Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crombie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome James Reynolds, Global head of direct Lending at Goldman Sachs. How are you, James.
I'm doing very well. Thank you for having me.
Thank you so much for joining us today. We're really looking forward to getting your take on the credit markets. We're also delighted to welcome back Bloomberg's own Lisa Lee. How are you, Lisa fine?
Thank you.
Lisa covers credit markets from London, and it's great to see you again. And from Bloomberg Intelligence. It's great to see David Havens, who's based in New York. How are you, David.
I'm very good, looking forward to a little bit of snow to it here tomorrow, So.
Let's start with you, James. Welcome. We spent a lot of time on this show talking to private debt. Investment is about what's widely being described as a golden age for this very fast growing market. The so called non banks are really very excited about the opportunity. Everyone from KKR and Apollo to black Rock is all over it.
It's all the rage. You're in a somewhat different position though, given your firms attachment to what we would call a traditional lender, though of course Golden Sas is not really a typical retail bank. So I just wanted to kind of start by talking about the opportunity as you see it, and what's the gold and Sacks edge when you think about private credit.
Thank you, thank you for having me and asking the question. And I would start by maybe stepping back and saying that, you know, we have been in this market since nineteen ninety six, and you know, for the last twenty seven years we've really enjoyed it and explosive growth in private
credits and direct lending in particular. And so whilst you know, some participants talk about a golden age, I think it has been really the last three decades an amazing opportunity for direct landing and and certany with with witnessed and I joined these business twenty four years ago and we have witnessed a lot of growth across a number of strategies and also regions. You know, where where is our edge?
I think certainly you know, as I started by saying, you know, having been around for a long time, you know, being time tested through a number of cycles. Clearly, the origination platform, I would say, is a real edge at Goldman.
It's how we work really hand in love with you know, thousands of investment bankers all around the world that that day to day connectivity, the trusts that we established on both sides of our teams really that that is being transcended by the one GS, which which is a huge priority that you know, our executive office launched a few years ago to really formalize what is effectively a way to collaborate across across teams and across divisions, and something
that you know, we've done very well I think in the last three decades between our private credit investing team and all the other groups at the firm. And I think it does give us an edge when we're you know, dealing with you know, private equity owners of companies or
management teams. I think the ability to bring the firm is something that we've refined over time, and I think we're doing well and something is appreciated by the privaty equity community, but also not only but also by our investors. I think they do recognize that the origination platform is highly differentiated.
So James Commensas is sort of unique among the global banks for having a really strong leveraged finance group that raises capital from higher bonds and average loan market, as well as a really sizable direct lending platform that can do both multi billion dollar deals at least participate in them. So as direct lending is and bigger and starts eroding into some of the investment banking share of the market,
how does Goman SAP navigate that? And and as other banks try to sort of play into private credit, well, how do you see that evolving?
Sure? And thanks Liza, and for us, that's not a new phenomenon again because we've been operating very large vehicles for for a long time, and so the ability to to work well with our leveraged finance colleagues, I think it's, you know, back to the edge. I think that's that's one of the edge that we have this ability to to go and peach together mandates and and also kind of work together on large capital structures so that maybe will anchor part of the capital structure, or maybe will
will anchor the junior part of the capital structure. When you know the firm a underwrite another part of that structure, and that ability to provide capital solutions to sponsors and companies something that is truly unique. And there are situations like take private where confidentiality is critical and so if you can effectively speak to one party that can do you know, the entire financing, either on our own or together with leverage finance, and maybe also you'll get the
advisory from from Goldman. I think, you know, having that kind of capital complete capital solution and advisory solution is selt only very very different, and so we're used to dealing with this. Actually I think you know, we we we make the other side better and to make our side better, and so that's that's very complimentary to have
both at Goldman. You know, we've noticed that all the banks are also trying to figure out how to deal with with private credit and direct lending, and every bank has, you know, a different way maybe of dealing with it. But I would say, you know, private credit is a force to reckon with. It's going to stay. It's loud today, it's approaching to trillion.
So you have about one hundred and ten billion in assets right now dollars. You want to double that, what's the time frame to get there and how do you get there?
