The Bull Case for Private Credit Markets

0:00There's still a lot of opportunity there. Munish Verma is with us, founding partner, and CEO of Verden Well Management. I'm glad you're with us because we did hear from Apollo saying that maybe some people are getting a little bit arrogant, or, you know, there's sort of a road map of how to do this. And then there's the people who sort of go outside the lines. And maybe that there's not systemic risks, but instead some risks that were taken. How would you sort of quantify it? What's going on here? Kind of cool, thank you for having me. Yes, you know, we've been looking at private well for years. We've noticed what was being seen by the markets. You know, we don't really think there's cracks in the armor per se here. What did we do think is a lot of that communication that was brought out for a couple of weeks back from Blue Arrow was kind of taken, but a little bit misconstrued. We are still confident in the high quality private credit that we use for our clients alongside with other private market investments that we have for them in their portfolios right now.

1:01Were you surprised to see that they're capping with draws and things like that? I mean, you saw the evidence, right? Why are they doing that? Yeah, you know, I think when they start looking at capping the withdrawals, that's really because they have a gate of 5%. We explained to our clients early on how gates work and how they could be gated if they needed their capital on a quarterly redemption period. Our clients were very concerned about the gates. We were watchful for them, but we noticed that some of the higher quality names did provide their own capital to those liquidity events. And to be fair, a lot of clients were a little worried. So they decided if they wanted to take some money out, they wanted to be able to take it out. So we saw some higher quality names that we use allow them to do that and open and expand their 5% minimum gates usually. So we're still pretty confident in how private credit's been used in our portfolios. And we are being mindful and watchful of that and making sure that it still fits. And look, I mean, these are investments that take time.

2:02I mean, it's not liquid that you sell it today and it's available. I mean, these are investments in companies that are growing and such. And so you're sort of on the inside track, the way wealth managers and insiders are. And that's the exciting part of how, you know, when you look at private credit or private equity. So people do want to get a part of this because it's what you can't get on Wall Street, right? You're not buying one share of whatever. So let's talk about how you can get involved. You want to be part of private credit. I want to be part of it. How do I do it? What should I be looking at? Well, the first thing is to have a conversation with your wealth advisor to understand the education behind private markets and how private credit and other private instruments work in your portfolio. Like you just mentioned, you know, you can't go in and sell something out of dime like you could for some other ETFs or common stock. So you want to be very mindful that these assets that you're investing in the private market space are not needed in the short run. Secondly, when you're looking at how and understand why you want them in your portfolio,

3:04do you want the non-correlated value to your portfolio and your equity component? Do you need a stream of income? So you want to be very mindful of how you're getting that and the advisor has to really explain and understand what the client's needs are and make sure that they articulate that to the client and make sure they understand, you know, this is not a stock or an ETF that can be traded in one day. And there is a timeframe that's usually quarterly that you can't get access to those funds. And it's usually like three to five years or something like that, right? And you have to put, I don't know, 100,000 down or I mean, what are some of the parameters? Go on the private market space, private equity. Sometimes you have three to five years that you can't get access to it so that you're looking for more of a vault year. We could have more volatility there, but at the end of the day, those funds are long term. Ten years are out or longer. On the private credit space where you're getting more yield, maybe a little bit of growth, it's usually your quarterly redemption. So you want to make sure that you know that you don't need that money for at least a year.

4:04If there is a gate and they say they can only allow you to take 50% of your 100,000 out, you want to make sure that you have other liquidity in your portfolio. So depending on which private market investment you're looking at, sure, it could be quarterly or it could be longer, but private equity would be more of a, we look at that in a 10 year type of timeframe or longer. And then when we hear the president, by the way, saying that the Fed should be cutting rates today last week, he was clamoring about it, really wants the Fed to cut rates because he's concerned about oil moving higher or the economy slowing down a little bit. What do you think the Fed will or wouldn't do now going forward or should or shouldn't do? Yeah, well, I think what we're expecting from the Fed is at some point to continue to cut rates. We're in that camp that rates will be cut again this year. I think what you're going to see is that, these are forward looking investments. So a lot of these future rate cuts are somewhat built into some of these investments already. So we've already reduced how much, for example,

