Mark, thank you for doing this.
I was just saying outside that when I looked back in 2010, you had around 70 billion in assets. Now, as we said, closing in on a trillion. Should we start with kind of current affairs? You've got the conflict in Iran. I suppose we can talk about the geopolitics, but on the basic question about what it's doing to the markets and the economy, how do you look at that?
It's disruptive. I mean, our refrain on this has been, if you look at the numbers, things are great. You know, everyone has a job. The capital spending is off the charts and very conducive to future employment. Government policy is very accommodative. Capital markets are wide open. That's normally 95% of what you need to worry about. But now, as we've been saying, it's only 70% of what you need to worry about. The other 30% is geopolitics. It's government borrowing, its excesses in capital markets, and it's technological change. None of this is unexpected. It's just here.
How do you rate those? I mean, do you worry about the Iran thing, say, more than all the trade disruption?
Personally? Not really. I mean, we always have an overreaction to the confrontation of problems, but this is a problem that needed to be dealt with. And if it were dealt with in other years, it would have been more difficult. And so the notion that it's being dealt with today in some ways is reassuring, notwithstanding the current instability.
Just going through that list of things you had, you had government borrowing. Is that something that worries you particularly at the moment?
It's not something to worry about, but it is something to watch. We have seen points in time when investors have called countries to account for their fiscal picture, and we saw it most recently in the UK, the departure of Liz Truss. And we have pretty much every government in the West spending more money than they are bringing in with no sign that they are letting up. And so there is nothing that says this will end soon. Japan did it for nearly three decades and so it's just something to watch. Normally that kind of borrowing is inflationary. Normally, the restriction of the free flow of goods is inflationary. Normally, the restriction of the free flow of labour is inflationary, but we just haven't seen it. Having said that, if you are a credit investor wearing your credit hat, you don't get paid other than your coupon on your principal. You look at the surrounding facts and you say this has been a good time for risk off.
Do you view it? Yesterday, Jamie Dimon talked about inflation being the skunk at the party. Is that the way that you look at it?
Not so much the skunk at the party, but let's face it, we've had very accommodative capital markets, notwithstanding the backdrop that I've mentioned of things that can be inflationary and we've seen rates go down. We've actually seen curve steepening to the extent we saw a tick up in inflation, that would probably handicap the Fed's ability to further push rates down.
We just go into credit, you know, these big arguments. It strikes me there's kind of two levels of it. The first question is, do we think that there is more kind of laxness in the overall credit markets? That's what people like Dimon talk about, like Lloyd Blankfein talking. Then there's a particular question of private credit. But just to look at those two, if first look at credit as a whole, how worried are you about that? I've seen you say that actually the numbers aren't too bad, but how do you look at it?
So I don't spend a lot of time worrying about it. Companies are in pretty good shape. Consumers are in pretty good shape. This is not just in the US. This is pretty much around the world. Ironically, right now it's governments that are not in good shape. Having said that, we're at the end potentially of a very long accommodative cycle in credit. And in every cycle you have people who move out on the risk curve, who ignore things that are obvious, and it all feels good while it's happening and then it doesn't feel so good once it arrives. Well, some of those changes have arrived. I mean, lo and behold, we think that AI might impact software. Is that news? Did we just discover that two weeks ago? But apparently, two weeks ago we discovered that AI is going to impact software and we've been in a massive risk off mode. And so software stocks are down almost 70%. I remind people that software first lien is senior to high yield bonds and senior to equity. So if you're going to have a problem in software lending, you're going to have a problem in equity, you're going to have a problem in high yield, you're going to have a problem in bank lending and broadly syndicated and everywhere else. Because to your second point, credit is just credit. There are good underwriters of credit and there are bad underwriters of credit.
Just on that point about tech, as I read it, from what you've said, you were nervous about software before two weeks ago. On the other hand, in terms of digital infrastructure, you're still fairly, you're less cautious.
So I'd say I'm going to give you a more specific answer because it requires a more specific answer. In our private equity portfolio, which is not the subject of this, we have zero software in our credit book across the totality of the firm. It's a fraction of assets. We run a broadly diversified credit book that is not concentrated in software. The problem with software is that it was 30% of the leveraged buyout market. Therefore it was 30% of the levered lending market and therefore it is just overrepresented and subject to attack. But we should not deny that change is coming and change is not coming just in data centers. And I, as a world, we are building infrastructure, we're building energy, we're doing energy transmission, we're building next gen manufacturing, we're ramping defense, and we're doing this thing called AI and data. We're essentially spending every dollar since the creation of fire, and we're doing it all at once. And whatever we're doing in the US they want to do in Europe and they're not as well prepared to it, and they're doing it in the Middle East and they're doing it elsewhere around the world. We will see the largest need for capital ever, and that's what we're seeing so far this year. And so now to your specific question, it's about underwriting. There are a number of very strong U.S. tech companies who run diversified businesses Amazon, Google, Microsoft, who are interested in seeing these centers built and are interested in not consolidating their debt on their balance sheet. And to the extent they are prepared to lend their credit, one can lend against those types of things and make sensible underwriting decisions. There are those who are more equity story oriented where it's maybe not a sensible underwrite and good underwriters pick good credits and bad underwriters pick everyone.
