We're talking about subprime taking down

the economy at $1.2 trillion. There's a

trillion dollars of private credit. So

much money is rushed into this. It's the

anatomy of a bubble, but really the mass

of the crisis is insurance where there's

a $10 trillion balance sheet. These

insurers balance sheets are levered up

in many cases more than Lehman Brothers

was in 2008. I mean, we're talking 90

times 100 times in some case. Today's

episode is brought to you by the Tukrium

Corn Fund, ticker C O R N. Let's get

into it. joined today by Nick Neoth,

financial investor, researcher, and

author at Mispriced Assets. Nick,

welcome to Monetary Matters.

>> Thanks, Jack. It's good to be here.

>> You write about a lot of topics. I think

I first stumbled upon your work, the

work that that you've done on private

credit and alternative assets. So,

private equity, real estate, but

primarily private credit. And you have a

piece out called the smart money is the

subprime this time. and you have some

very very bearish things to say about

the private credit industry. You say

this doesn't look like 2008. This looks

like 1929. So, first, what are we

talking about here? Just remind viewers

what private equity private credit is.

Why are you so concerned? What's the

issue here?

>> Yeah, I just wanted to start off and say

I'm not a perma bear. You know, I've

made money this year. I write about

longs. a certain segment of my audience

is very interested in the systemic risk

I've identified that I think is going to

be the end of the cycle. And I think the

end of the cycle because it's been a

long cycle basically one I don't count

2020. I don't count 2022 is going to be

uglier for numerous different reasons.

It's kind of like a marriage of builtup

risks with private credit being the

trigger for a massive blow up that's not

going to start in the banking system

could end up affecting the banking

system. But really the mass of the

crisis is insurance where there's a $10

trillion balance sheet that's 150% the

federal reserves.

>> Tell me about that. What do you mean?

>> I mean we're talking about subprime

taking down the economy at $1.2

trillion. There's a trillion dollars of

private credit, broadly private credit.

The concerning part is the direct

lending, which is when a private equity

company takes debt out, kind of like a

mortgage, in order to buy a business.

Now, this can be done well, but they're

running leverage at seven times IBIDA

that's adjusted. So, IBIDA, your

audience definitely knows this. I go

into podcasts and it's less initiated.

That's fake earnings. That's what Warren

Buffett would call fake earnings. And

then they make it doubly fake because

they adjust it on synergies that rarely

come true. S&P comes out with data on

each vintage and 50% of the time they

miss by 25%. Right? And and sometimes

it's 40 or 50%. So you can adjust those

IBIDAs 30%.

And then be looking at leverages at nine

times that.

>> Why are you concerned right now? I'm

concerned because of the massive

leverage running and then I look at the

credits and I've done loan level

analysis from BDC's to an insurance and

originally it just started off as like

this is going to be not good in a

recession. Private equity loves smaller

companies. They keep on saying that's

where the opportunity lies. Those the

vast majority I mean 80% of them are

cyclical. 30% are super cyclical. The

economy this year in 2026 is not that

bad. And there are defaults above 200

late 8 levels. So the more work that

I've done on this and it's been about

seven seven months of strict work. I I

pin this as a problem three years ago to

clients. I read on Substack. I also have

institutional clients in September

October. I'm like this data center stuff

is all ending up here. I got to figure

this out. But over the past 7 months,

that's when my thesis

first started that this is a systemic

issue. The key to it and what people

constantly say is, "Well, the banks

aren't doing this. There's the shadow

banks. The banks are fine. It's there's

some lending to broad portfolios.

They have some on their balance sheet,

but it's it's not enough to take down

the banks." They're right. That does not

mean it's not systemic because what's

happened is that it's ended up on

insurance balance sheets. And I started

off by saying it's a$10 trillion dollar

balance sheet. That's just so much

money. That's one almost onethird of our

federal federal debt. $1 trillion on

those balance sheets is private credit.

And if those balance sheets go under,

people might not know this, but there's

no FDIC. They have a guarantee that the

other insurance companies will have the

money. Do they collect the money? Is it

preunded? No. It's on their balance

sheets almost always tied to a tax

credit. So basically, there's no money

there. And

>> so you're talking about like a a

reinsurance recoverable. If I'm an

insurance company, I sell some of my

risk to you.

>> Same idea. It's not reinsurance.

Reinsurance is a whole another whole

another issue.

>> Maybe I've never heard of this. What

What are you referring to exactly? Like

like a life insurance company. Is it a

mutual thing? like what are you what are

you talking about just so I know

>> so each state will guarantee 250k that's

the minimum across states some states

it's 300k some states it's 500k of a

pension risk transfer of a annuity of a

life insurance policy but it's a

million-doll life insurance policy so

there's been recent analoges 777 PHL

where people that when these companies

go into receiverhip they don't get their

money back they get 30% 5 years later,

but

there are $22 trillion of inforce

life insurance.

So

that's a lot for the states to take on.

They they they won't even a very small

insurer stresses a state balance sheet

because of DoddFrank when it becomes an

orderly windown of even one big insurer.

and these the private equity guys and

we'll get into why private equity got

into this insurance game but even one of

those an orderly windown of those

balance sheets would not just stress

private credit when you're talking about

assets and liabilities and you're you

know questioning the assets

it needs a mismatch to happen. When that

mismatch happens, then you're sell

you're winding down an entire balance

sheet that might be $350 billion of

assets. In Athen's case, it might

>> Yes, Athena is owned by Apollo and kind

of started this whole rush into the

insurance world. I think it's going to

stress everything in credit. And then

you have to worry about the mor the

mortgages like, you know, the

residential real estate market's bad.

Commercial real estate's a disaster. the

assetbacked lending just broadly, the

consumer debt, all of this is going to

be sold at the market. And I think that

it's going to shock the system in a way

that the Fed may not have the tools to

respond to. They just the numbers are so

big and it would take a double COVID or

at least a COVID level response in a

scenario where it's like we don't have a

pandemic. we have just a cycle that's

gone on too long and there's been excess

risk taken and bad incentives. That is

something that's going to be hard to

jawbone. The response to that credit

markets can be jawboneed by the Federal

Reserve where the Fed prints $2 trillion

and $200 trillion of credit becomes

unlocked and unfreeze.

No, no, we're talking like one to a

hundred effect. That's a good Fed job.

I'm worried that people will lose trust

in the system in a way that the Fed has

to, you know, starts with a trillion,

goes to two and a half and then

ultimately 10 and then you have to worry

about the dollar something.

>> So, so Nick, we we'll get into the macro

and in particular the insurance

companies. I've got a lot of questions

there, but yes, safe to say let's like

you're absolutely right that the

insurance companies are very deep into

private credit. No doubt about that.

We'll get into the details later. just

tell us right now your concerns about

the actual assets within private credit.

