So, it's my real pleasure to announce our next keynote conversation, Sarah Eisen and Steve Tananbaum. And what's really special is the connections I learned that each of them has to NYU. As many of you know, Sarah is an NYU grad. She has been a big supporter of the initiative. Sarah actually helped us launch the initiative with John Paulson in April of '24, which we're deeply appreciative of. And Steve Tananbaum as well. His father and grandmother both took classes and went to the predecessor of Stern. So from our perspective, we're just thrilled to welcome you both back here. And if you can join us on stage, that would be great. Thank you. Let's welcome them.
Thank you. I swear I took a class in here. I think... Do you know what it was called before it was called Paulson Auditorium? No. Anyone know? What's that? What was this building? What was this room called before? Would there have been a biology class? Someone gave us some money. Okay. Thank God for his credit investors, right? I'm thrilled to be back here at NYU. Very special place to me. And I know for Steve, multigenerational legacy at NYU and really excited to be talking to a room full of people interested in credit, which I'm always amazed at how popular and how interesting credit is. Although I will say, Steve, the timing is perfect because credit's getting a lot of airtime these days on CNBC.
Boy, you know what? Especially private credit.
Especially private credit. Is private credit in a crisis?
Um, it certainly isn't a PR crisis.
Um, I think that like many asset classes, and you could look whether it was private equity, when you have too much of a good thing, it stops being a good thing. And that's what's happened with private credit. I look at private credit as just a different way to express debt. And so, you know, these were smaller bond deals when I started in the market. Then they were second lien deals and now they've been recategorized into private credit. And what was interesting to me is when the median private credit is 475 over, not that wide. So when you think of how you're going to make the returns, the only way to make the returns would be through leverage. So what started as probably 675, 775 got a lot tighter as more money went into the asset class. And we saw this in private equity a few years ago and seeing the results right now, the returns were lower as more money went in. Now, having said that, usually when you see bad headlines and low returns for an asset class, it's a good time to re-enter the asset class or certainly fill the void of what that asset class was doing. So, I think that probably there's some pretty good deals for new software acquisitions, for secondary trading, and, you know, time will tell, but I think it's probably not a bad time if you have some fresh powder.
Does that mean that that's what you're doing?
Um, we certainly are looking for opportunities on the credit side and software companies.
So, we didn't just finance software. So, we did something in aerospace just this past week that we think was a good deal at a fair spread, kind of a loan to value of 50% at a, we think it'll be a 12% return. So, we, and with a nice tailwind.
We just launched right into this. Sorry, I just did like CNBC style like straight into the crisis, but really I wanted to, I didn't intend to start that way. I wanted to step back and sort of help you introduce yourself and the amazing business that you have built at Golden Tree, which is now 26 years old. And when Dan Kamensky says that you're the goat, I mean, he knows everybody in credit. So that's a very big compliment, Steve. Talk a little bit about what the vision was for Golden Tree and what it is now.
So about 27 years ago, I saw that there was a need for more credit relative to other asset classes. I was in the equity department of May Shields running their high yield business and their hedge fund business. And I'd see for growth managers there'd be 400 managers in which 100 were top quartile and 100 very viable managers. Contrast that with credit. I was at the finals with just like three or four other managers. It was just like four or five of us. There was Oaktree, there was Shankman, there was just a few managers and we'd be just a few of us going to every final with the hedge fund. We grew to several hundred million in a couple years and I could tell that there was a lot of demand for that. So with that, I saw this opportunity that this area was going to explode and with that, having a firm that was wholly owned by its partners, having several products, and having a firm that would be based on meritocracy. So if you do well, you're going to do well. We wanted to have the majority of our partners promoted from within. Lee Kruger, who's in the audience, NYU Stern grad, who runs pretty much half our business, he was promoted from within, joined us as an analyst, as more than half of our partners have.
So do you think you manage differently than some of the other credit firms out there now?
So first, being wholly owned, yes, that's differentiating. The number, you know, starting with several products, we started with three products in our first year. We're about a billion dollar launch, which 26 years ago is pretty good size. And we're not public.