And we have we've not set a time frame, but we're certainly ambitious here in our leadership team and all our colleagues and and and we see great opportunities to grow. And it comes from various strategies, and I would say across different regions, right. And so if you think about our platform, by the way, has doubled in the last four years already to where we are today, we continue to to be in the market and a number of strategies. I think in the US, you know, we're getting into
larger financings. I think that's one way to grow, which is to continue to penetrate the leverage finance market. Right and and as you know, as as we do it, maybe you know, either on our own or certainly or maybe in club deals, you're seeing some of these private financings getting to which you know, frankly maybe five years ago would have been difficult to was certainly difficult to
execute and maybe even to imagine. And so that's one way to grow here, which is, you know, just getting a higher share of wallets of the entire leverage finance market. But we're launching new strategies, we're going into new regions. You know, Asia is an area of growth for us. We continue to deploy a lot of capital in Europe, for instance, even at times when M and A is slow.
We have the luxury of having a very large portfolio, six hundred plus portfolio companies, and so staying close to these companies provide us with lots of opportunities to continue to deploy in this portfolio what we call the incumbency edge, And certainly in twenty twenty three, a lot of what we have deployed dollarwise came came from that portfolio. And then you know, we have other ideas us when it comes to private ig that's an area that we would
like to grow and get more into. And we think we have again an edge here given at we're a bank, and so we tend to traffic in the kind of large corporate worlds or mid market corporate worlds.
In terms of the Asia opportunity you mentioned, is that more on the lending side, in which case which countries you mostly focus on, which sectors?
Yeah, I'm talking about credit here, and look, we've been in Asia for a long time. We've been in Asia for a long time, using our balance sheet initially and then gradually transitioning away from only using the balance sheet to having alignment of balance sheets alongside the party capital. And so we've announced a few months ago a partnership. We are active I was pretty much across Asia. We
have teams there by the way, located in the major market. Obviously, government has been a formidable presence in Asia for a very long time, multi multi decades. I think probably one of the or if not the first, major US in Esman Bank. And so we benefit from having this network and having these long standing relationships with also the corporates
there sectors. I think when it comes to our dark landing business, which you know we tend to really I would say stick to our knitting around avoiding defaults, right. And so the sectors in which we invest, whether it's in the US, in Europeora in Asia, they tend to be quite defensive and recession resilience. And you'll see the same whether we invest in Australia or in India. And then we have all our strategies where we look for maybe higher reason but we're getting paid for it, and
they're in those strategies hybrid strategies. Then we've gone into more sicly call sectors in Asia, including hospitality or other type of more I would say, sickly call maybe retail sectors or you know, we've we've invested in the golf course or the largest operator in Japan for instance. We've looked at the number of other I would say, probably a bit different, and trying to bring capital solutions always to these corporates and the owners of those companies.
In terms of fundraising, I mean, to get those assets over two hundred billion. What's your first port of call these as you flying more to Dubai or is it Toronto or is it Sydney? Where are you going?
What's interesting about this environment is and it's helpful to have many voices, by the way, to have you know, competitors, peers, other platforms talk about private credits so that you know, they can also educate the market and educate LPs. And so to your question, we're flying and I'm flying everywhere literally, I mean twenty twenty three it was a heavy europhone raising for us, a successful one, and the nature of
our investor base is very diversified. I think that's one of the strengths of our platform, you know, institutions, pension phones, insurance companies, sovereigned but also wealth management clients. And we're fortunate to have also long standing and loyal LPs on our platform. I mean again into back to our roots. We started in nineties, and you know, when we launched our first new dig landing phone in two thousand and early two thousand and eight, we were heavy, heavily invested
or heavy partner up with European pension phones. And today we're really diversified across the world. And what's interesting here is that we're still getting a lot of new investors, new logos, and that's really important because we think that if we do a good job at delivering the returns, having you know, this kind of close intimate relationships with our investors, hopefully they will want to continue to be with us. And we take a long term view here.
As I said earlier, I've been doing this for twenty four years, and we take the long term view. We want to make sure that we provide a good customer experience to our investors.