So I think it is fair to say a lot of

the riskier loans the banks used to make

because of DoddFrank postgrade financial

crisis regulation now the banks are not

making them. So suddenly these new

private lenders show up and they

actually make fantastic returns like

they they make loans at 11% that the you

know really should make 7% but no one's

there so they they do really well for

their investors and okay maybe defaults

are slightly higher than the high yield

bond market but recoveries are actually

better. So they I just want to say like

they they have done really well. When

did in your view the private credit

markets stop performing well and tell us

about the defaults that you're seeing

and how you define them. So, I would

push back on the idea that they should

yield 7%. I don't think that there's

anything in credit markets, especially

at scale, you could find granular

opportunities where you get paid more

yield for the risk you're taking on. In

the beginning of the private credit when

the banks weren't allowed to do leverage

loans and all of a sudden private

equities stepping in and new credit

vehicles and opportunistic credit

stepping in sure there was an ili

liquidity premium that was never 400

basis points 4%. That was maybe 150 200

basis points because of the incentives.

I think that if you see a 9% cost of

debt loan in these portfolios in the

public markets, it would be more like

11. I think that you're paying 100, just

to be, you know, conservative before

anyone says I'm way off on that. 100

basis points you're paying to have these

guys mark their Excel models and you be

able to tell your pensions everything is

smooth returns.

>> Yeah. Yeah. Well, like if I have a

printing shop that makes $40 million a

year, which you know that that would

honestly be pretty good. I' I'd do that.

But like if if someone made a loan to me

at 9%. You are right that the high yield

bond market is way too big for me. I'm

way too small for them. So they're not

going to make me a loan. So like my

alternative is a bank that probably is

going to charge me way more or not give

me a loan at all, especially if I'm

highly indebted. So let's just take

that. Yeah. So I I hear what you're

saying. a lot of big companies that

private equity, especially software, you

know, if if some of these software

companies went to a public markets,

it would be way higher. Like, let's just

say that they were publicly trading. And

that also kind of brings another point.

The companies that are in private

markets are worse companies with less

moes than their public market comps. The

public market's the best of the best.

The software stocks that you've seen

down 70% 50%.

Those are better than Toma Bravo's

portfolio which included Medallia. But I

encourage people to go look out the

portfolio companies to Bravo. I'm not

saying that they're all bad. But if you

looked at a software stock at 10 billion

and compared to, you know, a five10

billion buyout from Tomas Bravo, I'm

pretty sure that you would lean towards

the public comp. Yeah, they're more like

Adobe than they are Service Now.

>> Well, Service Now, Service Now's, you

know, I I'm bearish on Service Now,

those the tickets and Adobe I'm bearish

on I'm I'm bearish on software,

>> generally speaking,

>> but those are way better than what Tom

Bravo owns. I mean, they own McAfee,

they own, you know, a lot of lot of

companies that I'd never seen before. I

had to research and do alternative data

to figure out, are they doing well? And

the answer is typically no. Here's what

I can say with confidence is that if

they were publicly traded companies,

they would also be down 60 to 80%. Like

so many other public stocks in

>> I genuinely think that some of these

companies if they were if they were able

to be shorted too, right? That's the one

thing about private equity. You can't

short it. They're not used to the heat.

This year they kind of got ambushed by

that. I think that there's some $2

billion companies in these portfolios

that would be I live in small cap land

and micro cap land. I think there would

be 250 million dollar companies like I

some of them the average would be down

at least what the average software stock

is this year.

>> Okay. So tell me exactly where your

concern is located. software those deals

actually tend to be on the larger side

like it's the or is it the the the $40

million of ibidop lithography print shop

you know

>> there's not a lot of that when I look

through these uh you can see in the

BDC's really well

>> it's a lot of rollup strategies so

dental practices yoga shops you know if

you go into smaller private funds it

might be gardening or pest control HVAC

is huge even in the public shop. So the

software are the biggest deals. Consumer

uh has some big ones but there's also

these rollup strategies that are built

on this idea of IBITA arbitrage. One of

these things private equity guys say you

know stories they tell at dinner about

how they create value.

I you know sure maybe you can share an

accountant but the idea that you dilute

the quality of business that you do and

just roll it up under a bigger company

where ultimately inefficiencies can lie

and you can just immediately mark up a

roll an add-on acquisition at seven

times IBIDA to 12 times IBIDA and then

say your your IBID underwriting is X and

take take out more debt Yeah. And sorry,

what you're referring to is like you buy

one yoga studio that has an HR system, a

software system. You buy 20 of them and

then you consolidate, you know, you you

let go of the HR people and consolidate

into one software system and achieve

synergies. That's the word to use. And

then suddenly your earnings are higher

and then you can borrow against it.

That's what you're saying.

>> Yeah. They they love the world word

synergies. I mean, it's really just a

capital advantage. I'm not saying that

there's no advantage to doing that. If

you're buying up all these yoga studios

and by the way, you have a $4 billion

fund and you can put more money into it

and you can take out debt on it at a

lower cost of capital in order to

renovate your studio and compete with

the mom and pops. Yes. But then the

question is, what if you don't have the

capital advantage anymore?

>> Tell me the stress that you're seeing in

the credits. you have to do a lot of

work to really get granular on it. But

you can just Google private credit

defaults and it's above 2008 levels. And

if that happens for an extended period

of time, I think six quarters based on

my math, then these CLLOs's, which are

collateralized loan obligations. In

2010, we had collateralized debt

obligations. Now we have loan

obligations.

Um you're going to start seeing forced

downgrades of those. That's mainly

what's on the insurance balance sheet

and what I see as a primary trigger. Um,

you have to have a capital call when

that happens. But defaults are up,

leverage is extreme. And well, I started

off with these people are not investors.

That was my first piece in private

credit. I encourage people to read that

one. I think it's kind of lost lost. But

the smart money is a subprime this time.

Some of these private funds, they're not

even including pick in the leverage

because it's not cash and they don't

have

>> which is payment in kind, which is like

I yeah, I borrow, you know, a million

dollars and I pay back 600,000 of it in

cash. I pay back 400,000 of it in

payment in kind, which means I just pay

them back in more debt. So, it's it's

tacked under the principal. Yeah. And I

I just want to say um so private credit

defaults

now I think I guess I'm going to take

you at your word that they're higher in

2008 but in 2008 they weren't high.

That's the point, right?

>> Mhm.

>> They weren't high.

>> That's true.

>> Barely existed.

>> Yeah.

>> It was like 6%. But it was a totally

different

>> asset class. I mean so much money is

rushed into this.

>> It's the anatomy of a bubble. If you

read Soros, the amount of money and and

it's particularly bad when it happens in

credit a spa bubble that does that's not

systemic. You know, people lose money.

