Good morning everybody. What's left of it. I just wanted to take a moment to recognize our panelists. It takes some courage to get up here and make predictions about the future of private credit. About a month ago, Howard Marks of Oaktree published a memo called 'What's Going On in Private Credit?' It is, for those of you who haven't read it, an excellent primer on the history of non-bank lending. So, I highly recommend it. One thing that Howard does in the memo, and which I'm going to do now, is draw a distinction between private credit and direct lending. What everyone is concerned about, and presumably the reason you're all here in this room today, is the latter, which I suppose we can broadly define as non-bank loans to leveraged buyouts and private equity-backed companies. So that's where we're going to spend the majority of our time on this panel. Now for my panelists, as you all know far better than me, in fact, there are a number of competing narratives right now about the current state and future health of direct lending portfolios. To varying degrees, they all concern at least five things: the creditworthiness of the borrowers themselves, the companies, the quality of underwriting, what Howard would call a lack of discipline, the amount of leverage, some of it hidden, supporting this lending, the disruptive impact of artificial intelligence, mostly on the enterprise software industry, and finally the structure of the investment vehicles holding the loans. And then, of course, there's oil prices, the cost of gasoline and diesel, inflation, the economy, and interest rates on top of it all. So the question I'd like to pose to all of the panelists to get us going is this: Is there or isn't there a problem in direct lending?
I think this is a moment which I've seen in other markets before and that is tremendous growth. We saw it in the dot-com underwriting boom in the 1990s where it was ridiculous. I mean, companies that have no revenue were coming at big prices to markets and that didn't end well. And then there was the mortgage problem where suddenly we were turning triple-B non-Guaranteed mortgages into AAAs and pocketing the difference and that doesn't look really good. And now we have this problem with the mismatch of assets and liabilities and it really came into play with the retail market with the so-called semi-liquid feature which I suspect is going to be a significant problem because my belief is that a lot of these products were sold at very high commissions and while it's clear that prospectuses talked about the gating mechanisms, I have a feeling that the financial intermediaries, not all of them of course but enough of them, didn't explain and I think many of the owners of these interval funds thought they could get all their money out every quarter, not really understanding that it's on the aggregated fund level. And so whenever there's a really big boom in a market, things start to deteriorate. I use the analogy of the Wild West. So, you're in 1840 and you've got a nice agrarian town out on the frontier and everybody's living off the land. They're all god-fearing. You got a sheriff with a heart of gold like Gary Cooper in High Noon and everything's going fine. There's no crime. There's hardly any murders. People don't even bother to lock their door. And then something happens. Somebody discovers gold three miles away from the town. And all of a sudden in comes the strike-it-rich crowd, the quick-buck people. And they come in and they're not all quick-buck people, but a sufficient number of them are scoundrels and rapscallions. And all of a sudden the crime rate is through the roof. There's murders. You now have to lock your door and barricade it. And the sheriff can't control the lawlessness. And that's what happens. And that's what happened in the dot-coms. That's what happened in the mortgage market. Certainly the CDO market. Hey, we turned triple-Bs into AAAs and pocketed the difference. Hey, we made illiquid assets liquid and pocketed the difference. And this is going to unfold because I have a feeling that the opacity of these products was kept opaque and was not granularly described. And that's where the problem is and that's why everybody suddenly wants their money back. They're starting to realize that they might be the bag holder. And you know, if you thought one thing that characterized the first quarter of 2026 was ever-increasingly large redemption requests that ended up in one being a 41%. If people can't ask for 41% and get five, the next redemption request cycle, they're going to ask for a lot more.
