This is new. This is intelligence. It's beyond information. So, every human being on the planet is going to be the smartest person that we've ever known. And I think that's a whole new revolution. It's not easy to know what's going to happen. And I'm trying to stay flexible because you can think, you know, but we're all new to this.
Ken, thank you very much for joining us here today.
I have heard you causing quite a stir at the debate today talking about the private credit markets.
The private credit markets have been in the news a lot, but this is no different. I mean, the banking system has had $20 billion of private credit, and nobody marks their loans to market every day. And really, the main difference is this is what happened to Silicon Valley Bank three years ago. They had five-year loans, but they had five-second deposits. And so within 24 hours, they had lost all their funding and went bankrupt in a very short period of time. So what's happening today is a similar mismatch in maturities, but the 5% gates are going to keep everybody in business and will provide a lot of stability to the system. And one thing that I think is very important for people to understand is the key element as well is when the banking system has that problem, the government steps in, the taxpayer ends up being part of the solution, which drives people crazy. If there's anything that ruined American politics, it was the bailouts in the 2008 banking crisis. So here we're having 5% gates. Is that perfect? No. Nobody likes it, but you're keeping the taxpayer out of the situation. It's a private market. We're seeing a lot of companies struggle to solve the problem, but we're not going to involve the taxpayer, and the 5% gates will keep people in business. So this is a much better structure that we have.
What would you say to those who say that private markets are becoming too big to fail?
It's not. As I said, there's about three or four trillion dollars of private credit, something in that range. There's $20 trillion of less-than-investment-grade credit in the banking system. So it's always been there. You're reading about a new structure in which we've taken those loans out of the banking system and put them in the public. There'll be some debate as to whether the disclosures were right on the gating system, but I think again, I'll say this: if Lehman Brothers would have been able to gate their redemptions, we'd still have a Lehman Brothers today. We'd still have a Bear Stearns. So the actual structure that they've put in place is, you know, not perfect, but it's pretty good.
Speaking of debates, your debate was about the private capital outgrowing the public market, which talked about the most consequential shift in global finance. What were the takeaways from you and the people you had in the panel today?
I think that the private markets are here to stay. There are people who want to invest for long periods of time, five to ten years, put their money to work in these illiquid situations. Again, my point on this has been that what started out as a premium that you would get as an investor — you would get excess return for being illiquid — in recent years has almost turned into you've had to pay for the privilege of being private. And the reason is people don't like the volatility. So let's just look at the last month since the Iran situation happened. Stock markets have gone up and down one or two percent a day almost continuously as people evaluate. Meanwhile, the private markets, private equity, there's been no change in the marks. So if you're running money and you're in the public markets, you've had to deal with this struggle every day. The same inherent thing is going on in a private company. It's just not being marked every day. And why is that? Well, you don't mark. Usually a private equity portfolio is marked once a quarter, maybe once a month. And when you mark it, you kind of look through to the horizon and come up with what you think this loan will do over a two-, three-, four-, five-year period. The public markets are subject to much more volatility — you know, it's actually not subject to more volatility. The real volatility is always there. In one, you're just hiding it. And in the other, the market's expressing itself minute by minute, second by second. I mean, if you turn into the market right now, public stocks are going to tell you what they think this second about what might happen in Iran and how it'll affect their portfolio. If you're private, you could kind of ignore it and say, 'We're comfortable holding this instrument for two or three years. We don't think it changes by what President Trump says today.' But the public market disagrees. But you know, the public market is more accurate. It actually does matter what happens and what President Trump says today. It really does matter.
So how is the role of stock markets changing?
I believe a lot of the asset allocators would like to not mark every day. So they are putting more and more money into private markets. It feels better over the long run. I think the public markets are a wonderful place to invest. It's very hard to hide. You might say, 'I made an investment and it hasn't changed its value.' But the public market will tell you, 'Yes, it has.' And it will remind you of your mistakes, which, by the way, makes you make decisions better. I'm a public company. Moelis & Company is public. When my stock goes down, which it has since the war started, I can't — you know, I could ignore it and say nothing's changed, but the market's telling me something has changed. And to think about it, think about the risks, think about the rewards. And I believe the public market feedback and the intelligence you get from it is very important. Most entrepreneurs would benefit greatly by having that feedback. And being private, you get to ignore it. You might feel better about it, but it's actually a negative.