See what's happening in Korea? Like

[laughter]

people are just buying 10x leverage

somehow, borrowing money, putting it

into a broker.

um when it when it's credit, it becomes

a problem because it could seize up the

what in an economy like ours is the

lifeblood of the economy, which is debt.

>> How do you define defaults now? Because

because I've had some people say that

defaults in private markets are actually

kind of lower than they were a year and

a half ago.

>> Yeah, I think you have to um have have a

certain bias to say that things are

better than they were in uh 2024.

um defaults. It just depends on what

basket if you're including BSL.

I mean, maybe what I'm looking at is

direct lending companies and the 6.3%

number. I mean, it's S&P or uh you can

go do do a do a search on it. It's it's

actually not led by software, which is

interesting because software is at 2.3

2.4%.

Again, there's payment in kind there.

So, you don't you can kind of just

pretend until the end. So, one thing

that I just want to emphasize to people

and everyone will understand this. We're

talking about seven times leverage. It's

like having credit card debt. Sure,

maybe it's 11% interest. Credit card

debt, seven times your pre-tax income.

That's that's the equivalent. And then

you adjust it for the fake IBIDA. And

your pre-tax income, you really have

expenses. So, you know, you're you're

adding back something. you know, the

they add back rent in these IBIDAS,

which is pretty insane. Um, in some of

them, you know, they'll take a car wash,

they'll sell the rent to related party

REIT, they'll be able to borrow against

the REIT, and then they'll pay below

market rent on it so that they can

borrow more from the bank. Um, and then

they'll add back rent. So, people in the

node dobar,

IBIDA plus rent. Um, [laughter]

so, um, seven times can become nine

times and then you add pick and it can

become 10 and a half times. Um, so we're

talking about you make a h 100red grand,

you have a million dollars of debt.

That's that's how much leverage is

running here.

>> And that sounds very high. I'm not

saying it's not high, but if your rate

is you you're paying 7% on that a

million dollars you have in debt, that's

70,000 a year. that is less than you

have in you have an income. So that is a

you do have more than enough cash flow

to pay off.

>> Yeah. So so that's that's basically the

math. But I think it would be closer to

you make $80,000.

And if you think about the variability

of business performance of these

companies, imagine a recession. And then

if you're talking about credit, you need

a 90% hit rate,

right? because you're only get your

upside's capped, your downside's also

capped, but it's 100%. It it really

doesn't work. I see a lot of people ask

me like, "Hey, why don't you focus on

private equity?" I do focus on private

equity.

>> One, if I'm talking about private

credit, it's a correlary that this is a

commentary on private private equity.

But at least in private equity, and you

see it less these days, but you could

have a 3, five, 10x outcome.

>> Mhm.

>> In in private credit, you can only get

the it can only be money good. That's

the best it can be. And if you're

looking out and saying, "Okay, we're

going to have some disruption with

technology. Maybe money got too hot in

dental practices, HVAC, all all these

various sectors."

If you have 10% defaults and we're at 6%

for an ex four quarters, you have

massive problems. Hope you're enjoying

today's interview. This episode of

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back to today's interview. What kind of

recoveries are you forecasting or do you

expect?

>> Way lower than what they're saying. Way

lower. I mean, they're selling the hard

assets. They're pledging them to get

more debt to they the the amount of

credit games that I've been exposed to

over this past year. I talked to a

premier lawyer and the LME and I'm

talking to bankers. It's outrageous. And

then I'm reading the footnotes and

seeing what's pledged to what and the

same lean have different pricing by the

same company. Meaning there's an

agreement among lenders. It might say

it's first lean senior secured but it's

second first lean senior secured. Like

um the recoveries and software are going

to be horrendously low. the data in the

majority of these companies. I'm a tech

guy. Like I I I'm

bullish AI. I think there's gonna be

huge losers in AI, but in aggregate, I

think you can justify the spend. I just

clarify that.

>> Um the software

uh data on the majority of these port

codes, it's just not useful. I've talked

to OpenAI guys. I've talked to anthropic

guys. They'll pay a lot one time for

really good data. The majority of these

software companies do not have really

good data. If you are data bricks, which

is a private company that's been well

funded by Blackstone

um and others, you're going to be fine.

Their infrastructure, they're going to

be the build. It's a great company, but

the majority of these are rappers wrong

a like a niche process in enterprise

spend that can be oneshotted by the

front frontier models today. They have

one to two-year contracts. Look out when

they start rolling off. Today, this is

going to come out in a few days, but

today IBM comes out. And I think that's

a story that's going to be told a lot of

times. And a lot of these were

underwritten with 10 15% Kagger. And

that's why they could justify the pick,

right? Because you could grow into the

debt. And that's, you know, kind of what

we're trying to do as a country,

>> right?

>> If you don't grow though, you are in a

major major problem.

>> Yes. Tell us about the different layers

of debt because a lot of times when

people say, "Oh, private credit's not

that levered." I think they're using

some official data that does show that

it's actually not that layered but

levered. you track that there are

actually five or maybe even six layers

of leverage on some of these companies.

You know, Jensen Wong talks about the

the five layer cake of AI. You've got a

six layer cake of of debt here. So,

let's start with the operating company

and then go down the cake. Start at the

top of the cake.

>> Yeah. They they don't talk about the

operating company. So what they're

talking about is the fund level debt the

BDC

the bonds the BDC sells or you know

they'll have a collateralized fund

obligation the underlying credits as we

talked about are seven times leverage to

be generous that means that to a

business outcome if you miss IBO by 25%

leverage to the outcome is significant

then you have the underlying portfolio

of companies So a BDC might sell sell

senior debt, pledge assets, funding

agreements.

That can be about 30 40%. I think that's

what typically people think of when

they're talking about how much leverage

is in this asset class. Then you have

the underlying debt of the money that's

going into the funds. So, if you think

about the [clears throat] people that

will go into a fund, it's going to be

allocators, wealthy individuals, and the

general partners.

The general partners being the people

that make the investment decisions at

the firm. The allocators might be

sovereign wealth, pension funds, or

insurance companies.

The pension funds are not that levered.

Also, endowments. The pension funds are

not that levered. endowments are more so

there might be funding uh uh

subscription lines where they don't have

the money right now but they'll have

them in three months that's not so

worrying but the sovereign wealth side

as the Arabs have contributed I believe

a trillion dollars to private markets

and they've currently have a trillion

dollars allocated to private markets

they will do a repurchase agreement in

order to send a hundred uh a hundred

million dollars of US treasuries a

10-year to maybe Norg's bank or some

European bank or some American bank or

they can just ask Scott Bent for a swap

line and then they will get back minus

haircut a billion dollars. So there

could be 10x leverage there potentially

up to I've heard 20x leverage and then

they will contribute that billion

dollars that they originally only had

100 million to different private equity

funds broadly speaking maybe 250 million

a pop. So that's from the inside. Then

adjacent to that, the general partners

can borrow from their funds or this

burgeoning GP financing industry where

it's maybe 7% cost of capital and they

get your stake if you can't pay it. It's

basically a margin loan into it.

