Larry Hozenthaler - Private Credit Risks and Opportunities

Ladies and gentlemen, welcome to the business Brew. I am your host Bill Brewster. This episode features Larry Hosenthaler of first Eagle discussion on private credit here. And I found it to be quite good and candid and I was unsure of how it would go coming into it. I have sort of a natural aversion to things that have like private in the in front of them. However, I found Larry to be measured, honest, and I'm quite happy to be featuring him. So this episode was recorded on

February 3rd. We'll try to get it out quickly. Got some compliance stuff to work through, but hope you enjoy the episode. And none of this is investing advice. All of the information in this program is for informational and entertainment purposes only. Please consult your financial advisor before making investment decisions and do your own research.

All right, ladies and gentlemen, excited to be joined by Larry Hosenthaler today. Larry, you want to introduce yourself and tell the people what you do. Yeah. So I am a portfolio manager for what we refer to as FEAC First Eagle Alternative Credit, quite a mouthful, but we are basically a corporate lending team that sits within First Eagle, which is kind of our parent company. And 1st Eagle flies a little below the radar, pun intended. But we have about 100 and 150 billion of assets under

management. And actually the organization, if you go back to the roots of First Eagle has existed since the 1860s. But really from AUS soil perspective, we started to build out a mutual fund business in the late 1960s, early 1970s. So a bit of a pioneer within the world, actually a value investing, which I know is something you talk a lot about on your show. And so we specifically had this kind of niche that we kind of

focus on, which is corporate credit basically below investment grade. Corporate lending is what we do. So my team runs about 20 billion of assets. We have about 55 people on our investment team. So we kind of live and breathe the world of private credit every day. What was the transition from sort of, I guess, traditional equity value investing to credit? So it's interesting as a firm, First Eagle has obviously felt that the change is coming from

the world of passive ETFs. In fact, First Eagle recently is kind of reacting to that by launching their own kind of ETF products for their equity team and really just trying to bring some of the principles of value investment to different asset classes. So like as an example, what we do, we're kind of like the mortgage on the House, we're the first lien senior secured loan within the capital structure.

So there's a lot of emphasis on downside protection, being conservative, staying out of trouble. So you know, those are all themes that obviously from kind of a value equity tilt are kind of common, common factors. And so the thinking was let's kind of take the brand of first Eagle, which is a conservative kind of organization and and try to get into newer areas that obviously are higher growth than managing large cap value equities at least the last few

years. So in the last several years or so, First Eagle has acquired a few businesses that have this kind of specialization. So my team was came over to 1st Eagle about five years ago. We were formerly part of THL Thomas H Lee, the private equity firm. We were kind of their credit arm and and joined First Eagle about five years ago. Napier Park, which focuses on more like CL, OS and, and, and, and different types of credit

strategies about a year after. And then most recently actually first Eagle acquired a team that I've actually worked with in my prior organization, John Miller, who runs a high yield municipal debt team. So just trying to come up with the different, different ways we can add value within some of these not necessarily niche year, but kind of smaller asset classes and obviously the equity world.

Yeah, I have. I have noticed a, a general increase in the amount of pitches for the merit of of private credit specifically in people's portfolios. And I can't help but like I've I've got that value investor in me too. So I, I feel like whenever a product gets pushed through a distribution channel, I get a little bit wary of it. It is my spider sense correct? Or am I sort of? Do I have a bias there that I should maybe think about differently?

So there's definitely a lot of marketing involved in in kind of the optics of the asset class. So if you take a step back, lending to companies is it is really not very new. But on the flip side, it hasn't been going on for 50 years.

If you think about it, the, the genesis of kind of what we do today, I would say started to take formation in, in the kind of mid to late 1980s when you had Drexel Burnham, Michael Milken. Junk bonds became kind of an asset class that people would kind of willingly allocate to, you know, before that, these were the, the bonds that went bad, but you wouldn't voluntarily invest your money

in, in junk bonds. In fact, even today, we refer to it as below investment grade, meaning it's like it's not worthy of investment, but obviously credit and below investment grade credit is, is an asset Class A lot of people allocate money to willingly today. And so I think about the, the loan market, which more specifically a lot of the facilities people are using in private credit tend to be loans versus bonds. There's less registration process needed, lower barriers

to entry. You don't need to get them rated. There's no Q sips. So they kind of lend themselves to smaller companies. And I would say in the kind of kind of early 90s to mid 90's, the loan market was kind of maybe 5 to 10 years behind the high yield bond market. So if you look at the loan index, it's now the UBS index, used to be the Credit Suisse index. It only goes back to 1992. The high yield bond indices go back to 1986 for the most part. So it's 686 to 8 years behind high yield.

And initially the loan market was kind of focused on smaller issuers. Bigger issuers would go to the high yield bond market. But over time the loan market grew and so companies started to use both loans and high yield bonds to a lot of this stuff gets created to, to finance leveraged buyout activity. So you look at like the RJR Nabisco deals and some of the, the big deals that started to get done out of the LBO market, They would started to finance

both with bonds and loans. And as the market grew, you started to see a secondary trading market develop just like high yield. I could call Citibank or JP Morgan or Goldman Sachs and I could trade these loans in the secondary market. And when that happened, it really opened up a lot of a lot of doors.

Now you could have loan mutual funds, ETFs came along and the primary buyer are CL OS, which are these structured products that think of it as like a a big pool of assets that go to back a bunch of tranches of bonds and that pool of assets is a is a big pool of loans. So then you started to see the development of the CLO market in kind of O four O 5. And then all the sudden, the loan market became really liquid and it moved up and down a lot. And initially that was a good

thing. Now I have some liquidity, some transparency. You have banks trading this stuff. The market's grown a lot. But then I would say what happened is in in the global financial crisis, the loan market saw a ton of volatility. You had all this for selling in, in this kind of illiquid market. So Long story short, loans sold off like 30% during the global financial crisis. Then they snap back very quickly because all this stuff is senior secured.

Yeah, I was going to say, what were the recovery rates on I, I would imagine fairly good. Yeah, I mean recovery rates even

they've trended lower still probably $0.50 on the dollar and that's for a defaulted loan. Global financial crisis, the average price of loans was 60. So I mean, literally, if every loan in the market defaulted, the market was still arguably cheap, just the kind of backing out the implied default rate. And, and so then I would say what really happened, what, what really catalyzed this recent push was, was COVID.

So during COVID, your average syndicated loan fund was down about 20% in a really short period of time. We're talking the last two weeks of February, 1st few weeks of March, and you started to have these new private credit funds that were out there, whether they were BDCS or interval funds. And those funds, the one difference between these private loans that these funds are making and the syndicated loan is there's no secondary trading market. So you make a loan to a company.