Yeah, it's a good size. We are relevant. But we feel like we can still, we're not burdened by maybe too many assets given our strategies. And we also still being not public. I think when you're public you have a dual, I guess, objective which is you want to grow your revenue and then you want to have very good performance. When you're private you could really just focus on the performance. So we're, you know, very focused on that.
So all of our products are top quartile if not decile pretty much throughout. We have about 10 different strategies. So we're very proud of that.
So what do returns look like?
Um, it depends on different strategies. The hedge funds would be about 10% for 26 years. Our distressed funds would be in the upper tier, upper teens. Our CLO equity strategies would be in the upper teens.
That's a great question. So it's focus. It's, we have a process. We also have a lot of passion for what we do. We talk about trying to always get better. One of the things, as you can imagine, when we started out, the market was smaller and we were smaller and we've had to be broader and deeper to get the same type of opportunities. And so, we've been focused on how do we get broader and deeper? How do we, we know we always have to get better. The idea of, you know, the people who we started in the business, if you didn't learn different moves, different strategies, different asset classes, then you were pretty much left behind. You know, even something like AI that's very topical with research and using as a resource, you know, how to get the most out of AI. I see there is a book party for I think Thinking Machines here and that's something that we're very much using and thinking about how does this improve and inform on what we do. And thinking about, you know, we talk about each year trying to win a Super Bowl and we know that the score is 0-0, so or the one loss is 0-0-0, how do we put ourselves in a position to keep being in contention.
And AI is helping you do that?
Um, it's certainly a resource. I'd say it's more in getting information quicker and helping complete the mosaic than I would say leading us to, hey, you know, I didn't know this and AI helped us. We're not there yet. Opposed to, if research is a mosaic, it's certainly becoming a bigger piece of the mosaic as time goes on.
I guess what I'm really wondering is like are all these people going to have jobs, you know, with AI infiltrating every part of business.
Okay. The short answer is absolutely, many of you will have jobs.
That's not what we were going for.
Okay. Well, but and many of you will think of opportunities you didn't know existed. And so all of you should have jobs. And it just, you may not do exactly what you thought you were doing or setting out to do. And by the way, it was no different. I graduated college in '87. It's the same answer I'd give. So, you know, and the idea that we have somebody great and hey, you know, AI is able to do something that somebody great's doing. So, we should eliminate or, you know, eliminate the position, absurd. We're going to find something different for somebody great. I bet a lot of our peers are thinking about things the same way.
Like what does that mean for a credit firm? Like what are you not hiring for and what are you hiring for right now?
So I focus on the investment side and on the investment side we expect to grow. So we're not, you know, on operations, outsourcing, processing trades, that's a trend that has always been to make more efficient and to outsource. So that's continuing to do that to the extent AI can help with that. Sure. But on the research side, we are growing and expect AI to help us actually screen more efficiently. Now I remember when I got into the business, you had to just order the documents and do it manually. Then you were able to do with FactSet a bunch of screens. Now with AI, you can go to, you know, an AlphaSense and go, can you tell me which is key to all the research I'm looking at Microsoft, tell me what the best analysts say the biggest opportunities and risks are and please summarize. So that's something that's more efficient today than it was yesterday but it's just a resource.
Yeah, I use it actually that same way when it comes to researching guests and topics on CNBC that we're talking about on a given day. So, when it comes to thinking about AI and its transformational impact on business, how are you looking at it as far as the opportunity set when it comes to the investments you're making or the risks that it presents on some of the investments you've made?
So there's certain times you want to catch and not pitch. And what I mean by that is we're understanding not what the hype is. You know, every Anthropic release is going to eliminate an industry. We're trying to understand what the impact is and how lasting and is it complementary or destructive.
Yeah. I mean, we had ServiceNow CEO on today, Bill McDermott. He's pissed. I mean, because their stock goes down. It's come back a little bit, but you know, it's down 30%. His results have never been better.