>> 5x leverage on that. and they can

justify this because none of them

believe that you're ever going to get

negative returns over the course of a PE

fund or private credit fund. So you have

this the from the bottom you have GPS

levering and LPs levering up into

private credit and private equity funds.

Then on the equity side, the private

credit is leveraged to the equity. And

then under each of those portfolios, you

might have 30% LTV, meaning loans

against the entire portfolio that is

first lean. Meaning the GPS and LPs

don't get any money. The the banks or

the insurance companies that lend to the

broader funds get the money first, get

the returns first. And that's what

people typically say. They're not that

levered. If once you stack it all up and

there's some smaller ones too. I believe

that there's only in a buyout industry

total total uh private equity debt which

includes private capital is about 10

trillion. What's leverage buyouts is a

little bit over 4 trillion. I believe

that there's only a trillion

dollars of cash that's gone into that

industry. like legitimate cash. Not I

>> You're saying that it's mostly borrowed

money.

>> It's mostly borrowed money. Yeah. But

you're also seeing Harvard go to debt.

>> Yes.

>> They're going to deb debt capital

markets. They're So is Yale. Yale's 50%

in privates

right now. 50% of their money is in

illquid assets that they better get back

based on the amount of money that they

spend. So they're actually selling bonds

in order to

fix the liquidity problem and again

counting on the exits actually

happening. That's when it's actually

legit.

>> Yes. I almost say because of the Trump

administration's policies towards like

Ivy League universities and such that's

also a pressure there. So it's it's you

know many many many forces of why

they're they're issuing bonds. But the

facts that you said are are correct. I'm

not going to to dispute them. Okay. So,

why do you say that this is 1929 and not

2008?

>> 2008 hurt the little guy. 1929 there was

a lot of people that got extremely

wealthy off the stock market

and they were the people that got wiped

out. So my point there is

if you think about the people taking

excess risk, there's some great stories

in the Big Short or otherwise and you

know it's a adult entertainment dancer

that has four homes and she's like oh

you know I've got some money and this is

a great investment and that those were

the foreclosures.

This time I see the white collar workers

being primary effect. I see the cause of

this being the private equity guys that

went into insurance and made it a profit

center. They did the Warren Buffett

approach but started taking F35 level

risk.

>> Okay. Tell So now as as I promised we'll

go go to the insurance sector. So you

are absolutely right that the private

credit industry and broadly the

alternative asset management industry

has they're always looking for investors

of course you know as as most investors

are and when you're managing other

people's money and they've turned to the

insurance companies to manage their

money and in some instances they

literally bought the insurance companies

so Apollo created an insurance company

or bought an insurance company Athen KR

did the same uh with a company and many

all the other big alternative asset

asset managers that are publicly traded

have a giant arm of managing insurance

capital. And I also believe that a lot

of this insurance capital is in the

health and life uh space. So, so

annuities, life insurance and the like,

which on the underwriting side is a

little bit of a commodity. So, like in

the, you know, if I'm if I'm writing

flood insurance and you're writing flood

insurance and we're we're competitors,

you may be way better at pricing than I

am because you have some special insight

on like the hurricane patterns or

California or Florida, whatever, some

sort of niche in the market. That's

extremely rare in like life and health

insurance. very it is like a commodity

like the actuaries have figured out if

you have you know if you have an

insurance pool of 500,000 people like

they know how much it costs just because

it's it's the law of large numbers. So

then how do you get an edge as a life

and health insurance? You it's really

you're not an insurance business. You're

you're an investment business that's

disguised as an insurance business.

>> Yeah, that's a that's a sophisticated

point that you made about the

commoditization of this asset class. Um

there's not a lot of variability to it.

if your home is inland in Florida, maybe

you have better data on that. [snorts]

Um, yes. So, again, the the balance

sheets are so massive. This is where

I've spent a lot of my recent time on it

because I think that there's an amazing

trading opportunity uh shorting these

balance sheets honestly. um

they have seen these assets and the the

one thing you didn't mention the primary

reason they like this capital is because

to them it's permanent [clears throat]

right they'll call it permanent capital

it's not permanent nothing in life is

permanent but they call it permanent and

they think that the duration is long and

the asset and uh uh liabilities are

perfectly matched and

>> yeah you're talking about alternative

asset management firms, they have an

issue in private credit. They in 2015,

they go to all the big, you know, rich

investors. They fly to Saudi Arabia,

they fly to UAE, they fly to go to all

the endowments. They raise a fund. Seven

years later, they pay back the fund.

They've got to raise all that money

again. It's it's operationally it must

be very tiresome and it's not ideal as a

business to do that. So per permanent

capital they're like literally we are

going to just manage this money forever

and if we literally own the insurance

company it is it is permanent capital

kind of unless the unless unless they go

out of business. So they're not crazy

calling it permanent capital but also

they they do call um they they call

public business development companies

where they you know manage stuff for

public investors. They call that

permanent capital. And

they, as you know, I'm sure you know

this, they count the debt in that fund

as permanent capital when they're

reporting that to investors, which

doesn't seem to me to be very

straightforward or direct.

>> On the insurance side, one thing, you

know, just to f fill in something,

there's thing called surrenders. You can

ask for your money back. They just don't

think that it will ever happen in excess

of they they don't think there's a real

tail event scenario there. I hope

there's one actuary listening

and I've spoken to a lot a lot of

actuaries. They'll model out if interest

rates go up typically what's happens

what's a two three standard deviation

move.

actuaries.

If you find a really good one, they also

understand the investment side. The

actuary math, these it's pretty they

have to take 11 tests. 11 math tests.

They're good at math. But being good at

math and understanding the asset side of

the equation is a really hard picture to

put together.

but they know what would potentially set

off

um surreners

except if you don't understand the risk

you're taking on the asset side. You

can't imagine a reputational risk that

would spike six standard deviations and

you would think is a one in a thousand

year move but I believe is inevitable.

There are actuaries that can do it and

there's maybe 50 in the c country being

conservative.

Maybe I'm speaking to one.

>> Yeah. No, no, no. And um I mean the

people who structured mortgage back

securities and subprime cos they were

good at math too.

>> Yeah. Yeah. The LTCM.

>> Yeah.

