Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.
And I'm Joe.
Wasn't that Joe?
Do you remember deal toys? Did you ever see those?
I never got a deal I never I do know what they were.
You wouldn't get a deal toy unless you were working.
Out, so I'm aware that they existed, but I don't never had one. I never saw one.
I used to be slightly obsessed with them.
Were they toys like or were they like like were they those sort of looseight Uh?
Yeah, that's pretty much it. So if you are working in capital markets or in mergers and acquisitions and you completed a deal, you would mark the end of that transaction by, you know, adding some sort of swag I guess. And it could be really boring. It could just be a looseight block or something like that. But some of them were really interesting and fun. And one of the ones I remember seeing was someone it must have been
working in like capital markets. It was a little toggle, like an actual like think of like a railroad I kind of toggle, and it was to celebrate the first ever pick toggle transaction.
So can I say something you know we talked to First of all, it's amazing. Second of all, you know, we talked to a lot of investors on the podcast. We talked to a lot of people whose job in some way resembles our job, which is looking at screens all day or maybe looking at data. I think if I ever had gone into finance, I would have some job that looked involved a lot of looking at screens and a lot of maybe looking at data, but mostly
just looking at screens. We don't often talk talk to a lot of people who are in the world of actually talking to other people about making things happen. I never think i'd be good at that. No one wants to hang out with me, you know, stuff like that.
And so I want to learn and talk to more people about how actually things in finance, whether we're talking about a deal, whether we're talking about a new issuance, et cetera, how that actually happens, how an instrument or security actually comes into the world.
Well, I'm very pleased to say, Joe that we do, in fact have the perfect guest for this topic. We're going to be speaking to someone who's day to day business is talking to people sourcing and finding deal and someone who also knows exactly about that Pictoggle deal toy that I mentioned earlier. So I'm very excited we're going to be talking. We're going to try to thread the needle between sourcing deals and also something else we've been
interested in lately, which is private. That's right, all right, So without further ado, we're speaking with Millwood Hobbes. He leads Oak Trees Sourcing, an originations group. So really again the perfect person, Millwood, thank you so much for coming on all thoughts, Thank you for having me. So I'm right right about the pictogle toy. You've seen this toy.
Yes, I've seen it. My favorite deal toys. There's two that stick out when Ford spun out Hurts in two thousand and five, I was part of that transaction, and so I have a set of car keys and there's from Hurts and it's it's a it's they're called loose Heights. Yeah. And then the other one, which was pretty cool. I did the Mars regularly deal with Byron Trott, and so I have two eminem amazing guys that sort of they lay out.
The train a room in your house that's sort of like I'm imagining high school athletes trophies.
So so you know, I have we moved there in Covid in twenty twenty and we bought a house and I have like a real library. And then that library are two things from investment banking that I have. I have bank books from deals we used to we used to go to a printer and we used to draft. Oh like the pitch that well, it's like a it's like an actual it's a glossy picture book of of
the deal. The transaction goes through transaction over youw, it goes through company, it goes through business, and that was what folks used to actually underwrite deals back in early two thousands. Yeah, and then I have loose sites, so I have a lot of loose sights.
So the unit that you're leading at oak Tree that was created I think relatively recently, it was like twenty What was the thinking behind that?
So the market private credit in origination and financing of deals has evolved quite a bit. If you just go back to kind of pre Dot Frank, most private equity firms didn't have what we call capital markets professionals, and post Dot Frank and the migration and creation of a robust private credit mark. Most of the private equity firms have capital markets professionals who really spend time drafting, creating,
structuring financings for the private equity buyouts. And what we figured out oak Tree we were founded in nineteen ninety five, we managed a couple hundred billion dollars. What we were figuring out when I first started in twenty thirteen. Every strategy within oak Tree kind of did its own thing. So if a deal came into one strategy and it didn't work, it just kind of died in that strategy.
So what we decided as the market evolved and moved towards capital solution provider versus this fund does this and this fund does that. We created my group with the real purpose of a couple of things. Number one is making sure we were focused on providing capital solutions versus trying to figure out what fit a particular strategy. Yeah, and then the second reason we really did it is that, you know, capital is the commodity in our business. Everyone has a lot of money, but how do you get
the first call in the last call? And that's the relationship. So my team is meant to really spend time and develop relationships with the counting parties because look, the reality of it is, we shouldn't. We're not agreeing on We have different investors, So a private equity firm has a different investor base than we have. The goal in my group is to one make sure the entire firm sees a transaction, and two we're involved in the art of the deal, right, And so the goal is no one
really should win. Both parties should be just mildly annoyed. And how do you do that? How do you do that? In a way you do it the relationship.