Hey, James, it's David Havens here. Switch it up a little bit. Big picture question, Golden Sachs. It's it's sort of the nexus of just about everything in global finance, except for maybe sort of the mass affluent market. You've got, you know, investment banking, contacts, contacts, private wealth, limited partnerships, et cetera, et cetera. There have been a number of incentives and disincentives that have caused the corporate credit market to change over the course of the last five, ten,
twenty years or so. Where do we stand today, Like, isn't it the job of banks to lend to companies? I went through a credit training program a chemical bank way back when, and that's what we used to do. But it doesn't seem like banks do that much anymore.
I think they still do that job, by the way, maybe in a slightly different form or maybe slightly different strategies. But we're not saying, by the way that you know, the banks will still be in the market. I actually think, you know, when we started in knowil seven o eight, and we would do a financing alongside us, if we're
not the sole lender, we would have banks. And I think you know, now you see actually this type of collaboration partnership come back, and you know, there are situations that are totally private with a club deal of dark lenders and others that I could well see banks work with dark landers, and so I think you'll continue to see, you know, lending to good corporates too, high quality companies
is a good business obviously the banks. I've gone through a number of regulation in the US and in Europe that we've had to comply with and adapt to ourselves. But I do think that you could see, you know, this kind of collaboration work between between banks and uh and and other forms of capital and celtany. You know that we we bring that to our advantage internally. As I was saying earlier, you know, to the question around
the edge, we we bring into our advantage. The one thing that has changed maybe between when I started in two thousand and and today, the banks have incredible origination platforms, right and we certainly benefit from from it at at Goldman Sacks. But when I started, maybe twenty plus years ago,
the banks would hold more on their balance sheets. Whilst you know, maybe they started, you know, the movement from under from holding on the balance sheets to underwriting and syndicating, and that that movement we've seen probably nearly two thousands I think the banks today, whilst they continue to be very active in certainly in direct lending, they probably hold
less on their balance sheets to be fair. And then you know that that would that would depend yeah, exactly, also from banks to banks exactly.
And I think that according to some of the data that we have a Bloomberg intelligence, it looks like twenty twenty two twenty three was actually the first year where non non non bank financial institutions made more loans to corporations than banks actually did, which is which is interesting.
I think that's right. And also in the market has been dislocated. Yes, let's face it, right, I mean we are in between markets. Yeah, and we came from twenty twenty one lots of activity and then rates certainly shot up, and that really shook up the fixing call market. Hence the banks were not as active.
To your point that banks needs to hold more of this lending. When I look at the direct lending market, it looks early similar to the early days of the leverage law market, where banks needs to hold more and things didn't trade. So when you look forward to direct lending, do you expect trading activity to start picking up? I know there is some trading just for liquidity purposes, but
more of that and perhaps at different levels. And if that happens, and what happens to the liquidity premium that you guys.
Enjoy and thanks Liza. I think, first of all, when we commit capital, we have pre syndicated it. It's by having fund raised and our investors are, in particular the institutional investors, they're patients. This is patient capital, this is long term patient capital, and so we don't have the need to go and sell our positions, right, I mean, we can hold on to our loand for a very long time, and so that that's a major advantage of
dark glanders for instance. Now, what you may see at the start, you know, when you put together a financing, is that a lot of our investors quite enjoy having co investment opportunities, and so we may commit for a bit more with a view that some of our key
large LPs could get access to co investment opportunities. This way, I think to the point that you're making, and very similar to what we have seen in the private equity industry as we saw the explosive growth of private equity and as a result, you know, the first derivative is going to be secondary, and I think you're going to see you know, the staff and it's already started, and I think it's going to be a much much larger
business of a credit secondary as a class. By the way, you start hearing about maybe some LPs that would like maybe to sell positions, and you know, there's there's a growing market here. And so whilst the underlying is ill liquid I think at the LP level, I think we're going to see growth of credit secondary where LPs can effectively fine liquidity in this in this way as well. Right,
And we're quite excited actually about these market development. When you have an asset class that is getting close to two trillion dollar, you're certainly going to see you know, some some more strategies kind of flourishing out of the growth. Right.
