00:00A lot of people love to talk about at Super Return that everything is okay and there are no issues.
00:05You often are more outspoken than most when there are pockets of stress.
00:10You've warned of fat tails and maybe things are calm on the surface, but underneath the hood not so much.
00:15Where do we stand in that at the moment?
00:17Are you seeing some still maybe red amber flags underneath the surface?
00:22Yeah, we've got a real disconnect today, right?
00:26The economy is okay.
00:28Credit spreads at the headline level are tight, right?
00:32And then at the same time, what you have is you've got higher default rates.
00:38There are entire sectors, Danny, like private equity, like real estate, which are constipated, right?
00:46They can't sell.
00:48Private credit just joined the party a little bit too.
00:52So I think it's fair to say that there's a lot of stuff going right.
00:59I think on balance, it's also fair to say, my God, there are lots of the canaries and the coal
01:06mines are telling you a bunch of stuff.
01:08But that has to be an issue, though, because this industry needs to be exiting, right?
01:13That's the promise you give to your LPs.
01:16What has gone wrong in that we got to this point, that year after year of LPs saying we want
01:21our money back and we're still not at that point?
01:23You know, when trillions and trillions of dollars of deals were done before the hike in interest rates in 2022,
01:34right?
01:34So 0% rates, people did all these deals, rates are no longer zero.
01:43You've got a valuation multiples are no longer what they were for a lot of these businesses.
01:50You've got a problem.
01:51Now, add to that just more zip, right?
01:55So you have a software shock running through 20% of software debt is valued, priced below 80 cents, suggesting
02:09distress, that much distress in software.
02:13There's an oil and gas shock, which is starting to reverberate through.
02:19Interest rates are starting to go up.
02:21So trillions of dollars of deals, interest rates changed, and now you've got these, it's amplified by these shocks, and
02:30that's the problem.
02:32You've got to find clearing levels for these assets if you want to sell.
02:38And the clearing levels are not what people thought they would be, should be.
02:42Can I just go back?
02:43You mentioned to within some of that, there's a canary in the coal mine.
02:46Is that just the stuck assets are the canary in the coal mine, and what does that indicate to you?
02:50No, to us, the canary is really when assets are stuck, assets are stuck because people can't get the price
02:59they think those assets deserve.
03:02Right?
03:03Assets are stuck when, you know, when you have a line of redemptions, and you can't beat the redemptions, and
03:10you have to gate.
03:11But those are very obvious canaries in the coal mine, telling you there are lots of problems underneath this unruffled
03:22extent.
03:23I guess also what I'm trying to get at is if there are canaries in the coal mine, what does
03:27it lead to?
03:28Like, what is the big disruption if at the moment it is just people not willing to mark down assets?
03:33You know, it started slowly, slowly, because people have been waiting for so long, it started.
03:43So, can I tell you what we see?
03:46Yes.
03:46In our world, we lend money to people at 15% plus, so they can hang on to assets longer.
03:55We go out and we buy assets, paying very little for the equity, because they are so over-levered, and
04:04we de-lever them.
04:05And then we also convert debt into equity to kind of own the asset.
04:11That entire ecosystem opportunity set has just exploded in size.
04:19You know, if you look at somebody like us, we started out three, four years ago with a pipeline of
04:26$75 billion.
04:28We have a pipeline today of $365 billion, and we invest $6 billion, $7 billion a year.
04:37So, for us, you know, and when we say a pipeline of $365 billion, it's moving.
04:45People are starting to recognize the issues, and every one of those concerns.
04:50Does this go beyond software?
04:52Like, how widespread is this?
04:53Are there any other industries that this phenomenon is concentrated in, or opportunities for you?
04:59Danny, we've talked in the past.
05:00I know I can sound pretty brave.
05:03We have 0% exposure to software.
05:06When software goes bad, it just doesn't have cash flow go down 20%, it falls off a cliff.
05:13I would figure, Victor, like, maybe there's some nice little juicy deals in there that maybe you want to get
05:18some,
05:18because valuations have fallen enough.
05:20No, we're not there.
05:21You know, the businesses which get into trouble in software don't just get into little trouble, they fall off a
05:28cliff.
05:28So, we've looked hard, we haven't done anything, and I bet you if they are talking a year from now
05:34again,
05:34I'll tell you, still done very little, because the businesses which are in trouble are so damaged.
05:42Well, where are the opportunities that you're finding?
05:44Any sectors in particular?
05:45The real economy.
05:47For us, our focus over the last 10 years, 15 years, right?
05:52It is in buying into industrials, manufacturing, chemicals, consumer products.
05:59We buy a lot of real assets.
06:02Power plants, airplanes, toll roads, right?
06:05That real economy is kind of our focus.
06:08And, Danny, for us, all these problems in software or oil and gas shop, this stuff, you know, one tree
06:18does not fall in the forest all by itself, right?
06:22It reverberates through.
06:24Because the amount of capital available to do this stuff is shrinking so quickly, right?
06:31So, the opportunity set in the real economy, it has just gotten so much better with these problems.
06:38Is part of that also just because so much money is being funneled into AI data centers?
06:43Is there a kind of crowding out that you're seeing that there's, it's less competitive and you're seeing more opportunities
06:48in other parts of manufacturing?
06:49Because everyone's being distracted by this big, shiny thing over here.
06:52Yeah, it is.
06:52It is.
06:53It's that.
06:55The data center, these guys are such voracious users of capital.
06:59Most firms now, they used to have private credit and CLOs and high yield.
07:05They've got a now special asset class called data center, right?
07:09It just tells you the crowding out effect.
07:12I think it's a little bit, it's a little bit more than that, though.
07:17You know, when you buy into these real economy assets or businesses, our view, you've got to fix them.
07:25They're broken.
07:27Some of the stuff which gets into trouble, good management teams are gone.
07:32You've got to often strengthen the management team.
07:37We bought assets like real estate where leasing prices compared to the peers have dropped by 30% and they
07:46shouldn't.
07:46So I think to our point of view, you need those skills to kind of actually work the asset.
07:53It's not just, hey, I'm buying a good asset cheap, right?
07:56And those skills are in short supply, right?
08:01So and that to us is kind of so the capital would like to do this.
08:05It just has trouble.
08:07Those skills are in short supply.
08:09And AI can't do that yet.
08:10AI can't turn around a company yet and hire the right management.
08:13They can't get leasing in a property up by 30%.
08:16And that's probably right, Victor.
08:17Thank you so much for joining.
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