>> I actually think I'm gonna have someone

a co-founder of LTCM uh on podcast

pretty soon. So he's he's very good at

math. We we we'll see. So, but Nick, the

argument about when you hold risky

assets that cannot be sold in a fire

sale other than at severely reduced

prices

on a bank balance sheet where people can

pull their money from a bank at any

time. That is extremely risky. The

argument that the alternative asset

management industry makes and that the

regulators actually kind of like is,

hey, this is long-term capital or as

they say perpetual capital. You can't

pull your money. You can't pull your

money as a depositor at Apollo. We don't

have any depositors. We just have people

who are clients and they can't pull

their money. And then we also have uh

people who are clients of our insurance

company and they can't pull their money.

But you're you're talking about

surreners. Just how much is the

surrender cost? Because this is

something I had not considered.

>> Really low.

>> Really low.

>> You know, and Athen well I've done a lot

of work on Athen.

7% in year one, 5% in year two, and then

it goes down for five years after that.

Um,

>> this is the cap of how much you can

surrender.

>> No, it's the penalty of everything

you've given them, you can get back. You

leave 7%.

>> Okay.

>> So 7% is not for some reason people

think that's going to stop people.

People will sell a stock when it's down

50%. when they're panicking if this if

the actual panic is my insurance company

is at risk they'll pay whatever and six

twothirds of or twothirds or one third I

don't want to be wrong um of Athens

completely outside the window it's

probably one third go with a safer

number is completely outside the window

of uh any penalty whatsoever but if

you're you're in year three it's 3%

and what people don't understand.

>> Wow.

>> Is that especially the worst products,

if it's some sort of, you know,

specialized products or more risk being

taken on the balance sheet, they'll pay

out a salesperson 10%. And that'll be

the entire first year of premiums that

are paid. So, if you go through one

year, Athen pays out a salesperson. Um,

Anako or American Equity in Life will

pay out a salesperson. Then in year two,

they say, "I want my money back." Right?

Let's say it's year, it might be a 3%

penalty. You paid out 10%. You got to go

find the assets on your balance sheet.

Athen has 8% level one assets

and it's all treasuries and it's all um

cash. Then they have a a good amount of

level two assets, a lot of mortgages,

some corporates, and they have about 50%

level three assets. So

recognizing,

you know, that the majority of that

you're trusting a theme in order to

price appropriately, if you have an

uptick in surreners, it doesn't have to

be that big. Because what we're not

understanding is that these insurers

balance sheets are levered up in many

cases more than Lehman Brothers was in

2008. I mean we're talking 90 times 100

times in some case. Some have negative

equity and a commissioner said well you

don't have to mark to market. Here's an

exemption or you don't have to do the

here's a fair value exemption. So so now

you don't have infinite leverage. You

have only 70 times leverage. There are

better ones, right? I don't want to s

sound like all insurance guys. I'm going

after the savvy ones know exactly what

I'm talking about. Compare New York Life

to Athen. Compare New York Life to

Carile. You know what what what Carile

has been doing is the um through

fortitude is the where they have

negative book value and they got an

exemption.

So that's

>> interesting. I was I was going to say

that I imagine some of the insurance

companies that have very low equity,

some of that would be because of

duration. So interest rates going up,

not credit. I mean like if you know at

the peak of interest rates in like early

2023, if you looked at Bank of America's

uh equity on a marktomarket value basis,

it wasn't looking so hot. And I pointed

that that out and actually people

accused me of trying to start a run on

Bank of America, which of course I was

not. Um, so but you're saying that this

is from credit?

>> No. Bank of America, Bank of America

bought $600 billion of 20-year bonds in

2021. They kind of, I think, were forced

into it by the government. So the

government was like, "Here's a $250

billion.

>> It was agency mortgage back securities.

So very essentially no credit risk, but

lots of convexity and duration risk.

Yeah,

>> duration risk. So the asset liability

mismatch is important. You could be

negative as long as it doesn't have to

be realized.

you know, you can just lose money to

inflation or whatever it is, right? The

amount of credit writedowns that are

proactive on these insurance companies

is functionally zero. What we see per

year, it's, you know, interest rates are

up, it's eating these underlying

credits, if you have a a mortgage back

security, might be agency or non-

agency, however many years, it's just

duration. And then they have treasuries.

It's duration. Typically they on the

they mark it on fair value

but in uh the case of fortitude they got

an exemption because that was too ugly.

>> I think it would have to be a very

extreme scenario of of everyone pulling

their money at the same time.

>> I'm not saying it's impossible.

>> It's not.

>> It does seem it does seem unlikely. It

does seem unlikely until you figure out

that uh it only takes single digits, low

single digits for over a hundred of

these 680 insurers

to

be inside the R the the they talk about

these RBC ratios and capital reserves

>> risking capital or

>> yeah it's kind of like tier one capital.

>> Okay. Okay. Yeah. Now people can live in

financial markets for their entire lives

and not know what these means. But it's

basically they say that they have four

times as much as they need, right?

That's what they t the problem is the

number that they need is incredibly low.

That's where we get to the ratings and

the ratings being important just like in

2008.

In 2008 that was all AAA rated paper.

Was it the most riskless credit in the

world? No, it was not. But the ratings

agencies got it wrong. And I think the

ratings agencies are getting it wrong

all over again. And they're kind of

constrained. I've talked to Fitch and

Moody's analysts that have rated these

insurance companies. [snorts]

I have to say I just default to think

that anyone can that puts up with um

something that I think is ridiculous. I

think that they're not intelligent. I

think they must be not intelligent.

There's no way you can be an intelligent

and sit there and allow this to happen.

>> Are you talking about Fitch Moody's S&P

rating the insurance companies or the

assets that the insurance companies own

private credit?

>> Well, they don't do that. Egan Jones and

Croll do that for them. So, just going

back, I was talking to the uh Fitch

guys. They're not they're not dumb.

They're not dumb. They are paid to be

dumb. Okay? It is the function and the

model of those businesses.

They are not paid to ask questions and

they have to rely on the underlying

credit. So for a long time they would

just say these are 100bs.

Okay. Let's make that a you know slice

it. How much equity cushion is there?

How many mezzene classes? How big are

the mezzanine classes? What's the

senior? Okay. Double A. I mean AAA,

double A, triple B, double B.

>> Okay, but now you're talking about

structured credit. I mean, what what are

you talking about? CLLO's here or just

>> the CLLO's are what's largely on the uh

>> Okay. Okay.

>> Um tripleB rated mezzanine paper is

there's a Barkclays report on this super

outsized exposure to that and talking to

actuaries that's like the minmax of how

much capital you have to reserve and how

much yield you can get. So that's why

tripleB CLOS's are what insurance is

rushing towards. Again, just trying to

get the most profit that they possibly

can. But then the underlying uh

insurance groups and they're all rated

equally. There's like five different

entities in Athen. There's uh at least

there's so many in credential, but

there's one bad one, but it will get all

of the they will get the rating of the

parent company. So they're all rated the

same. And when they rate the Athen debt

or the credential, Metlife, Lincoln,

FNG, Jackson debt, they're looking at

CEOs that are tripleB. So, it's a rating

on insurance debt that allows them to

get access to capital and it is based

off of a rating ratings on CLOS's

and those ratings on CLOS's are based on

ratings by these

actually stupid people.

