal bonds, treasury side. And then the last piece is really looking at opportunities in direct investing private equity hedge funds, which we think is an enormous opportunity in markets like this right where investors are willing to pay that.
A liquidity premium. I know, what do you make as someone who looks at so many different types of investments that are out there that increasingly time I come to Milkin, it's the private markets, private credit, private corporates. It just continues to grow, but useful for investors.
It is useful for investors, and we are also seeing that trend, particularly with our largest family office clients that behave like global institutions.
They are very.
Interested in looking at direct deals and direct investment opportunities as well as a compliment to the overall portfolio, mainly because it's a different return profile, and the return profile can be very different from your typical egrets in bonds exposure, and you have some interesting and compelling industry and geographic opportunities that could be very additive overall.
All Right, So one thing I do want to ask you is the FED policy and FED meeting. Yes, what are you thinking around that? And what do you think is what is the because I feel like we go back and forth, and you know, I keep saying, everybody, if it's going to do, what's going to do when it means and they're going to look at what's in front of them, what's the constructive conversation around FED policy, FED decisions and really FED commentary?
So the FED last year increased rates at the highest velocity we've seen in a very long period of time. Seven rate heights last year to already this year, and another one we expect tomorrow at twenty five basis points. But then we think that it's going to teeter off.
So I think we're going to reach peak rates after this next hike, so this next meeting, tomorrow, next meeting, and then we think it is going to stay relatively flatish and then eventually going to have to come down, right as we see some of the unemployment numbers potentially going up with the layoffs that are hitting the system and the like your research team.
The strategy note I was looking at last night, it says what happens after the FED reaches peak rates to play off of that? Not too soon to think about it.
No, it's not too soon terms of strategy, And no, it's not too soon at all. We've been making a lot of pivots in our client's portfolios already. We anticipate a mild recession in the next quarter or two, okay, And you know, we know that typically markets don't bottom until the midpoint of a recession, so we think there's going to be still some downward pressure on the equity side,
some volatility in the nearer term. So we've been pivoting a lot of the portfolios, as I said, fixed income, looking at dividend paying stocks in some unstoppable trend areas that we like, which include healthcare, clean energy, as well as digitization and deep tech cyber.
Is that because of AI? Of course deep tech aias seriously it is.
It is because of AI, but it's also because of cyber because cyber is probably the number one thing on most CEO's minds, and that spending is going to only continue there. And then you've also got to think about the implications of what fuels that industry and those are semiconductors.
Really quickly twenty seconds clean tech. Yeah, that is another theme that I keep feeling keeps popping up. Is it because of some of the government money and the government programs or what is it specific?
You know, it's a combination. It's a combination of this is what where we're going to evolve in the future. It's the right thing to do for our world, for the for the environment. It's going there. So we're going to move and transition from fossil fuels to clean energy and cleaner sources of energy. So we see a huge opportunity in solar in New clear.
More so than twelve months ago. No similar more so, but just we will.
This evolution is happening and it's going to be an unstoppable trend in the next decade.
As the folks who live in California they see it first. Oh absolutely absolutely, thank you so much, so lovely to be with you, so great to see you, guys, really like you. Idle the globalhead of City Private Bank, member of the global wealth Management leadership team over at the company.
This is Bloomberg Business Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
I gotta say. One month ago, on a Bloomberg podcast, our next guest noted that aggressive rate hikes from the Fed and the ECP we're creating tighter financial conditions and more opportunities for distressed investors. This is from Victor Kosla, he's chief investment officer, founder of Strategic Value Partners. Roughly seventeen billion in assets under management. Welcome, welcome, so nice
to have you here, Thanks for having me. I have to say that Chanai Basik, who you knew well here at Bloomberg, we ran into you yesterday and I think she said you're a distressed investor, and you said, something else has an opportunistic.
Yes, I said, I bridled that description. Distress.
Your website says distressed.
No.
So tell us about this environment, because we're on a day Victor, as you know, where once again the markets are rattled, the equity market specifically, I should say, regional banks plummeting. We saw some volume behind it. How do you kind of look at this scenario, this environment, and what's going on and does it potentially get worse? First of all, let's start there.
Since the FED started to hYP rates, since the Ukraine War about here or Shogo, Carol said, the markets have been grinding grinding down, and the FED is still raising, right, the ECB is a year behind the Fed. Possibly inflation is just speaking out there. So I think to our point of view, as we kind of look forward right now, we think we think this is just the early early innings of kind of a credit cycle. Now are we going.
To Is this a a bad credit cycle? Tight credit cycle, a bad credit cycle? Yeah?