You look at something like EV and penetration and there was a time going to say three or four years ago where EVs, the penetration was going to continue to accelerate. It stalled somewhat. You look at programming with streaming, even though it was unprofitable, that was going to be the preferred way. And then that also has changed its business model and its valuations. So it's developing and I am reticent to draw any conclusions right now. One of the things that's interesting about software is if you were to use the example of EVs and OEMs, OEMs are very capital intensive. So if the business slows down and it has very high fixed cost then the economics of the business really come into, are very challenged. Software is a cash generative business. Now it depends revenue model but that and it doesn't require a lot of capital and your retention is usually pretty high. So even if the retention is going lower, that's the repeat user of a software program, it should generate a decent amount of cash given different environments. So I do think that there's residual value in contrast to something like an OEM which just may not be economic. So I do think the business models will be more interesting in a bunch of scenarios than maybe what the media is just assuming that they're going to go the way of the carriage industry.
Yeah. But it's not just that. I think it's, you know, we talk a lot about existential threat but also just about the ability for these companies to have pricing. You know, they've had this per seat pricing in the software business and just how strong their moats are, right? In a time where AI does allow some of these processes to be done cheaper and more efficiently.
Yeah. Well, I think like retailing, there are certain retailers who have, you know, different moats than others, and it's hard to talk about software just generally. So I think that if it's more data intensive and requires individual attention and you can have a mistake then that's going to have a better moat than if it's more general. So I think it really depends on the company.
Yeah. So some of these software sort of meltdown and questions about their viability in the future have I think spiraled into this private credit issue.
So you said it's a PR crisis and there's some interesting opportunities. But what do you think is actually going on here which is causing so much consternation?
Well, I didn't, if I said it was just a PR crisis. I think returns will probably be disappointing relative to what expectations were a year ago. So if you invested a year ago, at least for the next 12 months, so the 24 months, you know, a year ago 12 months forward probably will be disappointing relative to expectations as an asset class. And that's the opportunity. I think if you were to look at high yield as an asset class historically, when you have valuations which started the year in the bottom third quartile, top fourth quartile on price and spread, that historically when growth expectations are good, 2% or better, you earn less than the coupon. And if growth expectations slow down, so your actual results instead of being good growth of 2% plus are 1% or less, then you're negative. So entering the year in just high yield you had a poor upside downside. And I think private credit which tends to be riskier is more exaggerated. So just as a neighborhood, I think it wasn't a great neighborhood to start with. Now, in terms of what was desirable in private credit is you got to have a lot of companies that had large valuations, which software did, but poor ratings. So, a lot of the buyers of private credit and of software were looking at the transaction values and having comfort that that was your asset protection. A company was worth a billion dollars, so it could have 250 of debt. Well, if it turned out that the company was only worth, call it $400 million, that 250 seems pretty aggressive. Now, one interesting thing on the software side is if you look at some of the public software companies that have issued debt, you can buy the first lien debt at approximately 25% of the transactions. So, I was looking at some stats of some of the companies we have and if we were to do a cross-section, you have about 300 million of EBITDA for the companies, there are probably at least $5 billion transactions and you can buy the companies for about a billion to a billion and a quarter. So, they certainly are on sale. Whether it's justified or not, it's certainly to me it's provocative about what some of the value is.
Have you been involved, I mean, in the past few years on the private side as some of these other public companies have that everyone's worried about now, Blue Owl and Aries and Apollo?
So we've done private credit for 26 years. So it wasn't like we just got involved.
Because you do multi-strat, you do private credit, you do public, right?
Yep. In fact, Equinox was one of our first private credit deals of the fitness centers. I think that was 2001 or 2002. So, giving the money to expand.
That was, was that a good deal?
Yeah. Yeah, it was a... still around.
Yeah. I'm one of the few in that space that's still around after 26 years. So we tended to focus though not on the Equinoxes of the world, but looking for companies that on average were worth about a couple billion dollars. So that tended to, so we feel pretty good about where we are in that and avoided kind of some of the smaller companies.