A lot more. It's like a bond allocation deal where there's a good bond with a good credit and it's a $300 million deal and everybody wants it. So you put in for $100 million when you're going to get 10. That's the way these things tend to work. So this is going to be an interesting period because the data points aren't as frequent as you got in those past prior booms that I referenced. So I don't know what systemic means, but people are going to lose money here. And I heard yesterday that the SEC is investigating a couple of private credit firms, plural, for fraud. I have no idea what that means, but it doesn't sound good. And here's what's been going through my mind and I suspect the minds of others in this room and elsewhere. One of the things that we learned in the global financial crisis is that stress in one corner of the credit market can migrate. It could become contagious and eventually infect, right, not just the rest of the credit universe, but spread to other markets and eventually the whole economy. So, what if things do get messy? How might a run of defaults and a loss of investor confidence in this asset class metastasize into something bigger, even if it isn't as big as the GFC? When it comes to how something unfolds, I think one of the problems here is credit is based upon trust. I think the word credit comes from the Latin word for trust. And I feel like there's eroding trust that's been happening. And I think there's going to be more of it. I think the mismatch of the quarterly liquidity with the reality of the gate, that erodes trust. I think marking down a fund overnight from 100 to 81, that erodes trust. It's like, what do you mean? Did you mark all your loans down 19% yesterday? When did you catch wind of that? That seems awfully abrupt, you know? And was it all of the loans down 19 or was it half of the loans are rock solid and the other half are down 38? Or is it, since I keep hearing that everything's fine, is it 75% of the loans are rock solid and so the other 25% is down to 24? Which one of those is better? And when this happens overnight and it seems to be happening with some routine occurrences, that erodes trust. I think when you write down an equity position down 98% overnight and it goes from a multiple millions, nearly $100 million position to an $800,000 not-even position and you got the PIK bonds that you own $56 million of and you're still calling them current. In the old days when somebody defaulted we called it a default. We didn't call it a paying kind. They're not performing, but they're on the books as performing. And what's really going to erode trust is what they're doing is saying yes, the borrower cannot pay cash. So what they're doing is adding, let's say it's a 10% payment just to make life easy, they add it to the back of the loan. Well, what happens? You should be marking that loan down very significantly. The equity was just completely wiped out. You've got nothing here and now you're accruing interest. And if you look at it, they keep marking the bonds at par. So the best month you could possibly have for some of these funds is every bond defaults and PIKs because they'll leave them at par and you'll have a 10% monthly return in this example. That's going to erode trust. The reporting on what really is going on in terms of concentration and say software is very much in the news. These are all starting to build up. It's sort of like I keep hearing admissions that there's problems, that there's going to be losses, but everyone says not with us. This is Lake Wobegon on steroids. Every firm is top decile and nobody has any losses. Well, they're going to show up somewhere and that's going to erode trust. And so I feel that this could be very significant. I remember just a story. It's such a good story. I want to tell it about the Wild West in real time. In the CDO boom, we were issuing CDOs, we were pretty careful about it, but the industry was booming and booming and the biggest underwriter, I won't say their name, they were not doing deals with us anymore. And I had dinner with their CDO team and they all came out and I said, 'What's going on here? You're the biggest issuer and we haven't done a deal in two years.' And he says, 'We don't want to do a deal with you. We want to do it with startups.' I said, 'Why do you want that?' You know, well, they'll buy what we tell them to buy and you won't and to boot, they charge less than half the fee that you charge. And I thought, my golly, are you kidding me? So, I went and had lunch with the number two guy at this investment bank, the biggest CDO issuer. And I said, 'You've got a problem. These guys are off the rails. I mean, they are just shoving stuff out the door.' And he says, 'You know, we're underusing our balance sheet. We've only done $25 billion of deals. I want to make it 50.' And I said, 'You're going to blow this place up.' And we're at a sushi restaurant and the guy is just eating very calmly. And I'm like, 'Why can't I get a rise out of this guy? His firm's about to blow up. He's the number two guy.' And he resigned that Friday after getting a bonus of over $200 million and went back to Asia. That's the Wild West.
Jeffrey, could I just stick with you for a minute on this important topic? You know, as it were, bad behavior, right? Whether it's bad behavior when it comes to how you mark your book, whether it's other kinds of bad behavior that you've called out, garbage lending, for example.