That's funny because we say that in journalism sometimes, like the goal is for everyone to be like slightly dissatisfied in the story, because if everyone's happy, then you basically put out a press.
Release somebody's wrong. If one side is really happy, the other side is probably wrong.
I know Tracy already more or less ask this question, but I'll just put it in a different way. What do you just give us a sort of brief overview. If someone says, what do you do and how'd you get here? What did you do and how you get here?
Yeah, so you don't want you don't want my full full background.
Oh, I actually do, because you've been in the market for a really.
Long time.
Childhood.
But okay, okay, I'll start from what I'll start from. So so look, my my dad was in public accounting, and originally so I got a fool. I could a scholarship to Rutgers to go to law school. I sat in political science and I would fall asleep and wake up and they were talking about the same thing. So I said, I don't think I can do four years of political science. So I switched to accounting. Because my generation,
you did what the adult said to do. And so I switched to public into accounting, and my dad said, don't do public accounting, do banking. So I started out at a firm called Nation's Bank, which is now is a predecessor to Bank of America. And the most interesting job I had at Nations Banking, I was a controller for leverage finance. I was de controlling, the youngest controller in the firm, and I said, I want to be
a leverage finance banker, you know. And the reason why it sounds silly when you're at my age, but they wore a nice time, They were nice shoes, They were in big in finance, and at that time Nation's Bank was a pretty big terminobe lender, and so the head of the group basically said, look, right now, you're just an accountant. He said, go get a sales job and then go to the school. So again I went to g Capitol and I financed commercial equipment, so rolling stock assets, cars, trucks, forklifts.
Did that for one year to today, and then went to Columbia Business School. I summered at first Boston and I summered in asset backs and leverage finance, and then doing deoutsche Bank in two thousand full time. And during that time period I structured a lot of lbo's sun Guard, Nema, Marcus Us foods.
Irridium, first Demon, Marcus being the first ever pick Togles. Yes, and so you had that deal toy.
I have it, you know, I'll be honest with you. I think I gave it to someone more senior. Oh.
Oh, should have given it to me.
I know somebody who has one. And then in two thousand and seven I left Deutsche Bank. And really you sort of say, why would you leave Deutsche Bank? And if you go back to two thousand and seven, the market was very concentrated so versus today. There were eight underwriters who owned all the leverage finance, right, so you could see the market. You know, when I got a call to say, hey, what leverage would you provide on
a deal? I'd ask the private equity firm, well, what do you think the business work, and they'd say, well, it's based on you know, leverage, and so you could see that coming to a head. So in two thousand and seven I went to Goldman Sachs. I did LBOs at Goldman Sachs and also did high you sales and joined oak Tree in twenty thirteen.
It's always interesting to hear someone's background, but I like how there's dovetails with the actual development of the industry itself and this idea that at one point there were just a handful of very small or a handful of banks that ran leverage finance, and then of course we know about the proliferation of all that. So it's pretty useful.
Yeah, with that background, well, why don't we dive into that a little bit more so, talk to us about how the credit market, the capital market has evolved over the course of your career.
Yeah, so, look, when I first started, covenants were pretty standard amendments to deals were actually fairly standard, and as you moved forward, by two thousand and seven, the majority market was cove light. The one interesting thing about pre Dodd Frank was in the credit agreement, which is a document that sort of governs the loan if you will, you had to hedge fifty percent of your floating rate risk.
And so going into the cycle, two things that made since then is one folks were hedged fifty percent, and then the other thing is lightboar if you remember back in two thousand and seven was at five percent, so the spread to deals was two hundred and fifty to get to that seven and a half percent average LBO. Well, what happened at when Dodd Frank, when the markets cried the world the global financial crisis, rates went to zero, right,
So companies actually generated cash flow in that cycle. The challenge or difference we have today is we've been in no rate environment, so no one really hedged one and then two there because there was zero percent base rates, the spread on deals was much higher. Instead of two or fifty, you had for fifty five hundred, six hundred.
So when twenty two when rates started to move up, you actually had a situation where a lot of companies couldn't support the cash flows because no one predicted that race will movement, and most folks were not hedged like they were in two thousand and seven.
Can you talk a little bit, you know, it's a theme that obviously comes up with every private credit but also other episodes as well. Talk to us a little bit more about like the post the immediate the passage of Dodd Frank and how it's set into people's brands, that this is going to restructure the financial industry, that there are to be various activities, whether we're talking about trading, whether we're talking about lending, et cetera. Right, these are
not to be part of the banks anymore. Right, talk to us a little bit about those sort of early posting you know, and they were talking to two thousand and nine, twenty ten, those initial conversations that people were having about something new, New opportunities are going to emerge from them.