Right. I think as we as we look at the world today, is you know, we can all have a debate. Is it a soft landing? Is it a recession? We at SVP we believe it's a recession. But I'll tell you what put that on the side for a moment. What thirty years I've been investing in opportunistic credit thirty years, I've never seen a cycle where the FED was the headwind every cycle we've had over the last thirty years. You hit a bad cycle, the FED starts to lower rates,
the easy to ease. It, Yes, to ease because the ECB is even more dubbish, right, it starts to and it's lowering its increasing rates at the same time. So I think, to our point of view, these higher rates, these slowing economies, regardless of what happens, soft landing or a recession, they are creating an environment where people are starting to have problems servicing their debt much higher rates today, and those problems, we think just continue to now cascade.
Are you and please I'm not being I don't think I'm being overly glum or so on.
Yeah, I think most people.
Would say, look, the next five years, even your classic analyst would say, next five years slower economy, economic growth than the last five Yeah.
Economic I heard people talking about one percent Chris ailment over your Custer.
Yeah, so you get slow economic growth, you get much higher rates. And oh boy, and by the way, all this stuff with you know, First Republic or Silicon Valley Bank in the in the overall scheme of things on the it's just a little bit of noise.
Right, yeah, right, But does it get louder though with something else like office properties offices?
Office is not just going to get louder. It's going to broom and you you'll hear that sound.
Yeah, look at that. I even topped your properties in your view.
You know, if you let's just let's just talk about office. Yeah, if you look at if you look at office today new York City, center of it, thirty five percent of all mortgage debt on offices in New York City, twenty percent vacancies. You want to rent space in office today, effective rents are thirty net. Effective rents after TI after capex are thirty percent lower. You put that into your model. You you're talking about a fifty percent decline in office values.
So so you know, fifty percent traumatic, that's a boom.
Yeah, and so yeah, this won't be some soft noise.
So what does this mean for you? Guys? What do you do? You got from what I understand, Bloomberg did a story about a one and a half billion dollar fundraise, right for opportunities, maybe a target of close to four billion. Is that the case that you're put into Now?
I can't talk about fundraising.
You're going to forgive me, Okay, that's fair, But tell me in terms of the specific opportunities that are coming before you that you want to commit capital to.
So interesting, So like take like a lot of twenty twenty two. As this opportunity changed, we slowed down, by the way, cal can I tell you something that people always love to talk about, Hey, what a great opportunity. The first six months of twenty twenty two, Our focus
wasn't like, what a great opportunity developing? The first half of twenty two was trouble of ian right, it was, yes, So because you know, we all have portfolios, yep, and you kind of look at them now through through all these eyes of the coming the coming issues and the coming downturn and credit and you make sure that what you have is solid. Right, That's the first thing we did as an investor. And then in the second half of twenty twenty two, as we were looking around at opportunities, Look.
I only have we only have about twenty seconds left. Okay, but well, so let me tell you it.
Can I just finish on one?
Yes?
Please?
Right? This is not this is early stage. We invested a billion dollars or so in the last nine months of twenty twenty two, and we've invested a billion dollars in the first four months of twenty twenty three. Normally we would be investing two billion in those four months, right, So it started.
So stand by its Victor Krosla, Thank you so much. Come back. I'd love to continue this.
Brom journal.
How about you let me drive?
Oh no, no, no, no, who's going to honey?
Please?
How do the riding gravels?
Let's mate, I want to drive.
It's a good question time. This is the drive to the globe.
Dot com to me, I think we'll buy around.
On Bloomberg Radio.
All right, everybody, we've got just under eighteen minutes left in today's trading session. It is time for the drive to the clothes. Carol Masser live at the Milk and Institute Global Conference. We've just met back in our studio, but so delighted to have with us on this Tuesday. Chris Alman, chief investment officer at cawsts some three hundred billion in assets under management. I think more than that
California State Teachers Retirement System. You know, it's the largest teachers retirement system, second largest public pension fund of the nation. Chris here at Milk and not too much pressure that you have to manage all that.
And we're sailing to the clothes not dry. We're sailing.
Chris and I. Before we got started, we're like talking sailing. And then we were also looking at what pack Western Western Alliance are doing. I mean, I got to start there the regionals. How do you factor that in? Is that opportunity for you when you see some of these names getting beaten up or do you say too soon, too.
Early distress sellers. I'm more interested in the assets that they have to sell to raise capital. We spent a lot of time this weekend talking to different companies that we're going to bid on assets.
So for First Republic, for First republic might be sources.
On a name, come on, Chris, but we didn't win the bid, so it's safe to talk about.
But the.
Because the assets, the underlying assets were good.
Parts of them were good. At anytime that you have a distressed seller, you know, you know if somebody's selling than you want to buy. If they're buying, you want to sell. Field War and buffett Atage. So I'm concerned that the regional banks are getting hit one after the other. I mean, these two banks I've heard names of, but you and I were discussing. I didn't even know where they were located. I'm surprised that we're having more contagion.
We just had City Corps CEO here at Milcoinne Yesterday's say and JP Morgan's a representatives say everything is fine. That was it, First Republican. We should be done now we have other names. The regional banks are under pressure, but it's more almost a flight of fear and seeing capital flow out.