>> Okay, so the CLO rating, you know, we

all know that is coming from Moody's and

S&P and Fitch, the big the big guys.

Morning Star has actually got a low a

low credit rating department as well. Um

and but the assets in those CLLOs's that

that make up the underlying loans, those

are rated by

>> it's too expensive to have S&P or Fitch

rate your underlying credit and they

don't want to. The difference between

Croll and Egan Jones and Moody's is

massive,

right? So when when you're relying on

those market, if you're a private equity

company, you just want the lowest cost

of capital. What does that mean? You

want the highest rating. Where are you

going to get the highest rating? You're

going to go to Egan Jones. Does Moody's

want to rate your credit for 150 grand?

Yes. Right. Are they rolling out that

business line item? Yeah, especially

when people are talking about the Egan

Jones credits. But the all of these

ratings are not based on the actual

credits and the business fundamentals

being looked at by Fitcher Moody's,

right? It's kind of just sausage inside

of sausage inside of sausage and you're

just rating letter grades. They

>> Yeah. You're saying that the underlying

loans are being rated by like Dtier

credit rating firms like Egan Jones.

>> F tier. Yeah. You can't be worse than

Egan Jones.

>> Yeah. Yeah, I mean there are like

Bloomberg articles just about how many

ratings I mean they are they are a

ratings factory if this is a big short

moment you know which it sounds like you

are leaning towards the answer is yes on

that question like and there's a movie

about it which you know there probably

won't let's be honest but that scene of

the woman the woman who's blind who

works you know he's just got lasic

surgery and she's wearing the the

glasses she she would be she would work

at Egan Jones

>> yeah and then the guy that's talking to

Mark Bomb in is

he would be a actually there's multiple

different characters he could be and you

know listen

I think that what's happening now is so

ironic we've all seen the big short we

grew up with that

through the global financial crisis and

then the media that resulted from it

that I think that people

it can't like it can't be so similar.

That's what people believe. It can't be

so similar. Anyone says it's just like

oh wait must be you know shortcutting

the work. If you actually do the work

and you think about the incentives and

you've had conversations and I just I

love history whether it's living history

or or financial history. I was talking

to the head of a mortgage division at a

major bank and he was saying that he

wrote a diary for the first time in 2008

and he'd never done that before and he

never thought it would happen and he

never thought it would be as bad as it

was and I just think about the

incentives and it is so similar to me

and the reason being is that DoddFrank

didn't fix anything. It didn't do

anything. It pushed the risk and then

even worse, it gave

all of these institutions the

understanding

that one of us will go down and then

everyone else will be declared

systemically important. It'll be an

orderly windown. Assets will crash for a

second because nobody wants to be the

buyer first resort and then the Fed will

come and and backs stop it. But like I

said, that works if you're talking $250

billion. TARP was $750 billion.

You know, the the uh reper the repo

facility for after SVB was $250 billion.

The TARP was only drawn from $440

billion. The numbers were talking about

I think are starting. The Federal

Reserve is a big ape and I think we're

talking about an elephant.

>> It does sound I mean quite different

from 2008 in quality. I I understand in

scale you said it could be as big maybe

even bigger but I mean it's yeah the

banking system is not in the banking

system. It's in the insurance industry

and it's not in mortgages. It's in

private credit mainly to companies like

that that is a that is a substantial

difference. But tell me like so do you

really think that there could be a run

on all of these insurance companies at

the same time in the same way that you

had you know in during the financial

crisis if you know the bank is going

down it's you just literally pull your

money and then if you are in the repo

market you're a highly sophisticated

player you know how to pull your money

overnight. following these things. Like

I bet a lot of people who have life

insurance with these companies that have

a different name than the parent company

that's having issues in the credit

market, they they probably I don't know.

I don't I I don't know if they're going

to

>> same way. What do you say?

>> I It's hard to imagine.

>> Yeah. Yeah. I'm not saying it's

impossible to be clear. I'm not

>> It's It's hard to imagine for for

everyone, but they would have said that

about SVB and then all of a sudden on

social media, everyone's going viral.

Like I you remember the bear case on

SVB? People are like it's never going to

be recognized, right? Same thing with uh

Bank of America. Then all of a sudden

there's just a tip and then there's a

bad call. And once the bad call happens

where they're saying, "Everyone don't

panic. Don't worry, we're just raising

money. It's not for any reason." And all

of a sudden it's like the game's up.

When that happens, what what else

happened? Did SV would First Republic

have gone down if it wasn't for SVB? No.

No.

>> And then you have Contagion, right? Um,

so I think it's really hard for people

to imagine the verality of these things.

And I think that there's a very

interesting story that would do very

well on social media. Everyone I talk

to, I would say 90% of them sit in your

camp of it's hard to imagine and I think

it's an inevitability. That's like the

super tail scenario where you're getting

15%

20%

uh

redemptions. But if it's we're talking

single digits or or what needed to take

the first one down, that's you know it

could just happen because rates are

higher and credits go down and things

can just get compressed.

>> So you're saying that surrender rates

would only have to go to single digits

like 9% and then this could cause

>> more. So some of them have 10% surreners

per year. But what surrenders are today,

a little bit of people just need money.

A little bit of people, you know,

interest rates go up. And by the way,

they realize it's a terrible product to

begin with. Just buy a 5-year Treasury

or a 10-year Treasury. But the

the the modeling of it is very tight in

terms of what the standard deviation is.

But the outlier, especially if you're a

private equitybacked insurer with 25%

allocation to private credit running at

60 times leverage, you might have

capitalized your sales assets. So it

looks like your capital surplus is more

in Athen's case, they have goodwill on

their gap equity. Um, a lot of related

party paper that you can assume is le is

more likely to be mismarked.

Um, we're yeah, we're talking about it

going from 8 to 11. You know, it could

go from 10 to 14. We're not we're not

talking about much.

>> But didn't you say that half of the

assets are level one like deposits and

and cash treasuries?

>> No.

>> Oh, okay. So, what what is the

percentage of level one

>> on a on a fiend? It is under 10%.

>> Oh, okay. I totally misheard you. Okay.

Sorry. And then so what is

>> then they do 40% is level two.

>> Okay.

>> Right.

>> Which so which are corporate bonds and

agency mortgage back securities which

like realistically can be sold

>> even during a financial crisis you know.

>> Yeah. I mean during financial crisis you

could sell anything at 30 dollar

>> right.