Right. Well, well, if you go back to two thousand and seven, when a portfolio manager and a public side was selling risk in the market, the banks were the shock absorber to that risk. Yeah, right, So you know when I was sitting at Goldman Sachs, it wasn't unusual for us to buy two hundred million dollars of an issue and it would be on your balanchie and it'd be on our balance sheet. Right post what Dodd Frank did effectively has said, okay, if you go back to
the leverage. And I hope I'm not being too technical, but.
No, there's great.
Banks were levered roughly thirty times pre global financial crisis. Post they're fifteen times levered. Right, So once you shrunk that liquidity or capital out of the banks, they can no longer absorb the deals. And so what happens is and this is why liquidity is really an important phenomenon. So when a PM calls the desk and says, hey, I have to move five, ten, fifteen million, you're not really sure what their real size is because they know
the market's not liquid. When I was in sales and trading, Pimco or somebody would call and say, hey, I've got several million to move, and I'd say, well, this is your first call or a last call, and they laugh and they say why, I said, because I give you two different prices. And so what happens in a market that's less liquid is as they're trying to sell, they call relative different banks, and every time they make a call, a bank then assumes that there's more behind that to go,
and so they rerack the pricing. And so in a public security, which is different than private, a public security can actually move pricing wise without anything really trading, but on the anticipation that there's their supply out there, and so that created you know, and if you go back to two thousand and nine, private credit market was like three hundred billion dollars, right, most of that was more mes or off the run, not what we call our
regular way direct lending private credit, which we were active in, but we're doing it more on the distress or opportunistic credit side, and over time, because of the liquidity and capital requirements of banks, more of that has just migrated to the private credit market, supplemented by the fact that there are these private equity professionals who are very efficient at looking at both markets and figuring out where they should play or where they should place their credit or their deals.
I'm getting a lot of flashbacks to writing about corporate bond inventories that the dealers like around twenty twelve, so just on this note, is the pitch from private credit? Is it basically execution? Like you don't need to worry about us actually being able to do or complete this deal. Where is it a bank? You know they're taking into into account leverage considerations, regulatory requirements and all that, right.
Right, So what a proper deal should be? Right? If you're sitting in private equity, your job is to find the most efficient, best price capital for your deal. Right. The public market, what they're very good at doing is saying, here is the indicative rate for a deal. And let's just say the indicative on a term loan is sofur plus four hundred. Right, then the private equity firm comes to us and says, where will you actually own that risk? Right?
So they get a level where we're owning, which won't be the indicative because remember the banks are marketing, Hey, we can get you the best rate and best execution. We're in the storage business. The banks are in the moving business, so they're trying to move the risk, and we own the risk, and so we price the risk where we'll hold it. And if those two are not aligned, what then? And then once you add to that four
hundred is you ad what we call flex. So if you take the indicative plus flex, that gives you an idea of what the banks are willing to say that this debt will price. So let's say the flex is one hundred and fifty basis points, so they know on the private equity side, they know worst case the banks will own it at SOFA five point fifty, which the banks have gotten that sort of flex number based on their discussions with us to know where we would actually own that risk.
I see.
Yeah, So the process is how do you create an efficient auction to have the debt in the right market at the right pricing with the right structure.
Okay, so here's my other question. When you are about to do a deal, or when you find a deal, who are you actually talking to? Is it the banks or is it like the companies that are borrowing in the market.
So so generally in a.
Yeah, oh wow, so sorry answer questions, but I'm just sort of like I'm talking question.
I'm talking to both, right, everyone was my friend. And the goal is the more conversations I have, the more informed I am of where the market is right. You know, the interesting thing about public markets is that market reprices risk faster than private credit because there's a secondary market. Private credit doesn't really have a secondary market. So what we're always trying to make sure we're understanding is relative
value between public and private. And so my conversation, let's say XYZ sponsor wants to buy a business, right and let's say it's a public company. The first call, I'll get his front that sponsor and say, hey, Millwood, we like you guys to look at a financing opportunity for
public company we're looking to buy. I'm like great, I say, look, I'll put my compliance on the email and we'll do a conflicts checks on that business because we don't know if we own the stock or there's existing debt outstanding. So it goes through a process where that company is actually vetted from a conflicts perspective. Once it's vetted and that clears the process, then we get initial information on it.