You and I though, have lived between us through a lot. I think we're almost identical ages, real friction. But we've lived through many iterations of kind of credit coming, credit going. So when you talk about these individual decisions like, you know, is it good to be in digital infrastructure at the moment or not, that matters, but so does the overall picture and the one you just explained where you said there's all this money going into energy, going into AI, going into all these different bets. Does the bill for that either end up with taxpayers or does it end up with banks and credit institutions?
So, again, a longer answer than you probably want here, but the banking system is incredibly delivered and very diversified. I think it's in the best shape I've ever seen it in my 42 years of professional career. And then we get to the so-called public and private markets. Private and public are just variations of the theme. The vast majority of the private market is investment grade. There's a $40 trillion market and 99% of the headlines are focused on a little slice of a trillion and a half called levered lending. Levered lending is a below investment grade activity. If you trace the history of this, in 2008, levered lending was on bank balance sheets. Post GFC banks distributed this credit. On the one hand, you had the CLO market, which took credit off bank balance sheets, particularly less than investment grade credit, and distributed the risk to investment grade buyers on a senior basis and to below investment grade buyers, high yield buyers on a junior basis. Then credit was also distributed to private market BDC. US banks again supported them, but at a very safe tranche. And investors, private investors, retail investors, institutional investors came in to support private BDCs. And now we look at it and we say, well, credit is going through a cycle. Is that good or bad? And the answer is relative to what? And this is the point that people often miss credit is that the formation of credit, particularly in these private BDCs, is a de-risking activity for the economy and for individuals. It's de-risking because it moved it off bank balance sheets and essentially democratized it throughout our economy. And it's de-risking for individuals because people are not funding their investments in these BDCs with their Treasury portfolio, they're selling their equities. Last I looked, first lien debt is senior to equity. They are making an intelligent decision that they can earn equity like returns without equity like risk and take money off the table. That does not guarantee success. You can have if you own software stocks, you're really unhappy. If you own mostly software first lien, you're really unhappy, you're just less unhappy than if you own the equity. We can't legislate out of existence stupidity, but the underlying system you're arguing is safer because it's allocated to individual companies and it's not leaking back into the fully leveraged part of banks. And that's what in some ways we can say the post regulatory reform of the GFC worked. It's doing exactly what it was supposed to have do. It has socialized this risk. It has given investors another thing to invest in, which is actually de-risking for them and it has moved it out of the levered government guaranteed portion of our economy because we made a choice and we've made a choice going back to the formation of Drexel below, investment grade companies have been a massive source of growth. Private companies have been a massive source of growth, 80% of jobs. How were they financed? Well, they weren't really financed. They were cast out from the marketplace. If we want them to be financed, we can't. There's only two places they can get financed. One is the banking system. The second is the investment marketplace. If you're concerned about what's happening, you don't want it in your banking system. You prefer it in your investment marketplace where people can price the risk. So certainly there are problems in private credit. You would argue it's a little bit more like the idea of a dot com problems of years ago where it's really an equity play rather than a debt one. So there isn't that gelignite of leverage going through things. Almost every investor is not a levered investor in the private credit ecosystem. But we've also we have this habit of throwing the baby out with the bathwater. All the press has focused on this levered lending portion of the market. As I sometimes remind my partners as a deal shop, we don't get to be that big, you know, because although we're doing something from an efficiency point of view, we use up a lot of social capital. On the other hand, the vast majority of the market is private investment grade, which is also called private credit and has almost nothing to do with what we're talking about today. So I think I try to be careful in using my language to make sure that we understand most of the capital going into private companies is actually going to finance this global industrial renaissance, which is taking place around the world. A lesser amount of capital is going into the deal business, which is primarily being funded by investors or by institutions who are making a decision to sell their equity portfolio to invest in credit because they offer about the same rates of return. And by the way, we have ten companies that are 40% of the S&P. We're not even a, quote, qualified market at this point. We're too concentrated.