And we could talk a lot about some of the important benefits of direct lending from an investment perspective. But from a marketing perspective, one of the phenomenon was that these things just didn't move. COVID only lasted six weeks. So your average syndicated loan fund was down 20%. The average direct lending fund was down about four, yeah, and then ended the year higher. So people, the marketing guys looked at that and they went, oh, this is great, yeah. And the.

And the people at pensions that allocate looked at it and they said, hey, my volatility is lower too. Yeah, and there's. Nice incentive dance. There's a lot of good reasons that you don't want to have these loans just exposed to the whim of the market and the big mutual funds are selling it. So now I need to mark so a lot of pensions understand the optics of what's going on between the mark to market or lack thereof and the actual

risk. But quite frankly, I think in the retail market, you mentioned distribution are are fear and suspicion. What's happening is people look at a NAV, it looks a lot like a money market fund with an 8 to 10% yield and they go, oh, this is great. Why would I ever buy the syndicated loan fund that does this if I can buy the fund that does this?

But underneath, they're just three to four to five times leverage corporate loans that look a lot more similar than different from an investment perspective, from an underwriting perspective. But the optics of one asset that marks the market every day and one that doesn't is enticing.

So I think that's a lot of the reason you're seeing a lot of focus on private credit is the optics of that stability, which again, if there's good reasons for it, but there's also some risk that if you don't manage expectations, people don't quite exactly know what they're buying. They're just looking at the NAV and going, oh, this is great. It has less valve than the AG quite frankly. Yeah. What are some of the good

reasons that you're citing? So if you looked at fundamentally what, what started to to drive some, some focus towards what we call middle market lending. Everyone has their own definition in middle market, but these are like sub billion dollar enterprise value type businesses, which is it's a it's a wide range. And so the first thing I would say that kind of drew focus to the middle market was there just more issuers out there.

But if there's almost so many like for us the average EBITDA of the companies that we tend to write direct lending loans to is around 25,000,000. So think about we're doing 5075 million, $1,000,000 loans. And so there's obviously more businesses doing 25,000,000 of EBITDA than doing 400 million of EBITDA to the point where you could probably make the argument it it might even be 100 acts. There's about 1500 issuers in the syndicated loan market. You look at the index.

So it's a pretty finite group of issuers versus there might be 150,000 issuers in the US that fit that definition.

You're doing less than 50 million of EBITDA, but you're big enough that a private equity firm might take you out. And so you just have more more issuers to engage in transactions with? I was going to ask what percentage is sponsor owned? So for us, everything we do is sponsor back. We could talk a little bit about kind of everything we do goes back to mid trying to control risk and for us everything we do is spot.

The only exception is if, if there's a public company in the syndicated market, you might find companies that actually are New York Stock Exchange listed. There's very few of them today. But at different points in time, there's been 25% of the loan market have in particular, I'd say telecom names, guys that have a lot of hard assets might have some loans. The airlines, all the big airlines have had loans at different points in time. And so, but the vast majority

is, is private equity owned. And then in the, in the direct lending market, you could, you could do a transaction with, let's say, a business that's been family run for generations. And the problem you have is I don't know exactly what the value of the business is. I'm I'm kind of beholden to the family to try to help me frame out what that value is. And I just don't know exactly what my subordination is. I don't know how much equity is in the business to absorb

losses. And the really nice thing about a sponsor transaction is the PE sponsor comes in, they say we're we're buying the company for $75 million. And typically what happens is they look to finance half in with guys like us and half in equity. So the loan was, we would say the loan to value day one is around 50%. So the private equity firm can

be wrong. They can overpay, but at least I know I had a professional investor come in, spend months underwriting the company, they paid for the company and they absorb all the losses before we have a it's just like the mortgage on house. The equity goes to 0 before the lenders are are impaired typically. So, you know, we try to stick to sponsor back everything within the direct lending market and even in the the syndicated market, pretty much everything we do there, there's APE sponsor

sitting beneath you. So we've seen some horror stories in the past few months even of a big manager like us that lent money to a family business. And then you find out they use money to buy a yacht or invest in the Prosecco vineyard. And those things are can always happen, but they're less likely to happen when you have a private equity sponsor with significant equity sitting beneath you in the capital structure.

That's interesting. How do you think about the risk of like the, I guess the incentives of private equity are to keep doing deals, right? So as valuations continue to go up, it's like how do you think about just sort of managing the cycle and where we are in the cycle and where you're lending? Yeah, I think spreads have clearly tightened in as you've had a lot of capital chasing a, a finite, a finite number of of

transactions. I, I think within our market, the, the kind of what I'll call the lower middle market, but smaller, smaller deals that if I could generalize tend to not just be pure GDP plays, but tend to have something kind of thematically that the private equity sponsor is looking to

exploit. Could be something as simple as like taking a fragmented business and trying to scale it up. Could be we've done deals for like think about landscaping businesses, a commercial landscapers or registered investment advisors, financial advisors, HVAC servicing, orthodontic clinics, things of that nature that you're, you're trying to create some scale basically versus just kind of a more wide Moat GDP play you tend to find within the bigger, the bigger cap structures.

So it's all about trying to find private equity sponsors who have sourced the right deals. And even even with that, I would say that deal making has been constrained just because borrowing costs have obviously been elevated and the fact that they're coming down even marginally makes the math work a lot better if you can find the right transaction. But having said that, we again, one of the reasons we tend to like the lower middle market is it gives us a lot more looks and

more transactions. So I mean, we probably, and we end up passing on nine of the 10 deals that we bring to investment committee. And even within that, most deals that we get phone calls over don't make it to investment committee. So if you think about kind of the filter or the funnel, you, you end up having to pass on a lot of deals. And it might not be that you don't like the private equity sponsor.

In fact, you want to encourage these guys that, look, I'm sorry, we passed on 9 deals in a row. We like you guys and we like generally your view on things. Please come, come back to us because what you don't want to have happen is you don't want to have to sacrifice protections.

We're talking about a lot of the things that brought money to private credit to begin with is that typically we're the only lender to the company or there might be one other junior lender with us. So it's not us and 30 other people. So what that does is it allows you to really effectively write the credit agreement to, to customize the deal documentation based on where you see risk and making sure that you get made whole.

