Over the past year, there's been some

very bad press on private credit,

including on this channel where recent

guest Nick Neoth said that he thinks

it's almost inevitable that the next

financial crisis will be caused by

private credit. Today, I'm seeking out a

very different perspective. I'm speaking

to the head of research at a private

asset management firm that has over 100

billion dollars in assets under

management. He has lots of data on

individual companies in terms of their

debt levels and IBIT growth. He argues

actually that the debt levels he's

seeing are sustainable and that

corporate balance sheets are healthy and

that actually the financial risk that

he's most worried about is coming from

another source entirely. We also talk

about AI and the US dollar. And after

the interview, I'll share my thoughts.

Today I am joined by Nick Brooks, head

of economic and investment research at

Intermediate Capital Group or ICG, which

manages over 126 billion in private

equity secondaries credit across the

spectrum. Nick, good to see you. Welcome

to Monetary Matters.

>> Thank you very much. It's it's great to

be here.

>> What is on your mind when you're talking

to clients? What are some of the

messages that you're trying to get

through?

>> There's a lot of noise. There's a huge

amount of noise. So we had everything

from you know the tariffs winning the

Russian invasion of Ukraine and the

implications for Europe and commodity

prices more recently of course the war

in the Middle East uh and its

implications for energy prices and

supply chains but having said that so we

have all of these things going on and

plus a lot more that I didn't mention

software and other things which we we

can go there later on AI is um markets

have continued to power ahead, you know,

both in terms of equities on on the

credit side as well and and underlying

economies have actually generally held

up pretty well through all of this

volatility in commodity markets and uh

and also all these very negative

headlines. So I think that really is the

the key topic and this is what I try to

focus on. I think one of the key

purposes of research, what what I try to

do and I think many others in my type of

role try to do is try to look through

this noise and try to understand what

those underlying fundamentals are

telling us um so that we can make

intelligent investment decisions.

So there yes so the huge amount of

headwinds the Iran war the price of oil

tariffs valuations geopolitics fiscal

deficits

why are markets doing so well why are

markets so resilient

>> so far the disruptions caused by all the

geopolitical noise it's more than noise

it's reality it's wars it's higher

commodity prices so far the impact on

economy omies has been quite manageable.

So we've seen a bit of a dip in growth

in some sectors in some countries. We've

obviously seen interest rate

expectations change. So there have been

real impacts on

areas that will affect financial

markets. But really at the heart of it

is earnings growth. If you look at EPS

growth in the public markets or if you

look in the private markets where we

tend to operate and where I tend to

track fundamentals, EPA growth has held

up very well over the past couple of

years. So underlying company

fundamentals [snorts] are strong and

have been resilient to all of this noise

and these shocks. And I think that is at

the heart of why markets have continued

to perform well. I w I want to get into

credit and balance sheets, but just

talking about private company ibbita

growth. You've you've got this chart

from this proprietary database that you

you have showing US Ibeta growth for

private companies and European IBITA

growth. And for European, it's hovering

about at 8% and at US maybe a little bit

a little bit lower like like 6%. And

it's interesting to me that European

Ibita growth has been higher over the

past three to four years than American

Ibita growth. The narrative that we

encounter and I think it's true is that

Europe is has been impacted far more

hurt far more by the higher end energy

prices. So what is going on? Why is

European private companies growing

faster ITA than America

>> in our industry? So private equity,

private debt and the private markets, we

tend to be much more focused on the

mid-market companies. It has to do with

sector weights. So in my database or our

database, um we can look at various

sector performance and subsector

performance and we can look at weights

and waiting it based on company count.

What we found was that in the US there

was not a huge amount but a decent

amount more invested in the health care

sector than in Europe. So in our

industry healthcare still has a pretty

high waiting both in Europe and in the

US but it was a decent bit higher and is

a decent bit higher in the US than in

Europe. And postco

when we saw that inflation shock and we

saw wages go through the roof, we saw a

particularly intense margin squeeze in

the health care sector. Now that

affected Europe as well as the US, but

because the US has a higher waiting in

health care, we saw a stronger margin

squeeze in the US than we did in Europe.