And that information could be a selling memoranda, it could be an initial model, and so then we start the process. And what the sponsor wants to be able to do is from the preliminary information is get a sense for do you want do you like the asset or not? Do you want to finance it, where do you want to finance it at, and what's your leverage and what you're pricing. So there's some high level indication that they get from us to determine if they if we should
move forward with a more robust diligence process. So that's that's how it starts. And then at that point we do a due diligence process on the asset. Right, so we may have we may call third party consultants, we may do some background on it. We have a call with a sponsor, we understand their investment thesis, like why are they making the investment, and then we talk internally and we have an investment committee and we discuss it, and then we'll iterate with the sponsor on diligence questions.
And then at that point it becomes are you in a you out? And so then once the sponsor kind of has a sense for who's in and who's out, now their goal is to get the right terms, and so there's a process around sending us their thoughts on the terms right and our job is to figure out which of those we want to negotiate and which are we fine with.
First of all, this fantastic stuff. I want to talk more about, you know what, or get to what it takes, what it takes to be the first call, because you said that's that's important, and I'm like curious, Like, you know, Tracy and I are competitors, how does one of us
get the first call out? But but even before we get into that question, and it occurs to me that you know, because you work for oak Tree and there are multiple strategies within it, and you work ass with like different people on different committees and different funds, et cetera, is there ever tension that arises between your recognition of the need to make the get that first call versus what people on investment committees see as the fair price right.
Because if the investor is always trying to get every penny fun right, then at some point I'm going to stop calling talk to us about reconciling that. And I also have to imagine, just to sort of add on
a part read to this question. You know, it would be one thing if like it was a small shop and one strategy, but you're looking at this holistically correct, Where's the investor who's running a specific line there, cares about their returns and doesn't care so much about the returns of the other fund or just the general So talk to us about reconciling some of these tensions.
Right. So the biggest tension is, like I said earlier, we don't necessarily agree on price, structure, leverage. Right. But what we're doing is I'm talking to that sponsor or that client or that company all the time. Hey, how's your family? I know where they get is go to school. I may do zooms with their kids.
Hey, Milwolle really is a part of my big.
He say, no, I want to I want to go to Ocean Prime. I know you know the manager. I'm bringing a family. So yeah, so we are full service here. And again, like I said, the relationship is getting the first call and the last call. And by the way, out of twenty deals, I only care about the last two. So how do I pass eighteen times so I can see the last two? So it really is a form of art, if you will. And what we're trying to
do is demystify the negotiation and we're institutionalizing relationships. So if XYZ sponsors in LA, they'll call me and say, hey, mil, what who should I talk to the Okay, let me give you a list of folks. Because the more that that private equity firm or that sponsor or whatever client is feels like they understand our firm, the better the relationship.
So we spend time making sure that they know who our CEO Army is or Bob o'lary, that they know the pms at the different strategies, so it's not a scary monster. You know, when I when I joined in originally oak Tree, remember we were more opportunistic and as the market has evolved, and as we have evolved as a firm, we're sort of private credit and opportunists. And by the way, the client will say, no, I don't really care about one side of the house versus the other.
Your oak Tree, right, So we have to sort of in your oak Tree. I'm oak Tree, right, And so I have to go to the market as one as one firm.
Wait, talk to us a little bit more about what negotiations are actually like, because I will say, we just had Suji endap On wrote a great book about the Caesar's Palace LBO. Yeah, you're in that, not you specifically, but oak Tree certainly is. And there's certainly like there are some very dramatic negotiations that take place in sure.
Oh yeah, I mean look, sometimes you just you get up, you throw your pencil in air, and you walk out of room. And sometimes you know, so you know, at the art of negotiation is what I say to what I say to my team is it's not the negotiating point you're discussing at the moment, it's the points that are coming two points later. Right, You're always thinking ahead on the negotiation. You know, we did a deal for a business that wasn't really loved in the leverage finance market.
And I knew that the type of business because I had done an LBO and the market really didn't understand it. But it was a great management team. Sometimes sometimes deals do well because the management team is very good and very articulate. And I knew this deal would struggle at a bank, and so when it was hung, which means the bank had the funded.
They got stuck with it.
They got stuck with it. I called in and I said, hey, sorry, but I'll buy fifty million at ninety okay, right, Oh gosh, what ninety Wow, that's that's a deep discount. Da da da da dah. I said, well, you know, I think as you now realize that business is not it's a little tricky business. And it was a public tool private. So a private equity firm was taking a public company and making it private. And even though it was a climing margin business, there was a view that the public
company expenses were high. So you could sort of map you can map a scenario where over twelve months they were going to cut some of the public company calls and create a more efficient which would create more ebadah yep. Right, So they sold it to us. So now I'm a top five lender right with the right responsor. You had the right relationship right, well, sponsor, which you know they're they're meant to be opportunistic too. Cap structure ibadadh gru
cap structure looked good. So they wanted to do a dividend. Now, again, in a negotiation, if you're doing a dividend, that means you're putting more debt on my capital structure.