So one of the ways people bend if they don't see the right deals is they'll bend on making deal documentation more borrower friendly and less lender friendly. So it's kind of a multi variable equation. You have to look not just at the transaction itself, but what's the pricing, IE the spread. And then what does the credit

agreement look like? Because we're definitely seeing as you've had this much money chasing deals in private credit, not surprisingly, a lot of this stuff starts to get watered down a bit. The really fat pitch pricing looks all of a sudden not so fat. And the really strong covenants you had two years ago, all of a sudden maybe you don't have in, in parts of the market more

leverage. So we feel like we're we operating like I'll call the old school kind of traditional direct lending market, the lower middle market, everything still has covenants spreads on a relative basis.

So we think we can be a little bit choosier. But having said that, I don't think any manager out there is super happy with the amount of deal flow and the terms. I think you just you have to be much more selected now, just given kind of where the pendulum has swung. Why has the growth in private credit, why are banks not taking up some of this slack? I mean, I like I worked at BMO and they've got a sponsor group, right?

I don't know that they're covering Blackstone, but I would imagine that that banks are getting looks at similar type deals. Why is there an opportunity for private credit to take this kind of share? I think there's two things going on. I think that part of the tagline for private credit in terms of why does this fat pitch exists, a lot of that has been that it's a function of the banks aren't lending anymore, which which is partly, partly true, I would say.

So on the one hand, I would say for what we do, it hasn't hurt the fact that the banks are just not playing in this market, whether it's even providing like delayed draw facilities or revolving credit facilities are kind of like safer aspects of corporate lending versus a term loan where everything's funded day one and it's likely used to fund a leveraged buyout. The banks are not typically lending money for leveraged buyouts to software companies like like we might be doing.

So it's not necessarily the entirely that the banks aren't lending any more. And so now this business is ending up in our hands. Now the private credit umbrella is a big and growing umbrella and includes a lot of different things. And I would say that the private credit managers. Are starting to take business that usually historically had been done by the banks.

Like one of the examples I use is a lot of the the funds that you know, that we manage or if you look at like the interval fund peer group or business development companies, the banks used to provide leverage for as an example, like mutual funds or

closed end funds. And it was pretty good business in the sense that let's say you have a billion dollar mutual fund that has a billion dollars of assets in it, a billion dollars of loans or a billion dollars of bonds and they're looking to get a $200 million leverage facility. So if you look at that from a lending perspective, you say this is a $200 million leverage facility backed by a billion

dollars of assets. So like at the end of the day, even though they're below investment grade, to your point about the recovery values, what are the odds I don't get my money back? It's it's low. So it's it's kind of investment grade rated type business and the banks have largely shunned that business. So you used to get that loan from Bank of America and now increasingly you might be getting that loan from one of our competitors who it's not 300 basis points spread, but it's

100 plus and it's pretty good. It's pretty good, kind of at credit risk. Why is that? Is it? Is it just a function of regulations and how much capital they have to hold? Yeah, a lot of it is regulation. It's just too onerous now and there's there's more profitable businesses that they can use their balance sheet for. So underwriting and other things. It's just there's much more

spread involved. You think about the fees attached to doing a leverage facility on a boring mutual fund or closed end fund it it's not great. It's nowhere near the types of spread you're going to get on underwriting a new below investment grade loan or high yield bond or a new IPO transaction. So the banks just need to be choosier with what they're

doing. And so we're seeing that also in like consumer loans now guys are starting to in the private credit world do things like RV's and auto loans and other types of kind of ABS transactions that again I I would say is in fairness kind of a function of the banks just kind of turning that business away. So a pretty good private credit manager can come in, do a modicum of underwriting and go, this is a pretty good. Loan like a warehouse facility or like direct to private borrowers?

No direct to private borrowers. In a lot of cases these loans are. I'll tell you, we're sharing some personal stories before I, I bought my house 4 years ago and when I look to it was a non conventional mortgage I was looking at. And when I initially went to my mortgage broker who I ended up with is a fund who we compete with everyday interest. They're a very well known distressed manager out of Los Angeles.

I won't give them free publicity, but you know, and honestly, I went to Wells Fargo and they didn't want my business. And I've been banking with Wells Fargo since I got out of college.

And so I was literally working directly with their mortgage underwriting team that was part of this very well known credit manager out of Los Angeles. So again, when I looked at, I'm probably a little bit biased, but when I looked at the spread and the risk of my mortgage, I went, I've never missed a bill in my life and I'm not getting a really big loan versus what my house is worth. So when I looked at my mortgage, I thought this is a pretty good, pretty good asset for obviously

rates went up a lot. But from a from a spread perspective, that day I was surprised that the folks at Wells Fargo didn't want my business, but some quasi institutional manager was happy to make me a loan. Yeah, maybe Wells Fargo's going too far into not wanting too many ancillary products in every relationship. You would think a mortgage would be right down the right down their alley. Yeah, it's really interesting.

So if you go then into the corporate world, which it's a, it's a much broader spectrum of issuers, in a lot of cases, they just don't have the underwriting wherewithal to get involved, especially as you have, as I mentioned, software, technology, just more complex businesses. The, the banks are going to, are going to look, look away from that business and maybe try to get a finder's fee by lining those people up with someone like us. They're, they're not going to

underwrite that loan. So yeah, it does create a little bit of extra deal flow to look at that is, you know, not ending up in the bank's hands. I mean, I, I guess it, I guess the reason would be like the probability to fault given an LBO they probably think is higher and then the LGD is probably higher too. So then they just have to have so much capital. It's just weird to me like who does the cash management on these facilities and stuff? Obviously not like not you guys, right?

I I don't, I don't think. So that's where you know, the, the systems that are involved in managing loan portfolios are, are, are fairly high barriers to entry. Anyone can come in and buy a bond with AQ sip in your personal account. And it's, it's relatively doable, But you know, loans are very non standardized. They have amortization payments, free cash flow sweeps, a lot of different things that need to be accounted for.

And so the the kind of cash management you obviously I mentioned have revolving credit facilities, delayed draw term loans. All of these loans are also going to have especially within our world leverage based step up and step down in the coupon. So let's say my leverage is three times, my coupon might be so for plus 450. But if the leverage goes above 3 times, it might be so for so that you. Need you got like a pricing

grid? Yeah, You need a lot of systems to account for what those interest payments need to look like, cash management system. So we have a big back office team that supports our investment team to to kind of reconcile buys and sells with obviously we trade these loans too to add another layer of complexity to it. So. The servicing side, for lack of a better term, right? Yeah, exactly. So there there's a, there's a lot of the loan market is still

somewhat arcane. And so there's a lot of, a lot of that that needs to be kind of managed underneath the hood within these facilities. But like at the portfolio company, right, they have deposit accounts and they've got corporate credit cards and whatnot. Like when I was at BMO Harris for a while and that was a not the corporate credit cards, but the cash management was a big part of, I mean, that's pretty good business from a return on capital perspective. So y'all aren't that interested

in that, right? I mean, you're more of like the loan economics. Yeah, although that's where the sponsor relationship comes into play. You'd be sometimes surprised that some of these fairly large family run businesses, if you look under the hood at their their cash reconciliation process, it's not up to snuff.