So therefore, we saw EBIT DAW growth in

the US slow more quickly than it did in

Europe as we normalized after the COVID

boom. Now we're starting to see those

come back together again and as you

highlighted now the differences are

quite small. We've seen the US epidog

growth coming back up again. Europe has

still been normalizing down to about 8%.

So we're looking at them starting to

converge again. But there was this you

know period where that difference in

waiting in the health care sector was

creating this differential

>> and so in the public markets tech has

been a a real source of earnings growth

a lot of that has been I actually think

tech hardware rather than software

software in the private markets had been

an extremely wellperforming asset class.

Is there a difference in the European

software percentage of the private

markets relative to the US and how is

that manifesting in the in the

differences of EVA growth?

>> I can tell you what we see in our

database but it's not going to be the be

all and end all of the analysis but

looking at our broad range of companies

the the waiting. So interestingly we're

in pure software a little higher in

Europe than in the US but we were

looking at Yeah. But it's it's it's

quite small. You're looking at something

like around 14%

in Europe and I think it was around 12%

in the US. Now I know that's a lot lower

than some of these numbers we're hearing

when people do the analysis of the US

BDC's and we hear about specific

companies

>> or specific vintages. 2021 was a giant

year for the software buyout.

>> Yeah. So I think you know there are

specific funds that have very large

exposure to software and that's getting

a lot of press. I think that there's

certain segments of the market that also

have very large exposure to software. So

that's getting a lot of press. But when

I look at it from our data base point of

view, which is a very broad range of

different strategies, both liquid and

less liquid, I'm seeing exposures more

in the sort of 11 to 15% range. And it

happens to be that in Europe that's a

little bit higher, but you know, not not

you know, significantly higher. Nick,

now I want to talk about the debt

service coverage ratio, the interest

coverage ratio, or basically the ability

of companies to service their debt. In a

minute, we can get into broad trends

from the the Bank International

Settlement, the entire economy. But just

looking at the the ICG private company

database, tell us the trends that you've

been seeing in the US and European

private private markets for for interest

coverage ratios. And first, I guess,

what broadly does an interest coverage

ratio represent? And then what what is

the what is what are your findings?

>> Interest coverage ratio is one of the

better ways. I mean there are many ways

you can do this but one of the better

ways to get a sense for you know how

well a company can services debt which

of course is what we worry about in the

private debt world. And uh you know when

you start getting below one you start

getting worried. Uh you're between one

and two you know you're you're in in a

decent place. And anything above two you

know you start to feel more comfortable.

And obviously if you can get up to three

and beyond that's you know where you'd

ideally like to be. And again it depends

what segment of the market you're in.

You know if you're in the higher yield

element or in the uh senior side a lot

depends on on on that as well. Sort of

basically your risk tolerance. So you

know the trends that we've seen in terms

of the interest coverage ratio. So as

you might expect during the period um

when we saw the the huge bout of

inflation postcoid and the central banks

were forced to very aggressively move

rates higher

um during that period we saw interest

rate interest coverage ratios fall

pretty quickly. So you know we again it

depends on the company and the sector

and the segment of the market but let's

just say you're you know you're you're

moving from let's say at a median level

for the whole database you're moving

from let's say in Europe from like 3 to

2.5 in the US it was a bit lower so

you're going from like 2.5 down to two

and obviously I don't like to see or no

one likes to see that kind of trend

because you'd always question is where

is this going to end um and also related

to that that was during the period when

we were seeing that margin squeeze take

place as wage costs were harder to pass

on during that period. So EBID dollar

growth was coming down. So it was still

positive. It was still at levels that we

were comfortable with, but it was

slowing from those that huge postcoid

surge that we also saw by the way in

public markets. It's EPS growth for the

S&P 500 was seeing a similar kind of

trend. But what's happened more recently

as central banks as inflation came under

control and central banks were able to

cut rates and we saw yields start coming

back down again certainly at the short

to mid mid mid um maturity level.