And we've we've also obviously, as you mentioned, we've seen quite a bit of growth that we've words probably come up quite a bit in this conversation. Uh, private equity credit, I'm sorry, private credit has kind of gone mainstream. Maybe you can spend a few minutes talking about terms and conditions. You're seeing terms and conditions in the market evolving as newer entrants come in as sort of new quote unquote technologies are employed in the private credit.
Space absolutely, And to the point you just made around mainstream, I think, you know, we collectively need to just demystify what we do, which is, in simple words, you know,
lending to corporates. And but yeah, look the terms and conditions they do vary depending on market conditions, right, And so if you you need to step back and look at long period of time, you know, ten twenty years, and you certainly see a direk correlation of the activity of direct lending with dishuans of loans, right, So that really means that even when the banks are back on the writing, you have certainly more volume in the markets, more and many activity, more volume. I think that's overall
good for the industry as well. When when you see a drop in loan issuance, when the markets turn more volatile and less MNA activity, what you see is, you know, less volume in direct lending, but you see somewhat higher pricing, maybe wider origination fees. And I would say probably we as an industry have more leverage when we negotiate documentation, and so the documentation tends to be maybe a bit tighter in those kind of cycles where volativity is hitting.
I mean, as we saw the rates increase, for instance, in twenty twenty two, what happened is sponsors management teams were very focused on leverage ability of these assets and you know, what the true casual generation coming out of the corporate and how much you know, kind of quantum of that can this corporate effectively sustain. And what you saw as a result was lower leverage levels for the crop of deals that happened, I would say from me twenty twenty two and the subsequent year and a half.
And so those those terms, you know, they tend to vary very much dependent on market relativity and market conditions.
So as you know, James, you've been doing this a while, typically what blows up in finances what's just been growing the most quickly. Private credit is growing very quickly, and we've had a lot of guests on this show talking about, you know, red flags the speed of the market's growth. It's already bigger than the US highyeld bond market, which
took a lot longer to get there. Plus the lack of transparency and liquidity and the risks of companies just falling behind on debt payments rates stay high for much longer than people had expected. There's also the fear that new entrants will spoil the party. You know, that the so called private debt tourists will do bad underwriting that ends in tiers and some people just calling it a bubble. So, you know, what do you think about that.
It's a love of a lot of themes here. I think at the core of direct landing it's all about credit discipline, underwriting discipline. And you know, we've been doing this for twenty seven years. If you stick to lending to very high quality businesses and the discipline and you
don't lose that discipline, you don't get the POMO. You know, our experience, you know, through those more volatile environments or even crises like the GFC, you know, the these these corporates that tend to be more resilient I have certainly proven to be the case. And so will we see more dispersion,
Absolutely we will. You know, there's been very little dispersion for about ten years, as as the rates were low or even negative, and so I think, you know, in this environment of the system, you know, kind of receiving a shock, a certain shock I think you'll see that managers will fare very differently over time. It will be it will be seen in their ability to raise capital. And and it's no different than you know, when I started.
You know, there were names on the private EQUII that don't exist anymore, right, and so I think you're going to see you know, more of that. Obviously, this is these are the pride markets. Things tend to take some time. Another advantage that you have as a lender is that you can things don't go according to plan, and as a you know, a default, a lender can also take over an asset and then continue as as as the
owner of the asset. And so that that's why I think to play out and be able to say, well, this was a good vintage or not, and and this is what the average prior credit returns have been. Well, we'll have to have another podcast probably in about eight to ten years.
Now we're going into you know, the slower economy. Earnings of suffering rates are still going to stay high. It's a tougher environment than let's say, last year or the year before.
I wouldn't say so. When we look at the performance of our portfolio companies, it remains very resilient, and it's really surprised us too. On the upside, I would say including you know, I would say around twenty twenty one, when inflation was running very high and out of twenty twenty two, we saw our companies in particular having pricing power and having the ability to maintain their operating mal genes. So I wouldn't say that it's a more complicated environment
given the slowdown in the macro. That is not what we're experiencing our portfolio.
For instance, James, you recently got a new title Global Head of Direct Lending. When you look at US and Europe and you look at the opportunities there, especially as inflation seems to be monitoring at a different pace between the two regions, where do you see the better opportunities.