And so typically the private equity firms are going to target businesses that obviously have their ducks in a row or, or work with them to try to make sure that they're doing things to mitigate those type of losses that can, that can kind of to your point, the devil's in the details.

You can have a fantastic business, but if your, if your record keeping and cash management is sloppy and you're running two to three times leverage, all of a sudden the private equity sponsor can be in a precarious situation. So you want to make sure that the stupid mistakes are are mitigated as much as possible. Yeah.

I guess what I'm asking just from the banking side, like do you have a, do you have a relationship with like JP Morgan that they are doing the cash management and then sending you the the reconciliation because the cash management, the actual treasury management stuff doesn't go through first Eagle, right? Yeah. So we typically have fund administrators who who deal with all of that for us. So JP Morgan is actually fairly heavily involved in in the fund administration business.

So they're typically the ones especially like with our public funds that they're going to custody all the assets, they're going to price those assets daily. They're going to go through basically like an appraisal process to make sure that the assets are marked at a fair price. If there's been any new news that we're using that information to to kind of reprice those loans. So all that happens typically within the administrator of the fund.

Yeah. It's not something you think about every day, but there's a lot of administrative work and obviously our funds have have inflows and outflows if they're getting in some cases daily or quarterly inflows. And then there's also a redemption process. So the the fund administrator typically deals with NAV calculations and things of that nature. I mean, is it a conversation with the Trump administration's, I would say advertised stance on regulation?

Do you anticipate more banks entering the market as banking regulation may decline or is that not really on their radar of like what they're actually thinking about from a deregulation standpoint or TBD? Yeah, I think it's very much TBD. I, I think even if you're a banking analyst, which I, I certainly have not, I think there's still a lot of of variables.

And I think for us specifically the types of deals that we work on, I, I don't necessarily see that, that changing very much within these higher quality investment grade type type parts of their business. I, I suppose, you know, at the margin, certainly a little bit less regulation obviously what's happened with interest rates on the margin.

I would imagine that some of that businesses, some of that business does come back to the banks, but it, I would say it's a fraction of the overall market in terms of what guys are focused on today. I think longer term the big opportunity for private credit is investment grade, higher quality. It's just a much larger opportunity set. But the reality is the spread attached to a lot of those assets. I, I'm not quite sure how scalable that's going to be.

That's a private credit manager who wants to earn their fees can deliver a, a 4% return to to investors. I'm not sure that that's necessarily going to be something that is going to attract the type of capital that's certainly the eight 910% yields have the last few years or so. Yeah. Well, what the If the average fee rate is 2%, you're making four. You're giving a lot to fees, right? Yeah, no, absolutely.

And the types of transactions that these guys are working on too, we always say underwriting $100 million enterprise value business and a billion dollar business is not necessarily 10 times the amount of work. And yet I'm charging fees based on the size of the loans I underwrite. And so we've seen loans just in the last couple weeks that are $5 billion loans. So you do the math.

If I'm getting one, one and a half, 2% on a $5 billion loan for three or five years, there's, there's a reason some of these guys are buying NHL hockey teams, right? It's a very lucrative business. And so to the early point, I think there's always going to be concern around are people more focused on the end result for clients or are they, are they

really trying to put this money to work? And and so no doubt the the amount of fees attached to private credit looks like hedge fund light type fees versus the fees you would typically find attached to a syndicated loan fund or a CLO. So what fees are those? Pardon the ignorance. So there's different frameworks,

I would say. So if you're talking about the institutional world, what people typically refer to as like a closed end fund or like a drawdown fund, those funds typically charge anywhere from, I'd call it 1% on equity, so kind of invested capital. And then they'll typically use leverage. So they might use anywhere from one or two turns of leverage. So instead of having, so for every dollar of invested capital, I might have $3 of

investments post, post leverage. Now they don't charge on the leverage, they just charge on the equity. But then they charge a performance fee, which you know, I would say average is probably 1212 1/2 percent above a hurdle rate, which the hurdle rate is usually around 5 or 6%. So in a, if I assume kind of a eight to 10% type IRR, the the

fees can be pretty attractive. And then the other construct that you tend to find are interval funds are another popular vehicle for for private credit. Now what interval funds tend to do is they tend to charge fees on what we call managed assets, which is it basically includes the leverage, but they use a lot less leverage. So, you know, let's say I have $100 million fund, it uses $20 million of leverage next to it. I'll get paid on the 20 million.

So I get paid on what's in the administrator's account, which is 120 million. It's the equity plus the now, but I don't get performance fees. So what both of those are kind of designed to do is to basically incentivize the manager to produce returns. One does it be an incentive fee and one does it. In other words, one does it by trying not to disincentivize the

manager to use leverage. The manager obviously has to do more work to put leverage on. So what you're trying to do is you're obviously trying to incentivize the manager to to not be shy to use leverage because they get paid on on those leveraged assets, if that makes sense.

Yeah, it does. So for every invested dollar, you're probably looking at fees anywhere from 1 1/2 to 2% I would say, depending on the private kind of BDC structure as well tends to be a little bit higher fee than you find typically within the interval funds. In an interesting way, like as the like SOFR goes higher, your percentage of fees should go down, right? Because a lot of this is is floating rate.

Yeah. So that's been one of the fair criticisms around the, the hurdle rates typically don't change. So everyone comes out, they have a 5% hurdle rate and that's in the document. It's kind of onerous and fairness to change that number around. And you some of the pushback I get is if the risk free rate is 525 and you guys are getting paid on everything over 5, that's am I making things a

little bit too easy on you? But then on the flip side, as so far as trended back below 5, now all of a sudden it's a little bit harder to hit those hurdles. And I think over time, we're lucky we don't, we don't have to forecast interest rates, but our view would be that the economy is doing pretty well. We have a hard time getting to a thesis that the Fed is going to have to lower by three or four more times this year just based

on kind of what we see today. So our kind of view has been that rates are obviously have come down a little bit, but they're they're not likely to go back to 2%, which obviously would make that 5% hurdle rate a little bit trickier to hit, even if I assume a 4% spread. Yeah. Well, in thoughts bound to be wrong. I have this this recurring thought that with savings rates where they are as as interest rates are higher, I actually

think it's kind of stimulative. At the same time, I think it decreases the amount of investment. So I think it's kind of inflationary. And then if the Fed hikes and I'm close to right, it's almost like a self fulfilling prophecy that rates go higher and higher. I, I actually think lower rates are, are better for inflation, But we will see if that's crazy talk or not. Time will tell. It's certainly not conventional through how they look at things. No, no, I would say overall, you

know, I'm a credit guy. We are credit guys. And so we tend to be kind of glass half empty kind of cynical by nature. Because if you think about it in our world, it's all about staying out of trouble. It's not about finding the next Elon Musk. It's really about avoiding losers. It's kind of how you outperforming in credit.