Obviously long is another story and we

can talk about that later. And um

therefore we saw interest coverage

ratios stabilize. And then what we've

seen in the most my most recent data

over the past couple of quarters um in

the US which had actually seen the

sharpest fall and I think I' I've

provided you those charts so hopefully

people on this call will be able to see

them is the US has actually started to

see a pickup in the interest coverage

ratio and Europe has stabilized at um a

pretty comfortable level. So at the

moment interest coverage ratios look

solid which I I really emphasize because

you know again you know when I read the

news every day

um and you know the at times somewhat

panicked reporting on what's going on in

private markets and private credit I I

look at the data and I think you know I

don't see this at a structural systemic

level. You know again there may be funds

that are having issues. There are

certainly companies that are having

issues. These are median numbers. But

when I look at it from a systemic point

of view, from a you know an economist

point of view looking for systemic risks

allah 20089

I just don't see it in our data. So yeah

uh we are starting to see we are

starting to see that pick up in the US

and and stabilize at pretty good levels

in Europe.

is so interesting Nick and I'm just

looking at the chart now. So number one

so so a high level on this chart is a

very high level of a companies and the

broadly ecosystem private market

companies ability to service their debt.

So as that goes down they their the

multiple of their earnings or EBIT EBIT

relative to their interest expense

>> cash interest payment y

>> cash interest payments goes down. So it

it it looks to me like it is correlated

with a lot what the the Federal Reserve

does because in from 2018

to 2019 2017 to 2019 the Fed was raising

rates that went down. 2020 to 2021 the

Fed jacks rates down to zero. That goes

up and then from in 2021 to 2022 really

2022 to 2024

the interest coverage ratio went down.

And I imagine a large part of that was

just interest expense went up.

>> Yes, absolutely. I mean the IBIDA does

play a role. Obviously it's a ratio. Um

so you know it's IBIDA over interest

payments but but yes the the the the

larger swing factor the factor that

moves more quickly and often with a

larger magnitude is is the interest

rate. So yes that it does play quite an

important role.

>> Yes. And I think that where we are now

and the point that you're making is that

from 2024 to 2025 it the interest

coverage has actually gone up in the US.

So companies balance sheets have gotten

stronger not weaker.

>> Absolutely. Which goes against a lot of

what we're reading about you know in in

the press. But again I want to emphasize

these are median numbers covering 4 to

500 companies. So within there there is

uh a decent dispersion. I actually have

some charts and analysis on that as

well. So we do seem some decent

dispersion. So there I mean in our

database there not a lot of companies

below one with a interest cover ratio

below one but they exist and uh there

also a number of companies that are well

above three and you know and beyond. So

you know you are see in the same way

that you know we talk about the K-shaped

economy in the US and elsewhere but I

think in the US it's more intense than

other places. There's a similar thing

going on in the corporate sector as

well. Um and I think it sounds a little

cliched but I think it's utterly true is

that bottomup analysis is so critical.

It's always critical but right now the

differences between companies even in

the same sectors can be huge and that

dispersion my view will be that that

will continue to grow. So these, you

know, the so-called cockroaches that

Jamie Diamond spoke about, I mean, they

exist. It doesn't mean though that you

have a systemic problem. It but it does

mean that you need to be super careful

about what you're investing in um and

what's in your portfolio.

>> Tell me more about that dispersion.

>> It really seems to have much more to do

with

company management, the financial

structure of the company. So you know,

what is their leverage level like? you

know, how have they managed their

interest costs? Uh, have they

recapitalized recently? You know, I'm

finding that it is more micro issues

that are causing differentiation in

performance of companies rather than

common themes. And and just to throw out

there at the moment, I know everyone

who's concerned about software is not

concerned so much about software and

related today. It's about what AI may do

to it in the future. So, you know, I I

don't have crystal ball. I don't know

but I can say that in the data that I

see for software related companies so

far I have not seen any signs at all of

Ebida pressure. Now again that could

come down the line but right now the

actual data is not telling me that

there's something to be overly worried

about. So again it it's a company by

company analysis I find causing this

dispersion.