5:05if we're using it as cash flow, and we're expecting it to have an eight to 9% cash flow return in their portfolio over a period of time. We've reduced that already and their clients modeling in their portfolios to show a lower number. So we're kind of ahead of that. We also believe that the Fed will reduce rates. So we're in the camp of, we're expecting it to happen and we've already planned for it. What kind of yields can people expect from private credit? I mean, often when they say you invest in money managers, you should look, I don't know, five and seven percent a year type of thing over a long period of time. How much money should you allocate to private credit? And what kind of yields does private credit bring in versus what we normally know? Great question. So some private credit, six to nine percent, some have been 8 to 12 percent over the last few years. We have have the expectation those numbers will start to come down. So we're modeling lower numbers and those in our portfolios now. As far as how much should you have in your portfolio, depends on the size of your portfolio. But if you're looking at a five or 10

6:05or 15 million dollar portfolio and you're looking at a private market exposure first, this should be one sleeve of that private market exposure. So we would say five to 10 percent starting of that private market sleeve is what you can start with. You can always add to these investments later as you want to scale. But the education component is very important before we would start any private market. So when our clients understand what private markets are and how private credit fits, we start with a dollar cost scenario where we might start with five to 10 percent of that allocation upfront and then add to it as the comfort level is there for the client and where the allocation demands it in their portfolio for their long-term goals. So you are bringing down the numbers and expectations a little bit because things are slowing but it does normally outpace the general market. I mean, I think that's part of the idea, right? If the general market's five to seven and this is six to nine, you're not going to underperform the general market for the most part. I mean, you could correct me if that's not right. But I do want to know what kind of sectors you know,

7:07I just was seeing more about SpaceX right now to make me think, like, is it a lot of tech or what are people when they look to private credit, what kind of sectors are really doing well? Well, they're very broad based on the sector side. So, you know, there is software as you've been hearing in the media and that's in the private sector space for the private credits. But along that line, when you're looking at the sectors, the managers have the ability to go in and out of different sectors as they see fit and the profile of the seven and nine percent is right and that's not number. We're using as more to six to eight at the moment, depending on how we're using them. But the correlation factors what clients are really looking at. How is this asset class correlated to my equity exposure, my international equity, my domestic equity exposure? And if the correlation factors are relatively low, comparable, they're looking at it either as a hedge against their equity portfolio or a stream of cash flow that they can use down the road when they need or want it to a long term. So, it's various reasons why people would be using it. But the sectors, there's a variety of sectors

8:09that are out there and that's the nice part about it is it is well-defined if you use it as a fun. Some people are looking at private credit and saying I want to be more focused on specific sectors. We don't advise that in our practice. We'd rather be more broad-based and use high quality names. Are you worried about the liquidity issue of private credit? I mean, are people overreacting to the worries about private credit? Or no, what would you tell them right now? Yeah, as this news broke in the last few weeks and we had conversations with our clients and talked about their risk profile and were this space fit in their risk profile and it's really their longer term assets. And the bandwidth that they needed was years, not months or quarters. Our clients were still very comfortable with staying in private credit as we've advised them to. And again, we are looking at the high quality bandwidth not the intermediate or low-cali bandwidth of the private credit. So we've had very calm conversations with our clients educating them before they ever even bought the investments and during the media and understanding what's going on.

9:11But there have been some calls and the calls have remedied to the point of they understand what we're doing and how they fit in their portfolio. We're keeping a watchful eye on our behalf of our clients and they know that if there needs to be an adjustment, we'll advise them to make it. But at this point, we are comfortable with our exposure. And at the moment, we are adding to clients' portfolios as it sees fit in the allocation that we've advised them to get to in private credit. We're not deviating from that at the moment. All right, Moniche, Verma, Vardin, wealth management. Great to see you. Thank you so much. Really appreciate it.