Right, that's money that could go to you.
That's money that could go to anybody with them, right. And so you know the job of a sponsor at that moment is to call the top five lenders and say, hey, I'm doing a dividend deal, and they take me from violently upset to miley annoyed. That's the job. So this sponsor did not call it on that dividend deal, and so now I have a I'm in a unique situation.
They went to other lenders and got the fifty one percent to do the deal, and I felt some kind of way about that, some kind of way, and so I proceeded to try to figure out why folks would agree to this dividend deal. And so I called the market and a sponsor sort of said, you know, he calls me and he says, no, what I hear? You're working against me on my dividend deal. I said, well, that's not actually true, because you didn't call me when you launched it. So he said, but I thought we
had a good relationship. I said, we do. I thought so too, but you didn't call me, all right, And so, long story short, the dividend didn't go through, right, and so then we changed the structure of the dividend to allow we shrunk the size of the dividend, We changed the original issue discount, and I told the sponsor, I said, look, unfortunately,
I'm going to sell the position when this closes. And the point of that story is sometimes it's life's too short and not all, not all relationships are meant to go on forever. We still talk, I'm still a good friend, he's still a good friend, but we haven't done a lot together since then, because sometimes you know, in our in our in a negotiation, if you don't see IDI and that deal worked out, what happens if it doesn't
work out? Yeah, right, So sometimes sometimes you're managing relationships to keep, and sometimes you're managing relationships to not do on a business side, but you always want to be friendly in this market because you're usually one person away from somebody that matters in business.
Actually, since we're on this point, that strikes me as very savvy and very wise and like probably a lesson many of us should learn in many realms that sometimes it's okay to uh take the l or let a proposal fall apart because life is long and other things happen at some point. We have listeners who are in college or young and they think about, you know, career trajectories,
et cetera. I'm curious, just from your perspective, this is probably a sort of attitude that you would hope the people who work for you cultivate, internalize, so to speak. How do you recognize who has that? And like, when you think about like people that you want on your team, are you able to sort of like build intuitions about Yeah, the people who can think that way.
Yeah, So good, good question. So I would say, on my team, everyone is uniquely different, and everyone's exceptional at something and very good at everything else. And I think where you make a mistake in building teams, especially in our business, is you try to find someone who can be exceptional at more than one thing. So I'll tell
you a good story. So when I was first starting out, I would fly to Dallas, Texas, and I would meet with folks in Texas, and I thought I was a pretty charming, knowledgeable person on the markets, and everyone in Texas was friendly. But what I figured out was by the time the deals made it to me in New York,
in Texas, that already passed. So it's almost like wrong way risk and so well, because you're in Texas, right, it's a different culture, different in New York and and and in some markets folks want to do business with folks they may see on the weekend or see in the gym or you know, and so it's it's more of a that person sits in New York. They don't really know me, right ye. So but if people in Texas didn't really like the deal, then you call the people in New York. So so I decided that I
needed to put someone in Texas. So how do you hire people? Right? So this is for the year young audience. So I went to a conference and he was kind of managing a room really nicely. So I gave him my business card. I said, hey, we'd love to spend some time with you. So I called him and we set up two days and meetings. Well, he didn't realize
I was actually interviewing him for two days. Because everyone says they have great relationships, right, says, oh, yeah, I've got the best relationship, Da da da da, But how do you actually test that? So I spent two days with this person, and look, you know, high school football matters in Texas. I didn't play high school for I played high school baseball. This person plays high school football. And so you put someone in that territory that understands
the local culture. And what we're trying to do is have a hub and spoke origination model where we where we where. We have a global firm, but we try to talk on a more regional, local level, and that's what I think makes our sourcing origination a little bit different. And again, people matter in this business, and again the
goal is to get the first call. On the last call, that person may spend a lot of time, you know, going to events, spending time with the families, and ultimately, what you want folks to do is to show you deals because they.
Trust you, and it's still a trust your business.
One thing I wanted to ask you, just going back to something you said about the management of a particular company being good in credit. We've spoken about this on the podcast before, but we tend to think about it as avoiding losers, right, whereas equities are more about finding
the winners. So I guess my question is, like, when you're looking at a particular deal, do you feel that you're making a bet on that business or is it just about looking at the numbers and making sure that you know you're not going to yes?
