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A deal between P and C Financial Services Group and the TCW Group on partnering to develop to deliver excuse me, private credit solutions to middle market companies private credit.
There's a lot going on.
Continues to be great to be talking again, the Katie Coach, CEO of the global asset assement from TCW, which manages approximately two hundred billion in client assets. You've been busy, Thanks for having me on.
Yes, tell us about this deal with D and C. Yeah, sure, we're just by background.
You mentioned TCW as a two hundred billion dollar global asset manager. We were an early entrance of private credit that is led for us by the extraordinarily talented Rick Miller, our CIO of private credit. A twenty three year track record in that asset class of conservative lending that's allowed us to outperform with a low loss ratio. And we're really proud to be partnering with PNC, which is the course one of the leading US financialists tuitions. They're ranked
forth and middle market lending. They have an extraordinarily talented and tenured management team, a strong balance sheet, and great client relationships. And this has been a partnership. Just to answer a question how it came about. It's actually fifteen years in the making, so we've worked together very closely for a long period of time. Over that period, we've done forty co financings.
And it is also true that they.
Are number one fun finance partner, which means that actually PMC had to underwrite TCW and our capabilities in order to provide leverage to our fund.
So this is a very very.
Strong partnership, and I wanted to just end Carol by saying that there are This is different than other partnerships that have been announced, and this strong relationship we have with each other has allowed us to create something really differentiated for three quick reasons. The first is that it's very middle market focused, so we're going to target loans to companies with about fifteen to seventy five billion at Evada.
The second is.
That it's a shared investment approach, so we're both putting in investors.
To this partnership.
We're going to work together on the underwriting and the origination. Of course, it will be shared by Rick, and that's because we have a shared credit culture of conservative lending that allows us to do to share the investment approach,
and then finally it's shared economics. We're targeting two and a half billion dollars of equity this year, and it will be strong contributions both from PNC and from TCW and our affiliate, so that economic alignment aligns our interests with PMC and also of course with our clients.
So Katie targeting two and a half billion, how big could this partnership get them?
We think this partnership could expand significantly over time, and that's important because private credit managers and banks. We think those partnerships with US and others will continue because banks are under some regulatory pressure and private credit managers they have the capital to allocate and to lend, and banks have great origination capabilities, and those two things are going to have to cooperate so we can continue to put credit out into.
The US market.
Significantly mean But I'm not going to give you the exact billions of dollars, but i will say the double from the initial two and a half or many times actually for our credit alternative platform broadly, we've already doubled the aum of that platform over the next couple of years, and we're expecting it to be many multiples over that, and this is going to play a very important role in the growth of TCW's alternative credit platform.
Carol mentioned at the start that you've been busy. Another I guess deal, if you will, was a conversion of two mutual funds SOTS yes in the AI space. Talk a little bit about why you sure well.
First of all, mutual funds in general, we think that they have a place.
We'll continue to have.
A place in the market, very important part of our business, very big part of teas, and we'll continue to be a relevant vehicle. It is also true that clients are looking at the exchange traded fund vehicle because of the liquidity, the tax efficiency, and the transparency and ease of trading of those vehicles. And so we are going to convert several funds and launch new ets. We did want an AI. I do want to emphasize I am a believer.
In generative AI.
We have been managing AI strategies for seven years.
So this isn't something we just.
Launched because chat GBT is cool. It's we saw that transformative technology almost a decade ago and launched a strategy on that. We're investing in the technology enablers of AI, and also the companies that will best.
And I'm curious is what is a portfolio of AI Sazi sakes? Because if you ask someone else that question, they would just say, well, in video, maybe Microsoft that that's in I.
Assume this is war we have some of those in there.
So these companies that are driving the technology of AI, but then also the companies that are the beneficiary and what it's actively managed and.
It's relatively focused.
And so what we're going to do is ship the shape of the portfolio as that narrative of AI changes over time. I do just want to say one thing because I think it's important to be balanced on these issues. I do believe in the transformative potential of AI, but it is a story that's going to play out over the very long term. And so a vehicle this is appropriate for people who can take that long horizon. And this is said a lot, but I think it's a
very good reminder. The Internet was also an incredibly transformational technology, but that didn't happen in year one, in year two, and it took twenty years. But if you stuck with that narrative for a couple of decades, and many of our clients have that type of durability of capital. It was one of the greatest wealth creation opportunities in the US economy, and so we are excited about it, but balanced in telling people this is a great vehicle.
Be active, be selective.
Which we are be with a manager that can evolve with the narrative, but also be long.
Hey, it's a time as you know of our investment narrative. Just generally speaking, take the big broad macro Katie, what are you seeing right now?
How would you describe the environment? I would say that we are.
Long dispersion, the idea of dispersion across all of our portfolios. It's really hard to predict this in short increments. But what I would say to you, whether it's private credit or it's public credit, we think that the spreads and I'm going to talk about public because it's just a little easier to point to valuations which are at record tights in credit markets in their post global financial.
Crisis history, at record heights. That valuation is inconsistent.
With some of the obvious challenges that we have in this economy, regardless of whether or not we get a recession. Let's take the scenario where we muddle forward and have some type of soft landing, but rates we all believe will stay elevated because inflation is still pressure. That could create a credit event right when rates are this high and these companies, we're already starting to see stress in certain parts of the credit market not priced into credit spreads.
So in our liquid portfolios where we do take macro views, which is in the core plus space. Remember that's people's retirement money, so we're managing that for their retirement assets over many decades.
We're conservatively positioned.
We're overweight agency mbs, which is carrying over the index, and we're being very patient and eventually this is going to break, and when it does, we'll lean into those specific credit opportunities. If, on the other hand, I just we do get the recession, then we're going to have a credit event anyway, in both public or private markets, and that will create dispersion.
Are you suspicious that the default rate is in something different than what it is today?
So this is a good point.
Default rates are actually where we would expect them to be in the traditional levered loan market. They're low and actually went down in the first quarter. In the private credit market, And I'm glad you asked that, because we think that's really masking some serious liquidity challenges in the private credit market. And what we and you so the ouguest question is is why why is this happening? Well,
I would ask first, why is there stress? The reason that we think there's actual stress that's not showing in default rates yet is because from twenty nineteen to twenty two, these capital structures were highly levered with the view that rates would stay zero forever, right, and that didn't happen, And now masks taken over and they're under pressure. Now,
why haven't the defaults gone up? My answer to you on that is that if you look at last year, the amendments of these loans were three to four times normal, and we don't generally amend loans when things are going well, So this cannot be extended forever, and eventually those default rates will rise. I'm going to end with just bring
it back to dispersion. If you look at the last fifteen years in the private credit world, the dispersion between the top and bottom quartile manager is about fifteen basis points.
This is not high dispersion.
That number could ten x or more over the next couple of years as these defaults rates rise, and that's why you obviously want to be with a manager like TCW that does conservative lending diligence, very high levels of diligence, very significant underwriting, and we feel really great about how we're going to manage this environment for our clients.
All Right, Katie, we have to leave it there.
Great to talk, Thank you so much for you take it time for us.
Katie Kacha. Of course, elites at TCW, I'll take a time to talk with us here on the milk and stage