I wouldn't say better opportunities, but certainly I would say in terms of size of the opportunity set right now. Clearly the US market has woken up and shown signs of activity earlier than the European market. So starting in June of last year July, we started seeing a lot of processes, you know, buyers and sellers, kind of a green price and hand you know, the second half of the year for US was very busy, in particular in the US. It's also a bigger market size wise, and
so we're very active across the world. But I would say probably in the last six months and getting into twenty twenty four, we're seeing more opportunities in the US. Now. If I step back and I look at twenty twenty three, sixty percent of our deployment globally happen in Q four, right,
and so you can see the optic of activity. And I think everybody's talking, you know, CEO banks are also talking and seeing that you know, self, working with r M and A colleagues, we sent you know, a renewed optimism here about activity in the US but also but also in Europe, and we tend to see that activity very early on, given that you know, we have our colleagues kind of winning mandates for sales side byside, and
usually takes six months for those deals to happen. So I think I'm optimistic that twenty twenty four could be a more active year in terms of deployment. As I said earlier, it's all about deploying well and being disciplined. So it's not about the volume, but I you know, I see our teams and the pipeline across various regions really having stepped up in the last couple of quarters.
So EM and A after is picking up. So when should we start to see some big M and A, especially LBO deals which quite a bit of financing to get done. When we should we start seeing those announced?
Look, in all fairness, we've already started seeing deals being announced in Q four, certainly in the US, but also in Europe. There were a number of situations announced pably too private for instance, But it takes time for these processes to play out. And I think what happened in twenty twenty two, twenty twenty three is that usually you would have a gap between you know, the buyer and
the seller, and you know that gap remains. And I think, certainly anecdotally, when I looked at the number of situations in Q four, it seemed that, you know, buyers and sellers were getting much closer in terms of their respective expectations to transact. I think that bodes well. I think on top of these, given the lack of harvest and exit in the last eighteen months for the private equity industry, certainly their investors there LPs are also demanding some you
know what's called DPI, so distribution and so. And if the rates you know, go down, which you know might be the expectations of experts, I think, you know, you have a number of factors that certainly could fuel higher activity in twenty twenty four.
This year, James, do you expect the default rate in private credit to be higher or lower than last year?
It's it's a difficult question.
But the.
You know, plus you know, we don't have a crystal ball, so no idea what may happen in the market and what shock you know, we may see or not see. So but usually the default happened after, you know, a few years of stress in the company. They rarely happened overnight, although certainly when everybody went into lockdown in March twenty
twenty it created a sudden shock. But that's unusual. I would say, usually you have some sort of red flags for a while before a company declaredes and effective default. And I think in the market there's been a steady but slow increase in default rates across sectors, by the way, not necessarily only linked to you know, the sickly goals
and so on across sectors. We're monitoring carefully. I think, you know, more importantly, we're focused on our portfolio and making sure that our companies are healthy and so far touchoo, but that is deltenly the case.
And when you look across everything that you currently cover, which is a lot, what is the best opportunity for twenty twenty four. You know, you can talk about sectors, you can talk about regions, talk about country if you want, but as specifically as possible, if you had to put your money somewhere in private credit this year, where would it be?
You know, all we love all our kids and we put our money or we try to put it everywhere. As as employees, you know, we invest in in a lot of different strategies. And I'm not trying not to answer the question, but that that is really what we're doing here. We're pursuing a number of strategies existing where we're trying to be bigger and new, where we're trying to effectively launch, and we're doing all of these at the same time. We're fortunate that we've got the support
of our executive office. I think very openly they talk about asset wealth management and prior credit in particular, and so they're getting used now to answering questions about prior credit. It certainly helps us internally to get support, you know, in infrastructure, hiring more and getting you know, the backing of Goldman Sacks.
And on the risk you kind of boil it down to just avoid the faults, which is kind of easier said than done. Is there a specific week link in the system. Is there a week sector or a you know, a week kind of borrow that you really have to avoid?