So I think anyone certainly on our team, if you had asked us a few years ago, hey, the Fed's going to raise rates to 5 1/2 percent, what's going to happen to the economy? We would have been dead wrong and said, oh, boy, that's really going to. That's really certainly within the companies that we are involved in who were by nature floating rate issuers. Yeah, the economy's held up really well. Operating results whether I'm talking margins, top line are certainly a lot better than I

think we all would have assumed just given how how quickly the Fed jacked up rates. Yeah, Yeah. I think the last four years have kept everybody humble at least should have. Who knows. So you had mentioned interval funds. For those that don't know, do you mind talking about the difference between an interval fund and sort of a standard product, for lack of a better term? Yeah. So the way I would describe an interval fund is if it's almost like a mutual fund, it has a

daily NAV, it'll have a ticker symbol with share classes that kind of look and feel very similar to a mutual fund. But the redemption process basically consists of you typically get quarterly redemption windows that are about a month. And so that the sponsor like us will go out to investors and just say, hey, here's a reminder, your redemption window starts April 15th and, and ends May 15th. And so you, you basically call your financial advisor and, and they put in a redemption notice.

And the interval fund is designed to redeem up to 5% of the NAV of the fund every quarter. And without getting into too much weeds, I think it's important to mention that most interval funds have the ability with a very quick approval from the board to go an extra 2% higher, meaning you can, you can redeem up to 7% of the net asset value. So what that does on the one hand is it allows the fund to control the flow of assets, you know, much better than a mutual fund.

You know, in theory you could pull as much money as you want out on a nightly basis. So they can be very painful for even like liquid, quote UN quote liquid loan funds, syndicated loan funds, they can get hammered without flows and there's no imminent buyer. And it could be very tough for short periods of time, especially like a COVID or a 2022. So at the interval fund is designed to protect that and then it also obviously gives the fund the ability to own illiquid assets.

So you can own assets that you're not going to have to sell because you can control them by having kind of packaging them next to liquid assets. So what a lot of managers do is they have, you know, and you typically you can look on the fun fact sheet and kind of see, OK, these are the private assets, these are kind of the illiquid assets. And then they have other things sitting beside those liquid assets typically is part of the investment strategy, but often

times it's to provide liquidity. If we have outflows, these are things we can sell to JP Morgan to fund those those redemptions. Now what I will say is if you think about it, you're maxed at the five and seven. So in theory, if if everyone tries to sell at the same time, the fund is going to get more than 5 or 7% redemption requests. So then everyone gets kind of prorated. So if you get 10% request, everyone gets kind of half of

what they asked for. And so it's really interesting if you go back a few years ago, interval funds, financial advisors did not like interval funds. They just like the idea of getting their money out on a daily basis. But over the last few years, the ability to package less liquid assets that again, we could talk

about the fundamentals, the kind of advantages of some of those illiquid assets. But I think the reason you have a lot of retail advisors allocating to those funds that have illiquid sleeves is. It smooths out the Nava lot, which yeah, it's a good thing, but it's also you need to manage expectations and the other structure that people typically use for private credit, which is arguably just as popular as a as a business development company or a BDC.

So BDC's there are several different kind of forms of a BDC. The most I would say the fun that's been around the longest or exchange traded BDC's. So there's, there are BDC's that are literally New York Stock Exchange listed. So it's almost like a closed end fund. You can buy the share price and then it has this, this, this portfolio. More recently, the real growth in BDC's has come from unlisted

BDC's. So it's a 40 act fund, It's structured just like ABDC, but it's not listed on an exchange. So the redemption process for BDC and unlisted BDC is a lot like the interval fund. You do it basically with the BDC sponsor and it's similar in the sense that it's typically 5% per quarter. But the, the BDC is a little bit different in the sense that if the, if the board of directors believes that it's not in the bench best interest of shareholders, they can suspend the redemption on ABDC.

So you have like a 2022 or a COVID and some of the REITs, REITs are kind of a similar structure to ABDC. A REIT can kind of shut off the redemption process if they think that there's been a dislocation in the market. Yeah, Blackstone, right? Yeah, whatever, Barry sternly wrote. I'm. Pretty sure he gated it. What I always say is like, did you read the document? Because if you read the document, you would know like this can happen in an interval fund. There's really no like we're not

going to do it this quarter. The interval fund kind of has to redeem up to 5% per quarter even if it's not the right time. So there's, it's a bit of a nuance, but I think it's important for people to understand that with these BDCS, you do have a little bit less liquidity than you might with an interval fund. So you really have to take kind of like AI don't know what the right number is, but a little

bit of a long term view. I don't know if it's two years, three years, but you definitely don't want to use those structures if it's money that you think you might need. It's really longer term capital that you say, do I really need that money daily? That is starting to kind of gravitate towards some of those some of those semi liquid

structures. Yeah, the interval fund is almost it's like a way to get a liquid E liquid exposure without the lock up of like a 10 year fund or something basically and you can put your money to work right away, right? Yeah, it. Waiting on called capital. No, it takes daily, daily inflows, which again is part of the reason that you want to have some liquid assets in there is I don't want to have to originate a loan to put that money to work

every week or two. So you, you could say, look, let's just go buy a little bit of XYZ big public liquid loan only for a few months. And then when we see the right transactions in the direct lending origination pipeline, we can sell those loans and, and, and kind of allocate. So it helps you manage your flows a little bit better by having some liquid assets. The BDC does it much more on a, a monthly, quarterly basis. So they're not taking in money

every night. So they tend to have more of a focus on just those private assets versus the interval funds. If done correctly, you should always have some liquid assets that you're using there to manage your inflows and obviously your outflows. Yeah, that makes sense. You'd mentioned as as a credit person you're you're naturally averse to losses, which makes

sense. So like if I were to look through your portfolio, are there themes or what are you thinking about to avoid the loss in in what you're lending to? So I mentioned earlier that everything we do is sponsor back. That's that's one of the things that's pretty objective kind of black and white.