>> Yes. But I'm saying like a Microsoft

bond is you know they're

>> they don't have Microsoft bond. It's too

low yielding. Right. Okay.

>> Um I mean very little. They'll have a

lot a lot of mortgages, a huge mort

mortgage buck. They're always trying to

minmax yield and returns. And remember,

they're they're paying they have to pay

for the entire enterprise of insurance.

Their cost of capital is in a lot of

cases 7 8%.

They're not going into a Microsoft bond

unless it's the it's the best way to get

some quality on your balance. Like that

is not going to pay for their cost of

capital. They're losing money on that.

They'll have treasuries, they'll have

cash, they'll have high-grade in uh

corporates, but that is legitimately

just because they have to. Then the

stuff that is yielding more than their

cost of capital, if you're single A, is

all private credit.

If you're double A, it might be high

yield uh publicly traded bonds. Again,

if you look at HYG, Trans Dime is in

there. It's a It's a great company. It

just runs levered.

>> Um high yield in public markets is not

the same as what these loans are and it

doesn't yield the same. You know that

it's it's pretty obvious they're going

further and further down the risk

spectrum because one, executives in

public companies need to pay dividends

and they want to get compensated and

hedge funds like it and allocators like

seeing cash earnings. Um but on the

private equity side, these are

profit centers and also by the way they

they collect fees on the assets. So they

will take and they will try to maximize

the spread on their cost of capital. I

think it is fair to say that in the

private credit world, Apollo has

actually one of the best reputations

specifically for finding the best loans

and for underwriting, which is

basically, you know, finding the the

highest rewarding, lowest risk relative

to risk loans. Do you think that that

just that that reputation is justified?

>> I think that they are good underwriters.

I think that they have amazing lawyers

and I think that's really their

advantage. They are sharks. And if

you're in a deal with Apollo, look out.

They will cut you out. You know,

numerous examples. Ask anyone. I just

think that they're running risk at an

F-35 level. Yes. Could they be an elite

fire

set of fighter pilots? Yes. But you're

also seeing examples of failures like

the insurance and Germany, for example,

commercial real estate in Germany. They

make mistakes. Now, do they have enough

of a capital barrier on 300 and $300

billion of assets where I've calculated

the real capital as more like 4 to six

billion than 20 or 30 that they're

saying statutory it's 4.1 or 4.2. Um

that's like a razor thin margin of

error. Having said that, if we assume

that Apollo is actually pretty good at

moving out of hot sectors unlike

Blackstone, right? Blackstone seems to

love the hottest Momo trade of the year

in private credit. Apollo makes marginal

moves that you can point at and say,

"Okay, these guys are, you know, they're

better than their peers." What about the

if we So, if we say they are the top of

the league tables, right? We have 680

companies.

>> What about number 50? Number 50 might

have a billion dollars of assets. What

about number 200? 200 might have $50

billion of assets. and $50 billion going

onto a state's balance sheet will stress

it. It will stress it and that'll bring

down a $75 billion one. So if you're

thinking that if we set the the the bar

as okay but Apollo is smart, they can do

it. Do you think that Apollo's better

than every other private equity company?

Do you think Athen is has better asset

investment and actuary math than every

other insurance company by how much? And

understand that that risk level because

people have to compete. They need market

share. It's commoditized as you said is

taken down the leak tables and mutual

funds where there's not necessarily a

profit incentive. It's way better. But I

have to tell you, Mass Mutual, I've been

working with a guy named Rod Dubitzky,

worked at Fitch, called the big short.

Um, people should look him up as well. I

think he's coming out, he came out with

a report on Mass Mutual. They have 25%

private credit. So, there's massive

dispersion. And again, if you have

three, if you have $150 billion of

assets go under, that's a problem.

That's a major problem. And SVB was

what? $250 billion of assets. Sound

about right?

>> Yeah. Yeah. Yeah.

>> What was the percentage of treasuries

and mortgage back securities?

>> A very high percentage.

>> Right. So that's generally, you know,

especially if the Fed comes in and says,

"Hey, we're going to make sure that

there's a facility and it's going to be

fine."

>> That that's easy to wind down,

especially if you give it a runway.

We're going to wind it down over 18

months.

When you have so many level three

assets, the marks could be way off and

the amount of work that you have to do

to figure out if this dental roll up is

actually doing well. People people are

just going to be like, "Okay, I'll give

you 25 cents for it."

>> Yeah. state the the insurance company

the the the state uh balance sheet of

like Wyoming is not equipped to do you

know no offense to them analysis on like

whether the the loan to the rollup for

dental offices is good I'm not equipped

either to be clear I'm not I'm not being

a snob it's just

>> that's what the DoddFrank did it's

really funny too it's like they so actu

they'll call in actuaries to help wind

these things down and I've talked to a

couple of them and when they go in there

it's a mess

and they're calling, you know, the

investment side if they

still you're giving the regulators the

how do you orderly wind this thing down?

What do we do now? We're trusting the

government to make wise decisions for

the taxpayer because the taxpayer is

paying for it.

>> Nick, tell us specifically what form the

private credit it is in. like you said

25% of private credit on Mass Mutual

because earlier you said that it's

mostly in the CLOS's and there's two

types of CLLO CLOS's that contain

there's actually more that that contain

like broadly syndicated loans as you

said earlier BSL

>> and then the so-called middle market

CLOS's which contain middle market loans

aka it's it's a term for private credit

>> but like are you counting like if an

insurance company like Metife has a

bunch of CLOS's but are actually broadly

syndicated loans and like one of the

loans is to transdime which you say you

you know you don't have a problem with

>> are you counting that because I think

that even though the share of CLOS's has

gotten more middle market so more

private credit than the share has gone

up but it's still not a giant percentage

right

>> of the middle market CLLO's

>> of I'm sorry of of the CLO market I

think it's still mostly broadly

syndicated loans not middle market

>> there's a lot of broadly syndicated

loans and there is a dispersion there

but a lot of the broadly syndicated

loans are software

Right. Okay. The big the bigger stuff

that trades.

>> Um

>> so your concern to be clear is not only

referred to like direct lending, private

credit, middle market. It is also

broadly syndicated loans.

>> Yeah. I mean I I don't think that all

that much changes. Sure, you know,

there's a QIP. Sure, you can get a

quote, but when we're talking about

liquidity, and again, I traffic and

small cap stocks.

>> Top of book liquidity is not liquidity,

right? Just because you can trade a

haircut at relatively close to par does

not mean that it's that's the price like

that's the liquidation price, the

orderly windown price. And I I want to

go back to to what you said, how you

know the difference between 2008 and and

today. 2008 was in the collateral

system, right? That was a fundamental

crisis in the collateral system. Today

it's not. Today it's not. It's not going

to be a collateral crisis where because

that's tight, people have to sell

everything. I think it's going to be

people are gonna sell everything because

it's a credit crisis

and you're going to be looking in order

to fund because you can't sell the

liquid stuff. You're going to sell high

yield debt. You're going to sell what

you can as Boa Boas Weinstein says.

