This Is the Impact of Billions Flowing Into Private Credit

Tracy Alloway (0:10)

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, it's a new year.

Joe Weisenthal (0:18)

Happy new year.

Tracy Alloway (0:19)

Happy new year. This is our first podcast recording of the year. And I think it's fair to say that we are going into a different environment in terms of sentiment than we were going into 2023

So this time last year, everything was very pessimistic. Lots of people were expecting recession.

The hills were alive with the sounds of inverted yield curves and things like that. And this year feels a little bit better. Stocks are up. Lots of talk about a soft landing. Of course, the irony is that if there is going to be a recession and, you know, 100% chance there will be a recession in the future, it's closer than ever. And yet we feel a lot better about it.

Joe Weisenthal (0:59)

Yeah, it is funny. The optimism that we really felt in December about soft landings and bull markets and rates coming down and normalization.

Interestingly enough, we're recording this January 3rd. So far, I guess this is, we're looking at, we've had a few down days, but you know, whatever, a few days here or there, it doesn't make a big difference.

Tracy Alloway (1:18)

I call it profit taking Joe. But anyway, you know, a new year, new themes to discuss.

I wish. But one of the things that's still with us is this concern about whether or not the economy can escape the full force of these very dramatic interest rate hikes that we've seen over the past couple of years, whether or not there's still a shoe to drop, basically.

Joe Weisenthal (1:45)

Yeah, you know, it gets to the lags debate. We talked about it with Anna Wong at the end of 2023

The market expects rate cuts. Obviously, some people think as soon as March, unclear when or if that will be.

That theoretically is taking off some of the pressure from markets, particularly credit markets. But yeah, we had this really big rise in rates. Some people think that the lagged effect still has yet to come. And so sort of trying to understand what's changed from when we were adzerped to when we were at 5%, I think is still an important conversation to have.

Tracy Alloway (2:18)

Absolutely. And in my mind, one of the big areas of concerns, and it also goes to the idea of what's changed over the past few years, has to be private credit, right? We've seen this absolute swelling of this particular asset class at a time when interest rates have been going up and there's still lots of concern over whether or not this new source of funding basically knows what it's doing, right? Like are these managers, are these investors, like getting it right?

But then the other thing I keep thinking about, and we've sort of talked a little bit about this, but this idea of the macro impact of private credit. If you have a body of money that is now 1.3 trillion or 1.6 trillion outstanding, depending on which estimate you're looking at, that is more or equivalent to the size of the entire junk-rated corporate bond market. So there's basically this like new pool of money in the economic system at a time when interest rates are going up and we're not really sure what impact it's having.

Joe Weisenthal (3:24)

And I'll just add on to that. Part of the interest, obviously, is, okay, what does it mean for this cycle, higher rates, et cetera? But this asset class that's exploded, it's not gonna go away regardless. And the expectation is that it's going to, over time, continue to grow.

So I think there's just a lot of need and interest, but I would say need to sort of understand, as you say, the macro impacts from this space.

I'm also curious about the source of excess returns. We talked about it a little bit, but it's always sort of important when thinking about an asset class. It's like, okay, what is it specifically that's being exploited here for above average returns? How correlated, uncorrelated it is? I think it's still worth trying to untangle the impact and the role of this asset class.

Tracy Alloway (4:09)

Absolutely. So we've done one episode on this topic previously. We spoke with Laura Holson from New Mountain, and she basically gave us the elevator pitch for why this asset class has been growing so dramatically in recent years. But in this particular episode, we're going to dig a little bit more into the macro impact of private credit, how it competes with other types of funding, and per Joe's point, where the source of those excess returns is actually coming from.