So so interesting enough, what we're trying to do in a diligence process is figure out where there may be holes in that investment. We did one deal with accounter party that we required them to switch to CFO just because the questions it took too long. The answer like if I ask you how many days does it take you to close your books? What percentage of that is manual versus automated? What do your management letters say in
the auditor? You know, those types of questions if you have to think about them, where you say, I'll come back to you as a CFO, that would be concerning. So you know, our job is to protect our investors. Yeah, that's our job, and what we're trying to do is make sure we understand the investment. And no one bats a thousand, right. If you look at the top ten hitters in Major League Baseball, they strike out as much
as they hit. So you know, our job is to avoid losers, like you said, and we have to manage that through a process.
Can you say actually a little more. I thought that was really interesting about some of the questions that you asked and the idea like why can't the CFO just quickly answer how long it takes to you.
Would think that would be an easy Yeah.
I'm always surprised. Also, just generally there's a bit of a tangent that even you know, in twenty twenty four with like all the computer and accounting systems, that like fraud still happens, that there are still way or you know, companies like we have a material weakness and we're gonna have to it. I'm always a little surprised that that curious, like how you like this world of things just being wrong or ambiguous at companies. And I'd love to hear you talk more about that.
When you're when you buy a business as a platform and then you then buy successive businesses, more than likely they didn't have all the same financial stea and the integration process depending on how quickly you want to grow, it drives how long you actually integrate and so time what time. What happens sometimes is you don't fully integrate these businesses and systems. If you go back to failures of businesses in our market SAP, integration is a big
sort of point of contention. And so businesses you focus on risk that you see time and time. So fraud fraud, you know, there was a water business that was you know that was fraud fraudulent that you know, some banks lost a lot of money. You know, if you go back to like Collins and Aikman, which was an LBO long time ago, there was some fraud and you could see what you're doing in a diligence process. You are
looking for sort of what I call inherent weaknesses. And the information you get back and management letters which the auditors produced is a good document that sort of highlights the risk of accounting systems, financial systems, and that's a pretty systems tends to be a big driver of sort of integration issues.
So this isn't necessarily fraud. But you just reminded me of ad backs and deals and you know, adjusted earnings and things that can be inflated to make a transaction look a lot better than it actually is. The last time I remember writing about this was I guess, gosh, five or six years ago, and the feeling back then was that there was more sketchy stuff happening on the valuation side of credit deals. Is that still the case or has that been your observation over the years.
Well, so, the ad backs, it's an assumption and it's an ask to get credit for something that may happen in the future, right, or it's saying something's happened previously that hasn't fully been flown through the financial statements, and we want to get credit or we don't want it to affect our earnings. Every deal has adjustments, okay, so just start with the premise that adjustedy badah will exist. And part of our job is to trust our partners
that they're adjusting the right things. What happens is if you watch the financial statements over time, sometimes the adjustments never go away, right, and then you start to say, okay,
this is recurring, not RecA. Right. We did a deal for a sponsor and we were and it was near your end, and the sponsors going through each line item of what they wanted to add back, and you know what, I said, Wow, we could we could go through this for three days, right, explaining one to add I say, you know what, you can add back five million, call
it whatever you want. Right. So, at the end of the day, what we're trying to do is understand the rationale for the ad back in a market like today, the problem is the rationale isn't fully explained all the time, and the amount of time you want to add it back it's kind of almost infinite. So you start to say okay, and the sponsor's perspective would be I'm paying for that right, because I'm paying off that Adjustinbadasa, you
should leverage against that. The counter would be I'm capped upside right, I'm capped at par And if you go back to seven, A lot of the ad backs in some of the largelbos never truly came to fruition. So if you take cap structures that will leverage seven times. If you're adding back one hundred million a seven hundred million more debt, that if one hundred million ever comes through at some level, you could be over levered. So
that's why you have to look at ad backs. And in the one notion, folks say documents are loose, well, I would argue it's about asset selection, right. A document is not going to help you if you just underwrote the wrong asset. At the same time, a document, if you're doing well and I'm not letting you lend more, what do you think I'm going to do. If you're doing well, I'm probably going to figure out a way to fix the document to allow you to lend more.
So I think part of our you know, business, You're right on app bats, but you know cove like the market is mostly cove light. And even when you think about structures with a covenant, a lot of times if you actually hit that covenant, it's unclear that business right is a is a going concern at that point.
If you need the document to save you, right, then you've got a problem. You've already got a problem.
You're you're you're in.
Well, since we're actually talking about documents, and we have done a recent episode about so called creditor on credit or violence and how that works, et cetera. One thing that came up with that, and I'm also curious about it.
It's like.