>> Uh Nick, who I'm just going to do a

lightning round of the publicly traded

asset managers. We talked about Apollo.

What do you make of Aries? I think Aries

has the biggest gap of brand name

CocaCola aura to reality and I've done a

lot of work on ARCC as a BDC and this is

what people can see and they can verify.

Go and maybe I should come out with

something on this. Go compare that to

FSK. Everyone thinks FSK is junk. widely

seen as a lowquality

publicly traded business development

company that has problems to put it

mildly.

>> All the professionals hate FSK.

>> Yeah. Yeah.

>> Right. Compare that to ARCC.

>> All the professionals love Arcc. Yeah.

>> Exactly. You know, one has a 50%

discount more or less. One is less than

5% discount consistently.

Both have 60% software. ARCC has more

subordinated debt. now in their business

is having a brand and having

professionals believe that you're God's

gift to earth. Is that a pro to the

business? Sure. But that is the one that

I would knock down the most in terms of

reality. Blackstone is is next in terms

of I feel like the entire business is

marketing entire business. the way that

they have Bloomberg or Fitch reporters

and do Instagram reels. John Gray is not

a math guy. He was he's an operator

through and through. When I look at Mark

Rowan and I listen to Mark Rowan speak

and

Zo speak. There are people that okay,

they're used to making investment

decisions. I kind of I don't dis I don't

agree with them, but I see somebody

who's an investment person. When I look

at John Gray, I see a narrator. you're

talking about the CEO of of Blackstone.

I will say you're bullish on AI, so it

sounds like you're bullish on semis and

data centers. Blackstone's got a lot of

data center exposure. So, if you're

right about that, they could do well

there. But, um, yeah. Okay. What about

Blue Owl?

>> Blue is the one that I would bump up the

most. They're underwriting.

>> Yeah, Blue Owl's uh [snorts]

their public relations is the worst

thing I've ever seen. The worst thing

I've ever seen. I've caught them giving

$20 million to a nuclear company that

doesn't do anything. Absolute bogus.

It's awful. Having said that, going

through Oi, OCIC,

OBDC.

>> Wait, Blue gave $20 million to a short

report.

>> Oh, I I wrote a short report and I'm

like, Blue, what are you doing here?

They gave they gave it to $20 million.

Um they there's actual hot air behind

that company. Okay,

>> but you know, so they will make

mistakes. you can find mistakes but

overwhelmingly analyzing their

portfolios you know they will do the

related party to Gavvare they are not

what the market thinks as that much

worse now I'm not saying that the stock

is is is you know a stock you know no

financial advice

>> your reputation really matters your PR

your marketing really matters for these

businesses anytime there's just a stink

on you just Because you're as good

underwriters as Blackstone doesn't mean

that because there's a discount in your

multiple or anything like that, it's a

buy. But

>> because reputation matters so much and

it if you have a good reputation, you

continue to get inflows. If you have a

bad reputation, you continue to get

outflows. Outflows can cause bad

performance which causes more outflows.

It's a vicious cycle.

>> It's it's incredibly reflexive. You're

seeing Aries and Apollo be able to raise

money. Blackstone's not. So, you know,

I'll bump the most overrated is Aries,

the most underrated is blue.

>> That is a very contrarian take. I I'm uh

I like I'm here for it. Nick, tell me

about the outflow inflow situations.

Like, so far for a lot of this

interview, you've described dry, you

know, kindling which by your eyes to

your eyes seems extremely dry and

extremely ripe to go into a giant

bonfire, but like what is the match? I

mean, the match has to be outflows. And

before you have outflows, you have to

have inflows stop. I think for some like

blue owl funds the inflows have been not

very good and I know there's also a lag

just tell us your picture your view of

the inflow outflow dynamic in the in in

the private credit market.

>> So I think that this asset class and

everything the spreads the multiples and

private equity is all built on

consistent inflows consistent massive

inflows. It's like when the monetary

supply is going up 10 percent every

year. If it goes down to 5% that you

have a problem because everything is

priced off of that 10% and the rate of

change is painful. So I think that's it.

I think you have that and then there's a

problem on refies especially when you

get to the disruption in the software

wall. [snorts] Now I do think that

there's opportunity for money to be

coming out of the asset class. The money

that is returned is the first money that

is returned in a long time or not much

this year. Pensions aren't going to

reallocate to private credit on the open

funds. If you come out of an open fund

and go and buy a Aries at 95 cents

because you see an immediate OIC or you

know when they do these loans they get

an immediate markup but this could be

your your um your uh immediate markup.

You could go out of Blackstone at BCRAD

into ARIES at even a 5% discount or FSK

at a 50% discount. Right? If you believe

in the ass talking about taking money

out of privates marked at 100, put it

into public assets that have very

similar assets at a discount. That's

what you're talking about.

>> Very similar. They're closed, but you

can buy the rights to the dividends if

there's dividends. And um that's money

coming out of the asset class. Even just

that swap, right? So, as long as the

game theory says rational participants

in economics will go towards the value

that's so obvious, you know, there's

enough information out there. Um, they

should just go to the closed funds at a

discount. You know, it's 80% similar,

substantially similar, you know, to use

an IRS term.

um

they don't do that because they don't

want to see the prices move. But over

time, I think all it takes is less

money, more scrutiny going into the

asset class and then all of a sudden

defaults pick up and then redemptions

pick up again and it's just as this, you

know, every bubble everything is

reflexive on the upside and it's also

reflexive on the downside.

It is extremely procyclical. Nick, we

will leave it there. People can find you

on X at nickno17.

17 is my lucky number. Your substack is

mispriced assets. Nick, as you said in

the beginning, you are not a perma bear.

So tell us what is the research that you

do on your substack other than bearish

stuff on private credit. What are the

themes stocks you're looking at?

>> So the theme is stuff that's way off. I

don't want to talk about Google if it's

marginally consensus. So I try to find

stories that, you know, I think are

going to be multibaggers or down over

50% on the short side. So typically I

traffic in smaller companies, midcaps

for technology because small caps and

technology are typically not that great,

especially when AI has been pumping a

lot of stuff stuff recently. Um, but

it's long, short, and macro coverage.

basically whatever gets me extremely

excited in order to do enough research

on to feel like I have something to say.

>> We'll leave it there. Thanks, Nick.

>> Thanks, Jack.

>> Hope you enjoyed today's episode. Those

interested in learning more about the

Tukrium Corn Fund, ticker C O R N, can

find more information in the link in the

description. Until next time.

Thank you. Just close the door.