The other thing I would say that's pretty objective is the vast majority of all the loans we do are first lien senior secured term loans, which is kind of the the old facility that's been used since the dawn of time in the loan market. More recently, we're seeing a lot of these direct lenders using what are called Unitronch loans where it's the same credit agreement, but kind of built into that that loan. I have some people that are first lien, others that might be

what we call. It's kind of AI always laugh when I say this. First lien last out. Which means you're not first lien, you're technically first lien. Closer to mez, right? Yeah, but someone gets their money back first, and so that's meaningful in terms of the risk you're taking when someone gets

their money out first. What is that that matters for like for, for the security, right? If your first lien last out, then somebody can't come and prime you or something. Exactly, Yeah, Yeah. So again, you're up there in the in the priority of payments, but you're not first. And then the other thing I would say, getting into kind of more subjective things, we tend to really like businesses that have a lot of recurring revenue. So that could be everything from, like I mentioned, Ras.

If you're a registered investment advisor, you have a bunch of clients, you charge a fee on assets. If you don't, if you do a good job by them, I can kind of model out what your revenue is going to be year over year. Other things I mentioned also like HVAC servicing, orthodontic

clinics, tax and audit firms that regardless of what happens, your clients need to get tax and audit work done, just the higher percentage of recurring revenue. Every business has some cyclicality, but if I can try to remove that as much as possible, let's try to do that less leverage. We're we're seeing a lot of direct lending managers now refinancing these broadly syndicated loans. These loans are kind of existing mutual funds today and they're

kind of taking them private. And a lot of these, these, these loans are getting refinanced into the private markets, these larger deals because they have a lot of leverage and they can't get done in the syndicated market. So these might have 467 times leverage and leverage is typically how much debt do you have versus how much, how much EBITDA do you throw off to, to service that debt.

So I would say our direct lending business tends to focus on deals that are more like 2 to three times leverage. So they're smaller companies. So I'm taking risks. On a debt to EBITDA basis, yes, And your EBITDA, the cash conversion is probably quite good given the businesses that

you're talking about. Yeah. So in exchange for dealing with these smaller businesses, you're, you're typically buying day one at a level of cash flow that it is, is very significant relative to the overall amount of debt outstanding. Yeah. And then the other thing I would say too is as the market has grown, you're seeing a lot more what I'll call creativity, which again, it's a good thing and a bad thing.

Creativity is great. But I always say like, I always like to go back to the mortgage on the House analogy. And like if you tried to use that same framework with the bank when you try to get a mortgage, what would the banker on the on the other side of the desk say to you? So one of the structures or features we're seeing in the direct lending market today, it's become a lot more prevalent is what's called a pick or a paid in kind.

So a paid in kind means I'm not paying my interest in cash, I'm paying my interest in more debt. So, so this again, the people are going to tell you the good reason that this is happening is there's a lot of lending right now to very high growth technology businesses and software businesses, AI. And so the thinking is if, if the business is really growing rapidly, you don't want to consume.

Cash and interest expense. Yeah. And so I want to let the business grow into the cap structure, the old school kind of loan guy in me would be saying. Used to say, let's lend to the cap structure as today in the growth can go to equity. Yeah. And so, you know, imagine if you went to the bank and you said, look, I want to put 50% down on my house. I'm buying in a great community in Florida that's growing and everybody likes it. But the only thing is I can't pay my first four mortgage

payments. But then beyond that we're good. I mean the bank, which is they're not going to make you the loan. There's there's nothing you can do to tweak the other variables that the bankers going to make that loan. So we don't that and then that's what we call pick as plan A. So a pick can happen if all of a sudden the business runs into problems. Typically a pick is built in to say, OK, if you can't pay your interest, you know, we will allow you to pay it in kind.

But going into a deal day, one that you know the first year is going to be paid in kind, I don't know, I'm sure some of these transactions are going to work out well. If I'm getting paid to take the risk, it might be a good trade off be kind of guardrails and everything we do has covenants within the direct lending market. So things that we try to do just to control risk day one that other lenders might have a little bit of a different framework than we do. Yeah, that makes sense.

Yeah, I would. I would think a pick is traditionally like more mez right than senior secured first lien type stuff. Yeah, there's definitely a home for it like distressed lending. Some of the smartest guys in our world are distressed debt managers and they take a lot of risks. There's nothing wrong with that. The question is what am I getting paid to take the risk? And so as long as the risk return trade off is fair, then

it can be a great investment. But if I'm all of a sudden being risk into the document and I'm and the spread isn't, isn't moving commensurately with that, but it's a multi variable equation that the manager needs to figure out. And are there things that I just always say no to that even for another 200 basis points of spread? I, I just don't do that. You got to find somebody down the road that does so yeah, within mezzanine and certain other kind of approaches guys are doing this.

But for us, we've tended to to kind of error on the side of caution a bit. Again, I think it goes back to kind of the first Eagle brand too. I mean, that's part of the reason we ended up here is our team has been doing this a really long time. It had guys who I report into and over time they just decided like these are the things that we, you know, kind of bend on the things that we don't. How does deal flow work?

And like why do you win deals? You're competing I assume against Aries and and the other 6th St. or whatever. Like who is it that a sponsor wants to spread sort of the, the debt around so that they can rely on the market to come to them? Or I always get worried that the answer is we're loosest on covenants and and structure, right? Which is not exactly the answer you want out of a debt shop. So curious to hear your.

Answers, yeah. So one thing I will, I will mention is we don't compete with those types of folks. I would say most of the household name private credit managers who people are familiar with the one you just mentioned, I would say going to generally focus on companies that are doing 250 million of EBITDA or generally a lot more. You know these are, so these are, these are much larger

transactions quite frankly. And again, these are the larger managers who tend to have the big distribution teams who might have BDC's and interval funds and they're on the platform at the big wirehouse firms by nature just going to be bigger. They're going to focus on bigger, bigger deals because like I mentioned, our team runs about 20 billion and there's guys who deploy $20 billion in in a couple months. So, so we're a lot smaller than them.

And so I would say that for US, one of the things that's a little bit unique is the sense that because you're right, a lot of private equity firms if we're involved with other lenders in a deal, the, the likelihood is the private equity sponsor wanted that. So they're planning on growing their business over time because that's that's typically the MO in our world, especially in the lower middle market is we're coming to you today, we're looking to acquire an HVAC

servicing business. Once we absorb the business and we are able to kind of prove that we know how to operate the company, we're going to come to you in six or nine months with another HVAC servicing business that we're looking to acquire. And so we're going to try to scale these businesses up over time or an orthodontics firm or a registered investment advisor. And so they want to have access to, to, to different lenders.