And what's going on with some of these redemption requests? How do you think that plays out?
What I don't know is what the buyer was told about how this works. In other words, you know, my guess is it's disappointing that they only can service 5%. But if it was communicated, you know, hey, this is the risk. When are you buying these are retail products? That's the issue that I just don't know how it was explained.
Should they be retail products? HLAN, BDC, all these?
Yeah. You know, is that a good thing?
It's, I think that there's the matching the opportunity with the supply of product. And I think it strikes me as if they became manufacturers. So, what do I mean by that is as long as something would satisfy the criteria that they were looking for, let's just say a software company that's valued at a half a billion dollars that's looking for $200 million of credit, of debt, we're going to do it. And then if we do that enough times and we do it enough times in other industries, we're just going to reload opposed to what's the quality and what's our, you know, so I think the quality, my concern is as these funds got larger and larger, straight, but I can only guess on that. That's what it seems like when you look at some of the cash coverage on some of these funds that's reported which is, you know, somewhat precarious to the dividend that the only way they could satisfy is by borrowing and using the PIK interest. So I don't know, Sarah, if you know what I'm referring to.
No. So the... I'm sure people in the room though do. So the BDCs pay these dividends and the dividends often are not covered by cash.
So they borrow on it. Now the reported numbers, let's just say you have a dividend of let's just say $100 million and you have interest income of 110. So you go, well no it's covered 1.1. Well, if it turns out that 30 million is payment in kind interest, then your cash interest coverage is below the 1.1. And many of the BDCs have cash interest coverage of less than 1:1.
So, so what happens? Do the dividends go away ultimately?
Um, well they may have to if it looks like the PIK interest is fictitious, they're going to have to lower the dividends that...
You think that's the next shoe that could drop.
Um, it's certainly that's what the market's predicting.
You know without knowing these portfolios it's hard for me to, you know, pontificate but that's clearly what the market's concerned about.
And then there are these new headlines like the big banks like a JP Morgan is for instance coming out and restricting some lending for these companies. What does that tell you?
That they want to be larger in private credit.
I think Jamie's been, yeah, jealous of private credit for a while. No.
Um, it's certainly a part of the market that I think they wanted to do more in. Now, I do think I genuinely think when he says it's overextended, I think he's commenting on what I just mentioned. So, I think there are aspects of that, but I think they'd like to get larger in that space. It's been a good space and their sourcing is very strong.
Right. Ultimately, does private credit as an industry get bigger after this or do you think this is like some sort of wakeup call?
So overall, credit has always expanded, you know, in my lifetime, so I would expect it's going to expand whether it's expressed through private credit or broadly syndicated loans, you know, it's just I'm not sure the way it's going to be expressed. I mean look at structured products, was very big up until the financial crisis and then really hasn't come back but that isn't to say that people didn't, you know, that those borrowers just stopped borrowing. They just found different outlets to get credit.
So that's what could happen here. Why did you not take Golden Tree public ever like some of the others?
Um, well, we really wanted to focus on performance and we didn't want to be, you know, have a dual focus on revenue. And we like, we think it's a competitive advantage to be private and to be a private partnership.
But if you are driving performance, don't you drive revenue too?
We do, but it's not always, you know, so, you know, there are times where we don't, you know, feel when there's less volatility, less a need to raise money.
Got it. Yeah, that's probably nice.
So, just one more on the private credit thing. Do you find that, do you think it's at all systemic what's happening?
Like a larger risk to the system?
No. To have a bad distress cycle, you need a bad economy. And when you have a bad economy, there are a lot of contributing factors. So for something to be systemic, there just needs to be a bad economy. If it's just on its own, let's just say it's isolated to disintermediation in software, I'm not terribly concerned on that. Will there be banks that need to raise money or, you know, funds that had very poor performance? Sure. But I wouldn't expect that to be, you know, broadly problematic to the economy.
What about this? We have these rising oil prices and gas prices, the war in Iran, some jitters around that as well coming at the same time. Does that make you question the cycle?
