Credit Exchange with Lisa Lee

“Whenever you have noise, that leads to more selling volume in our market – so volatility for us as secondary investors is a very good thing,” says Michael Schad, head of credit at Coller Capital, a secondaries specialist with $55 billion in AUM, on the latest episode of Credit Exchange with Lisa Lee.
Schad is positive about the overall health of private credit, describing it as a “very attractive and sound” asset class, with its rapid growth coming alongside a more recent maturing of the market.
He notes, though, that a decade is “not a very long time”, as some of the funds can run for that period of time. “Because the asset class was so new, people couldn’t really calibrate what would happen in a more volatile market environment, which we just happened to hit over the last couple of years.”
Schad explains that Coller generally engages in two types of transactions – buying fund positions where the seller is a limited partner (LP secondaries), and transactions where it is a general partner making the sales decision (GP secondaries). The latter have become increasingly popular more recently.
The firm is also a leader in the continuation fund market. Schad notes that the major evolution that has taken place over the last couple of years is that technology developed in the equity secondaries market for continuation funds, has been adopted “on steroids” in the credit secondaries market.
“[The reason] that was so successful... is that the way a continuation fund works in credit is very different to private equity,” he says.
“What you have now in private equity, it is maybe a single asset that gets into a continuation fund. In credit, what you have is actually still very diversified portfolios. So you still have high quality loans in a very, very diversified fashion that a GP brings to a continuation fund.”

“It’s just like nothing we’ve ever seen before,” says Bryan Whalen, CIO of fixed income at $200 billion global asset manager TCW, in reference to AI’s capital spend, equity prices and momentum on the latest edition of Credit Exchange with Lisa Lee. “What we’re looking at here is just everybody on one side of the boat, too much enthusiasm,” he says.
“It just feels like it’s the beginning of the end of the euphoria.”
The AI spending spree has broken the natural feedback loop to slow down borrowing. While the bond market is raising the cost of borrowing, these companies turn around and say, ‘we don’t care,’ Whalen contends.
If the market starts to question the fundamental elements of the AI capital spend, that could lead not just to volatility in the sector, but for the rest of the market. And that would likely lead to an economic recession, reckons Whalen, who oversees $170 billion in AUM.

“One of the predictions I would make is that the private equity industry is in a tectonic, Darwinian moment itself,” says David Golub, co-CEO of Golub Capital, a direct lending specialist with more than $90 billion in AUM.
Speaking on the latest episode of Credit Exchange with Lisa Lee, Golub also sees a ‘Darwinian moment’ for private credit due to higher-than-usual credit stress and lower-than-expected returns.
“The winners thrive, they adapt, and they grow, and the losers, they don’t,” says Golub.
This will all lead to more consolidation in the industry, and a core group of private equity and private credit firms of size unseen before.
David, who along with his brother Lawrence Golub has been in the private credit space virtually since its inception, also speaks about the history of the industry, the recent bout of negative headlines, and trading the illiquid asset.

Lotfi Karoui, multi-asset credit strategist at fixed-income behemoth PIMCO, says the top risk to markets and the economy is the potential unwinding of the AI capex cycle, on the latest episode of Credit Exchange with Lisa Lee.
“Then you’re going to tighten financial conditions,” says Karoui, which is bad news for equities. That will have wealth effects and probably affect the broader economy. The market isn’t blindly rewarding all capex financing announcements, he says. Right now, markets are seeing some indigestion regarding data centre financing – Karoui recommends looking at dollar versus other currency debt to see whether that’s fundamental or technical.
Karoui, who is also co-head of client solutions and analytics at PIMCO, is watching six-month oil futures and diesel prices to gauge whether the resumption of the Iran war is choking up economic activity. We discuss his inflation expectations (moderating), the direction of Federal Reserve monetary policy (on hold), and private credit (seeing some stress). He also finds pockets of fixed income in emerging markets such as Brazil and South Africa compelling.

“We certainly have noted from an oil price or fuel price perspective, just how comfortable businesses have gotten with oil price or gas price pass-throughs,” says Aaron Kless, CEO and CIO of direct lending specialist Andalusian Credit Partners, on the latest edition of Credit Exchange with Lisa Lee.
“They’ve really been able to manage that price volatility, and price spikes, quite well.”
Andalusian has a unique perspective on the macro-economic backdrop. Its executive chairman is Roger W. Ferguson, Jr., a former vice-chairman of the Federal Reserve, who also sits on its investment committee.
“Our view certainly is that there’s really no expectation of rate cuts, [and the] possibility of rate increases,” says Kless.
The firm focuses on the so-called middle market segment, which drives around 40% of US GDP and 30% of US employment.
“We continue to see real resilience in the consumer, even at the lower part,” says Kless, who was formerly head of non-sponsor direct lending at Apollo Global Management.
Kless also discusses the attractiveness of sports investing due to the recurring, predictable and sticky nature of the cashflow. The World Cup will help boost soccer in the US.
“We’re on the precipice of something really exciting around soccer,” he says.
“We get to participate in the market, or at least in the deal flow in the market. [There are] lots of smart and interesting things happening around what I would call ‘minor league’ soccer.”
Kless also talks about what makes a good investment in sports. For instance, pickleball as an amateur sport is interesting, but remains too emergent from a professional perspective for a credit investment.