I wouldn't say so. And also various rategies may have various resk appetites and hence also expected returns, so I wouldn't say so, but certainly on the performing direct lending sides, where I was saying earlier that you know the name of the game is really to avoid default, because that's how effectively your returns will be measured. Eventually, we tend to stick to stable and defensive sectors and not really look at the sikly calls or not even wanting to price Sikly calls. Great stuff.
James Reynolds, Global head of direct Lending at Golden Sechs. Great to have you on the credit edge.
Thank you very much, and please do.
Come back on the show on all the best of twenty twenty four. I also want to say big thanks to Lisa Lee of Bloomberg News in London. Brilliant to have you again.
Thanks, thank you so much.
So David Havens with Bloomberg Intelligence in New York. You look at the BDC's, the business development companies, they're all going public. Now what's that all about? Is this the top? Is this the end of private credit? Is it downhill from Hey? What's going on?
Well? I guess it depends on who you ask. There are some people that will if you were to liken it to a baseball game, some people would say, we're not even in the in the first inning, yet we're still in spring training in terms of where we are in a nine inning baseball game. Other people will say that the cycle could be problematic, particularly if we're in a recession or have a recession. Why is money coming into the sector. I think money is coming into the
sector because it's performed well. Default rates across BDC's, which are about two hundred and fifty billion dollars in total assets right now, have been minimal, which I think comes as a surprise to many observers. Given the move that we've had in rates, the stress that that place is on interest costs for highly leveraged companies, the investments that
they've made have held up well. And I think that there's a general view that private credit has gone mainstream and BDCs are a way for private investors public investors to play the credit market and earn a nice dividend in the process.
So the IPOs aren't assigned necessarily of a top it's just these BDCs. It is a chance for them to raise funding more cheaply or more efficiently elsewhere.
It's I think that what we're seeing is companies want to they see a growth opportunity, and they want to diversify their sources of capital as much as possible. So having access to public capital markets gives them a currency that they can use to to grow further, that they can use to to make acquisitions. So it's a dynamically growing segment, and you tend to see companies that tap the public markets when when you've got some dynamic growth going on.
So you would on the call just now with James Reynolds with Golden Sachs, head of direct Lending, there he sounds very positive to me, very bullish. He's seems to not think it's a bubble or a risky market right now. Obviously he's, you know, in the game of telling people it's growing because he's trying to raise assets. But from your perspective, David, is it riskier than he's making it seem it's risky.
Risky doesn't mean that you're going to end that it's going to end in tiers. Necessarily, risk means that there's risk, and if you can manage that risk, then you can do quite well. Goldman certainly seems to have the intellectual horsepower and experience to manage credit risk very well, and it's done so for a number of years. The way that I like in it too, is is that if you sort of think about the credit markets as one gigantic ski hill, you've got expert terrain, and you've got
you've got terrain for low risk players. Low risk players might take the magic carpet, and that would be the government bond market or the muni market or something high grade investment grade credits. The BBC's and private credit to some extenter are on the double black diamonds there. They're going down areas where they're cliffs, but they're prepared, they've
been through this before, they're familiar with the terrain. There's always danger out there, but if you're familiar with the terrain and you've got the capabilities, you can manage that risk. Usually that's what that's that seems to be what's going on right now. The biggest risk from my point of view, is an exogenous factor, is some sort of geopolitical you know,
uh thing that we haven't anticipated yet. So it's it's it's if you're looking out for buses that are going to hit you in Credit, you're going to see the buses coming. It's the one that you don't see that's going to cause the problem. So right now we see it seems to me that we see a lot of the buses out there.
Wise words, and it's also skiing seasons. Are those analogies hit home. Thank you so much, David Havens at Bloomberg Intelligence, and we look forward to reading all of your analysis on the Bloomberg terminal. Thank you, James, and thanks also to James Reynolds, Global head of direct at Girl and Sechs. It was great to have him on the Credit edge. We look forward to having him back, and to Lisa Lee with Bloomberg News in London. Please do subscribe wherever
you get your podcasts. We're on Apple, Google and Spotify. Give us a review, tell your friends, or email me directly at JCROMB eight at Bloomberg dot net. That's j c R O M B I E as in my name the number eight at Bloomberg dot net. I'm James Cromby. It's been a pleasure having you join us again next week on the Credit Edge