But the other thing that that tends to happen is the initial transaction might be quite small, but if the private equity sponsor is successful, they're going to they're going to grow, they're going to grow the business.

And so I think one of the things that we've been able to do to potentially put ourselves on a short list of lenders to get involved in is we don't mind doing smaller transactions upfront if we then can grow into this larger business with the PE sponsor because it's it's really beneficial for for both of us. And it's beneficial for us because there's nothing we love more than an add on where we worked with the PE firm before.

We know how they behave. We might know how they behave when things don't go according to plan and what happens when surprises to the negative kind of happened, how do they react? And there's nothing better than an add on because we've worked on a deal with you, you're basically coming back and trying to replicate a similar transaction with a similar firm that's in a similar industry. So there's a lot less incremental work we have to do. And now I can put another 30,

forty, $50 million to work. So add-ons are really great for us. But again, if you're, you know, especially some of the the names you mentioned, you know, when you call them up and you say, hey, we need a $20 million loan, they're not going to call you back for them to do six weeks worth of work to deploy $20 million. Yeah, they're going to go to the smaller, the smaller lenders like us. But on the flip side, we are big enough that we can hopefully scale.

So we're not just doing $510,000,000 loans. We can kind of grow with the business. And we have a lot of people on our team. We have 50 about 5055 people on our investment team. So that gives us a bit of an edge in that we have kind of industry specialists across these different sectors who can hopefully add value in terms of structuring the loan. They understand the business really well.

So I know it's a little bit cliche to say it's a partnership, but it's a little bit of a partnership. Like we like how these guys behave. They they're good to work with. So I think you tend to find a little bit more of a tighter knit relationship between guys like us, the PE sponsors and the issuers.

Then you might find with even these multi billion dollar deals that have become a little bit more commoditized because I might not shop the deal to you, but I can also call JP Morgan and I can get them to syndicate that risk. So there's a little bit more of an arm's length relationship within those bigger multi billion dollar transactions.

And we've seen this is not prevalent, but we've seen a few deals recently in the direct lending market where the private equity sponsor tried to effectively extract assets from the lenders and put it into kind of like subsidiaries where the lenders now low no longer have liens. So these are like aggressive tactics. You tend to see more in the syndicated market that we're starting to see a little bit now more in the larger direct lending transactions that we really don't see in our market.

We have private equity sponsors we've worked with 456 deals on with. So anyone can do things that are unscrupulous. I've worked on Wall Street long enough to know that this isn't an industry of angels necessarily, but certainly knowing your partner's better helps mitigate you from some of that, some of that risk that might be more more prevalent within some of these, some of these bigger deals. Yeah. Well got to know your restricted assets and what not right?

Yeah, it's definitely an asset class that you really need to read the fine print. There's a lot of language now founding credit agreements that have come from some of those aggressive tactics. So we call them blockers. So it's the the aggressive transaction, ABC transaction, it's now an ABC blocker that mitigates that risk. So the other market's evolving a little bit. But definitely the deal documentation within these loans

can vary a lot. And knowing the details in terms of what you own when things don't go according to plan is again, ultimately how you kind of protect capital within within these loans, whether it's syndicated or a direct lending deal. That has been a consistent, what's the word that I'm looking for? When I talk to people about why there should be outperformance

in credit versus the index. This is a common thing that comes up right, is that the index can get swallowed sort of by some of these poor credit agreements where if you're a prudent manager, you can avoid some of those. And in a game where it's all about avoiding losses, that

should matter over the long term. Yeah, It's interesting. I mentioned earlier that I was, when I started to get into investing in college, I'm like, where do you go? You go to like Warren Buffett and then you kind of branch out from the Buffett books. And so I think a lot of people kind of start there. So you start to think a lot about active management. And obviously with passive management, it's a conversation

everyone has in our business. And I remember I took a class at Columbia Business School with Michael Mobison, who who at the time had worked at leg, was working at Leg Mason, you know, back in the Bill Miller days. And so this is like, this is like where you go to talk about active management, right?

And we're talking to Professor Mobison about his investments and he was talking about how he has a lot of money and passive, passive mutual funds effectively in in ETFs and in the equity world, obviously sitting at First Eagle and our Global value Fund. It's a debate we have every day, but if you think about the what we do in the loan market, it's it's really very different because all these indexes #1 are cap weighted. So you start with the largest

issuers in the market. So if you look at a cap weighted high yield bond index or a cap weighted loan index or, and, and a mutual fund that tracks that cap weighted index, they're naturally going to own the companies that have more debt than everybody else. That's just kind of how you get to be the biggest name in the index. Now, that doesn't mean that you're going to have more

leverage, but it can. There was a company years ago called Texas Competitive Electric Holdings TXU, which was one of the, I think it was technically the largest default in, in history if I take both the loans and the high yield bonds. And when it defaulted, it was not surprisingly the largest name in the high yield index and the largest name in the loan index. So just starting day one and saying, let me just not start

with the index. Let me start with the companies I like, Punk, the companies I don't like and and just kind of start there. What you tend to find is like syndicated loan funds versus the index. They beat the index pretty handily.

They have a huge advantage and the ETFs in our market are somewhat systematic so that they sell to rebalance to an index versus a mutual fund manager who gets outflows is presumably in a better position to say, let me sit down with my trader and figure out it's 2022 where it's COVID, what do I sell and what do I want to sell? And again, that person, it's not an ideal world, but I'd much rather a, a, a smart PM and a trader sitting there going, OK, what do we do here?

Can we call JP Morgan? Can we call Citi? Can we figure this out versus an index and a computer just going boom, just going through and just rotating out? So that active versus passive debate I think in the credit market is still one that if you really understand the mechanics of of our market where you have a lot of money in open and mutual funds and ETFs, that could be for sellers, for buyers. A trader working at Goldman Sachs who has five screens in front of him or her who can see

flows. It's a professionals business. And so an ETF operating in that market is we think we're biased. And if I look at results, they tend to bear it out. A good active manager should be able to beat an index pretty regularly. Yeah, that makes sense. That makes sense. Let's see. Oh, I, I think y'all can borrow to fund distributions. Have you ever done that or is that just kind of like what's what's the purpose of that sort of language? So we have never done that. You can.