So tell me what you're doing in this environment. You got a lot of money to put to work here.
We are very neutral. We have been defensive. We have been anticipating a tough economy for almost for nine months, and we've been wrong because it's been muddling along. And I really believe so many people are expecting a recession to come up that either it's going to be a self fulfilling prophecy in the most anticipated recession in history,
or maybe we will just muddle along. It's hard to say that the Fed's going to pull off a soft landing, but the FED will probably stop tomorrow after tomorrow, or surely they're not going to pivot. Yeah, but we may have almost the worse than a recession, just a slog for up to two years, no growth, you know, one to below around one percent growth. Yeah, it's good unemployment, so good employment, strong market, but an equity market that's going sideways.
So okay, So what are you thinking about? Like I was reading some stuff about you specifically, and while VC is not something that you guys a big exposure, you've been looking at some stuff though. Is that fair?
We have We've always been trying to We have very strong disclosure laws in California that make private equity and then specifically venture capital or real challenge. Yeah, yep.
Do you wish you could to do more?
Oh? Yeah, without a question. Silicon Valley is right in our backyard. We absolutely wish to be a major player. They would rather take money from sovereign wealth funds that don't ask any questions than from a California public fund that asks a lot of questions and wants to know what it owns and how they invest in, what their fees are, and want to negotiate fees. Those other ones are much more happy to take the money, So it's
for us we're interested in private credit. I have stated that we're very worried about real estate, particularly the office market Class B and Class C. Thankfully we have a wonderful office portfolio with long tenants and good quality seeing.
No stress, no problems, no worries.
Well, but the price is just simply because the FED one from zero to five high out probably tomorrow in nine months, tenth straight rays unheard of since the seventies. That's got to cause damage more than just Signature Bank and Silicon and First or Public.
So well, so let me ask you about real estate. You talked with the Ft recently getting ready to write down the value of assets in your real estate portfolio. Of this, I guess it's said fifty two billion dollars real estate portfolio. Is that the case?
It's while we sat down with our real estate consultants and just simply because the FED has moved so quickly, cap rates have to go up, which means real estate values have to come down, and so we were just already anticipating. I have a very educated board that asks really good, tough questions, and that was their question, what happens to our office portfolio. Nobody's fully back in the office.
How do you figure out values? They're no transactions. The conclusion was we would expect right downs in the office portfolio.
Write downs, but not defaults.
You're going to see defaults, particularly in the Class C and Class BE property, but you're not there, and we would be probably interested in being a buyer if you could upgrade some of those. But I think that area is going to be distressed for a long time period. I'm and you're right. I'm more concerned. We're fine, we have Class A and fully leased. But what I'm looking
at is who owns the paper behind those defaults. Will we go back to pretend and extend environment like we used to see with the banking regulators, because you know, they want to solve what we're having. This banking crisis.
Chris, I do want to ask you about bonds too, because from what I understand, you guys have been moving into it, increasing your bond investments.
What specifically, Hey, you know, for the last thirty years that I've been as CIO, bonds have been decreasing in the portfolios, Shields have been coming down, they bottomed in bounced, and so for the first time, fixed income has a return, cash has a return. So we're going to slightly start increasing or fixed income allegation.
Short duration or we will extend.
Out the curve because even when it's inverted, that's probably a good time to buy some duration, to buy some longer data. We like private credit.
Can I just ask you who doesn't like private Oh?
Good lord, that's the thing that worres me. Everybody wants to go in.
Thank you for saying that, because how I sometimes feel like three years from now will be at milk and being like we all missed it in private correctly, No, but I do wonder there's.
Too much money flowing in and it's all about credit and analysis. But it's simply because the banks completely stepped out due to the change in regulations.
So you had is there enough oversize private credit.
I think you have sophisticated investors who are doing it. There will be some default, especially if we do have a recession, then some of those companies some of those covenants, but a lot of it is collateralized short term loans, variable rate loans, so they float, which gives you an opportunity to get a decent yield and return on your capital. The problem for me is you have to then turn
around and redeploy the capitol. A lot of people love that, but for me, I need to make a long return over thirty years, so rolling money constantly is a challenge.
I just got twenty seconds. You got an equity thing, any in the equity area that you like.
I am still very cautious on equities. I'm shocked at Europe and you know, but the US market from milk in a year ago, the US market is basically flat, and I think, unfortunately we're going to.
See them going forward. It's an interesting time. Another one, right, always good for the book over the trip when we're sailing or something.
I don't know.
Chris alman over At Calist's chief investment officer, Chris, thank you so much, pleasure en closure.
This is the Bloomberg Business Week podcast of a little on Apple, Spotify, and anywhere else you get your podcasts. Listen live weekday afternoons from three to six Easterning on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg journyalone