Legal expenses and you will detail, like you know, every comma and all that stuff in these documents. I'm just curious, like, over the course of your career, yes, how much have you seen and to the perhaps to the point that it extends exchanges, your expected return on investment, legal costs,
and the sort of rising lawyer fees, et cetera. To check those documents regardless of how many covenants they have in them, and if you've seen an evolution over time since you've just been in the business of how much of a deal resources end up going to the legal sete.
Yeah, how much do the lawyers bill you everywhere?
What have you seen?
So while I while I said I'm going to now counter myself, okay, while I said the document won't save you any deal, it's very important you have a document that sort of expressly documents what what it is, the intentions of the transaction. And it's very it's very good to have governance in a document. Right. So if you just think about public versus private markets, in a public market situation, you're given two to three days to review
a three hundred pay lead to a document. Now, if the deal is going very very well, arguably there isn't a lot of opportunity for you to push back on the document, right, so you kind of take the document as is. In the public market and the issue with that, there's a lot of and you said credit and current balance, but there are a lot of opportunities for you to take assets out of a restricted group, create new ass new co and lending against that and take value away
from existing lenders. I think one thing that Private Credit is very good at, and it's focused on that part of the document. We've been very firm on making sure that the ability to take assets out and create new assets or new financing or new capital. We've limited that quite a bit in private credit. But I will tell you lawyers what argue inflation is real for them too write so you know, and a lot of that deal cost gets kind of you know, born at the beginning.
But yeah, lawyers. But you need lawyers, right, you need them. You know, there's two reasons why deal usually gets hung up. Is usually illegal or tax reason on the m and a side on the financing side. And so lawyers are an important part of our process, and we spend a lot of time making sure we have the right cancel who can understand and be able to move with us if this goes sideways. We want to make sure your
bankruptcy and attorneys are really good. We want to make sure that you are put You know, if you're thinking about biotech or something where IP is important, how do we make sure that IP you can't overlicense it. There's a lot of nuances in the document that we find. Lawyers are very valuable in our process.
So I just have one more question. But you know, you've had such a long history in this market and you've worked on so many interesting transactions. What deal are you most proud of?
So when I was doing LBOs, it's almost like you're watching the company and the sponsor get married and you sit in the middle of that marriage and you're kind of playing consultant. And all of my deals. I still talk to the CEOs of those deals because you get to know these people, your own planes with them for ten days, you know, I know some of the quirks or some CEOs. You know, you just get to know people.
You know, when I was doing the buyout, when Hughes spun out direct TV, ROXE and Austin was a rock star, right, a female CEO running direct TV a very profitable business, and really really get to know interesting people. So I would tell you they're all the deals I'm pretty proud. There's probably one that was a bit of a disaster that that you know. You know, we used to say, if you made one bond payment, tell us.
About the deal that you're at least proud of.
Yeah, so that was probably It's actually just a question, but nobody really wants to ask that.
That deal was hard. That deal was hard. It made one coupon payment and filed it is no okay, I want to protect those involved. Okay, Yeah, but good question. And I think you know so, I've done a lot of deals, and most of them I'm pretty happy about. All right.
I think you mentioned you take all right, you want to be the first call, and to some extent, being the first call is some combination of, you know, the ability to give decent pricing and also just being a likable guy that people want to talk to about their family.
Right.
But I think you said you take twenty calls and you maybe take two. Like what's so?
So what you're saying what I'm saying is out of twenty calls, I get the last two or the most interesting. So how do you actually well, like, engage eighteen times and it goes nowhere?
Yeah, but like is there a minimum, like you have to say yes to You can't say no forever otherwise at some point you'll no longer be the first call. Right If I like, yeah, I might like talking to Tracy a lot. But if she never, like in the end, wants to consummate the deal, eventually she's no longer going to be my first one.
That's how you say no.
Okay, so talk to us about saying no but still maintaining first.
Sometimes we don't say no, We say here's how we can get to a yes. Okay, right, So sometimes you give a path to a yes.
All right.
Sometimes and I'm more like we're in today, you know, I'm not clear, it's not clear that someone takes my no offensively. There's a lot of capital, so it's easier to say no in this market than a market where there's not a lot of capital. And generally we may say no. It may be a concentration issue. Maybe we feel like we have too much of that type of risk on our books. It could be an attachment issue
like leverage or attachment could be a problem. It could be that we had an issue with a similar business and maybe our LPs are fatigued in that in that type of space, and we don't want to, you know, sort of bring it up again. There there hosts of reasons why we may say no. We may not get there fast enough. Right, That happens in this market. But generally, I think we're a pretty quick study. And what we are very good at is we do exactly what we say we're going to do. So if we put something
on paper, we're going to stand by that. And I think that that goes a long ways. And I think if people say, well, why do they call what do they call? Oak Tree? I think we price risk right. So in some markets that's a real big compe at an advantage. And I think we don't. We don't be as people. We say what we can do, We do what we say, and that's it. And so sometimes our answer is yeah, we like it, but we don't love it.