So all of these funds have leverage facilities built into them and we have the ability to kind of dial up, dial down leverage depending on our view of the market, funding costs, opportunity, how we could deploy it etcetera. And I would say again, going back to kind of our team, kind of our desk overall, we tend to try to keep leverage levels low.

And one of the reasons we do that is certainly in a really bad scenario, it's another lever that we can pull to try to get our investors redeemed out of the funds without just fire sailing assets. So it's obviously it's limited the amount you can do that. But if I'm running maximum leverage and all of a sudden the market gets really hairy and I'm getting outflows, the only way I can fund those redemptions dollar per dollar is obviously with selling assets into the

secondary market. So if I'm running my leverage below target, it just gives me a little bit more flexibility to use that. It's not something we do regularly. We've been pretty lucky. The funds have grown certainly since we've launched them and it's been a fairly benign market for us. A lot of our funds really didn't live through the, at least here at first Eagle through the initial COVID time frame. So it's been a reasonably benign market X 2022.

But we always want to be prepared for that worst case scenario where everybody wants their money out. There's some big macro shock. And so having the ability to draw down on some leverage a bit to to help fund those outflows just gives us something another kind of leverage that we can pull. Yeah, makes sense. It's, I don't know, it kind of triggered me to be like, OK, well does that create some risk in the portfolio?

But I understand why you're from your perspective, you would definitely want that get get you through a little bit of a downturn, right? Yeah, one of the, again, the nuances of loans is loans are technically not securities so that the settlement process of loans is bond settle, T plus one, T + 3. Loans settle on average somewhere between T + 5, T +7. And there's really no mechanism to force settlement necessarily for loans unless you call the agent and kind of for settlement.

So again, it, it, it's not even necessarily that I can't sell the loans. It's I've sold the loans, but I may not get the cash for seven to 10 days and I'm getting outflows. So obviously with the interval fund that is that's mitigated significantly. But if I'm talking about like as an example, an open end fund, they might use their leverage facility temporarily to try to kind of bridge that gap between the the settlement time and when the the loan was traded, if that makes sense.

Yeah, that does make sense. That makes sense. All right. In closing, my final question is, I mean just generally, we probably touched on it throughout the conversation. But if you were to give me an elevator pitch on why private credit, given that it looks like spreads are are as tight as they've been in a long time and it looks like valuations are as high as they've been in a long time. Like why is now the time to take or to be OK allocating this some risk here?

So it's interesting, private credit, credit in general tends to get kind of lumped up into the fixed income bucket, which I understand why that happens. All these loans have maturity dates, income is going to drive the vast majority of your return. So it's kind of a debt obligation. So I I get that. But when I think about the risk that we take everyday by by lending to these companies, it's very similar to the risk you

take as an equity investor. We're in essence betting on the operating results of these companies that they can continue to pay their bills to service their debt. So in a lot of ways we do it from the, the other part of the of the capital structure. But I'm, I'm kind of making a bet that the company performs well, which is in some ways a lot obviously what I'm hoping if I buy the equity of a company. And so I think relative value becomes really important.

And there's been obviously a lot of conversation around valuations in the equity market and I know our equity team wouldn't disagree with this. If I look at the S&P 500 or even the equal weighted over the last few years, it's it's up 50 to 75% depending on what time frame you look at.

And I look at the earnings yield on the S&P right now or any other equity index, it's probably an environment where if I assign A6, seven, 8% return to equities long term and they've just outstripped that by a huge margin over the last few years.

I probably want to start to think about a mean reversion that maybe equities if I buy an index only return 5 or 6% or 6 or 7%. And so if I look at credit, one of the things I really like about credit is I can kind of model out my potential outcomes a little bit easier. And what I mean by that is I generate income. So I go, OK, the income that this fund generates is going to drive my return. So what's the income? Maybe it's 8%, nine percent, maybe 10% on some of these

structures. And then I need to figure out the manager is going to make mistakes. Even First Eagle. I think we're really good at what we do. We have a huge team of really smart people. We make mistakes. Default losses happen regardless of how good you are. And So what I need to figure out is what type of default losses should I expect? And we talked a little bit about this, but you know, an average default rate for the index is around 3%, maybe 4%. And then a recovery rate is

maybe $0.50 on the dollar. So I go, OK, the manager. I'm guessing if I hire a bunch of these different credit managers, my default losses should be somewhere around 2% a year, a really bad year, maybe a little more, a good year, a little bit less. But my return is going to be something in that 8-9 percent minus my 2 or 3% for default losses. So if I'm thinking about the total return of that investment over time, I'm getting equity like returns with a lot less risk.

And what I'll say is not necessarily Mark to market like the S&P was down. Obviously today looks like a rough day for the stock market. Again, the S&P is down 1% today and that fund is flat. I'm talking about long term risk over time and what types of credit losses am I going to see. And that's where I think for investors who still think the economy is doing pretty well, maybe they're a little bit older and they don't have the stomach for big volatility drawdown and

maybe they need income. Credit could help be a proxy for equity risk, but certainly helps to augment income from a fixed income portfolio. But comparing what we do to AAA rated bonds is kind of an apple to an orange. If we're going to recession, you're going to wish you on those AAA bonds. That's just that's just the way that the world works. So I look at things like equities and I say, I think that credit offers a really interesting relative value, an interesting mix of income, less

volatility. But ultimately I'm taking the same risk. I'm taking the risk that these companies continue to do well, but I'm doing it from kind of the top of the food food chain. So that's the way I look at credit. By the way, I'm, I'm in my mid 40s and I have a lot of my own personal money invested in credit. Historically, I should be in equities, but I look at compounding my money and credit,

different tax consequences. Obviously it's a very interesting part of an asset allocation, particularly if you think base rates are going to be high and higher inflation has the potential to cause volatility in equities. So that's kind of that's my maybe not elevator pitch. It's a long elevator. But I like that one. That's my pitch. Well, that was a good one. It was better than I was expecting and I think it was a very well said argument, so thank you very much.

Excellent. All right, cool. Well, I appreciate you stopping by. Did we miss anything in the conversation? I don't think so. We certainly covered a lot and I appreciate you having me on this was this was fun. Definitely not my my typical Monday morning I'll have. To, well, good. I'll have to wear my Tommy Bahamas shirt next time. Well, you know, sometimes you got to lighten up the mood with the shirt, so that's what I was working on. I like it.

We'll see each other hopefully in in similar shirts. Next time, I promise you, you see me, I won't have my hair slicked back and won't be wearing a tie. That works all right, man. Well, thanks again. Absolutely. Thanks, Bill.