But if the sponsor or somebody's able to say, well, OA Tree's involved, right, that gives credibility to the deal and we can help them get it get it done by saying we're involved, but we may not be the anchor, we may not lead it, you know. And and when you're when you're managing the size capital, we need to write three to five hundred million dollar checks on most situations. So we're always looking at the biggest deals with the largest sponsors. Generally those are safer plays than the lower
lower middle markets. So we think there's less competition when there's only seven seven of us that can write large checks versus in smaller deals, hundreds of folks can write small sex.
I have one more question. Actually I just remembered, but you mentioned earlier that you want to be friendly with everyone, including the banks that you know you're ostensibly incompetition with. One thing that's been happening recently, it seems, is that a lot of deals that were originally done in the private credit market are getting refine out in the public market.
Great.
Yeah, so first of all, why is that happening? And then secondly, like is that a concern for someone like oak Tree?
That is great? Like if we can be on two or three year interim capital in most situations, that's good. The reason why they're going back to the public market is there's a spread between public and private, so there's a cost reduction element, and then for the sponsor there's more flexibility. Private credit is not meant to be the most flexible. It's the most efficient, but it's not necessarily
the most flexible. And if I can create an institutionalize and have a broader investor base, right, sometimes I can get more things done if a lot more people own it at very small sizes versus five or six owning and at chunky sizes. So it's actually you want a healthy market public and private, right. And when most folks say, oh, you're losing deals to publicer I'm like, we probably should have gone to a public market anyway. Right, it's rated,
it's it's an exten existing issuer. It's been into public markets. It's just stay in public markets. You know. If you think about the private credit market, we're one point seven one point eight trillion going to probably three trillion. There's ABF asset based finance, which is a new phenomenon, which isn't really new, right. G Capital was a large ABF under. But there's three trillion dollars of dry powder at private equity firms. There's enough for us all to do and be happy.
All right, Millwood Hobbes, thank you so much for coming on all thoughts. Fantastic good Thank you so much.
I'm so glad we made this.
Happen, Joe. That was so much fun.
That was an unusually fun good episodes, even though all of our guests are the perfect guest. You know, I'm I really like and I think we should do more about talking with the people whose job it is to be nice to people and hanging.
Out with other people.
Yeah, because that's like an element there's a lot. Yeah, we could, we could, but that's like an element in finance that's still you know, Like I said, we talked to a lot of screen people, and I'm as screen people, I'm glad that there are still parts of the industry where there's a big role for likable people who can maintain relationships.
And stuff like that, play golf.
But that's part of being human, right.
Uh don't you have a whole song with the title like all my friends are online or something, all my friends.
Are on my phone? Yeah, like I want to I want to know more people who have friends, who.
Have friends, I RL. Yeah, all right, there's a lot to pull out that. I did think like Millwood's early point about banks being in the business of like pricing end moving risk very quickly was a good one because I think like that's kind of a fundamental difference with private credit.
That was really interesting. I also and it was really interesting hearing him talk about the tensions that emerge because you want to be the first call and you want to have a reputation for at least saying yes ten
percent of the time or something like that. Yeah, with the demands of the actual PM who doesn't care about all the times you have to say no. You know, I think this is probably a sort of asymmetry that comes up in a lot of sales based businesses, right where you have some salesperson and their job is to hit a commission or something like that, and then you have like a product manager who's like, no, you can't price it at this or we can't move the product
this fast. Yeah, this is just sort of like an interesting dynamic that emerges in all businesses. And I really enjoyed hearing him describe how he negotiates that implicitly.
The negotiations, because a lot of these deals involve like so many different entities who are all coming at it from a different angle with a different incentive.
Yeah, so much, so much there, We'll have to talk to Melody.
Yeah we should, all right, shall we leave it there?
Let's leave it there.
This has been another episode of the Odd Loots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our producers Carman Rodriguez at Carman Ermann, dash Ol Bennett at Dashbot and Kilbrooks at Kilbrooks. Thank you to our producer Moses On On more Oddlots content, go to Bloomberg dot com slash odd Lots. We have transcripts, a blog, and a daily newsletter. You can chat about all of these topics twenty four to seven in our discord Discord dot gg slash.
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