>> The same yeah the same is true in the

public markets. the the data the

fundamental data on software companies

in the public markets are very good.

>> Yeah,

>> it's just a fear of something in the

future.

>> I think that's the nature. I mean, it's

the nature of markets, right? We're

always looking forward. We're always

thinking about where things will go

because markets theoretically anyway

have priced everything in that we know

today. So, everyone's thinking what's

going to happen tomorrow. Problem is,

none of us really know. So, it's

speculation. And then when there there's

always some rational reason for this

type of in investing behavior, whether

it's driving certain stocks through the

roof or if it's driving certain ones

down, it's about projecting out to the

future. And of course, nobody really

knows what's going to happen in the

future.

Nick, tell us about the corporate

balance sheet trend, the debt service

coverage ratio you see not just in

private markets but around the world and

and we can talk about the US consumer,

the US corporate sector and and

globally.

>> Yeah. No, absolutely. Well, I've always

had a great interest. I won't run

through my background, but I've always

had a great interest in, you know, what

causes financial crisis, the big ones.

So you know the Asia crisis 9798 you

know we had the dotcom which was less of

a economic crisis but more of markets

crisis we had the 20089 which was an

everything crisis and you know what

drives these things and obviously

there've been a huge amount of good work

done that by a range of academics the

IMF focuses on this a lot and the BIS as

well so I having looked at this area for

years you know you know obviously debt

is usually at the heart of it so just

going to the BIS for example and you

look at for example debt service ratios

for the non-bank private sector. Now

they actually wrote a quite an

interesting paper December 2024. You can

go look it up if you want. It's on their

website. Um you know talking about what

are some of the best early warning

indicators of a systemic crisis. And one

of them is maybe no surprise is the debt

service ratio which is very similar to

an interest coverage ratio just sort of

inverted and they track that every

quarter. Now it always lags and like all

of the data unfortunately it always lags

by a couple of quarters at least

sometimes three u but this is structural

stuff so I think the you know you don't

have to have it daily data on this and

on that analysis the interest coverage

ratio sorry the debt service ratios for

the non-bank for for the private sector

um has been uh trending down since 20089

and is much is much lower than it was

back during that period. So, you know,

based on their analysis with this ratio

being one of the better early warning

signals of a systemic crisis on these

measures of data and and this is

corroborated by other bottom-up analysis

of corporate sector, Fed data is that

actually the corporate sector balance

sheets in aggregate are actually pretty

solid. And I think that [clears throat]

partially explains the resilience of u

markets and economies to these external

shocks is that corporate balance sheets

and household balance sheets in

aggregate

are actually pretty solid. You know,

that doesn't mean there's not dispersion

in there and that we don't have segments

of markets where we might have some bad

things happening, but from a systemic

point of view, it it it seems less

risky. Also most critically though it

hasn't been a focus so much recently is

um the uh systemically important banks

balance sheets are also very strong. Um

I mean that was one key lesson learned

by the regulators after 20089 is you

need wellbuffered

banks and for the ones that are critical

to global economy they are well ring

fenced and well buffered at least for

now. uh you who knows where we'll be in

five years, but right now they're pretty

solid, too. So, strong corporate balance

sheets, strong household balance sheets,

strong financial um

systemically important financial

institution balance sheets that has

created a lot of resilience for the

global economy.

We could put several charts up showing

around the world, but in the US that the

debt service ratio or DSR peaked

basically in 1928 or 1929 and we had we

had the Great Depression

>> and then it it really went went way way

way down let's say 1950 and it has

steadily increased from like n 1950 to

2008 but since 2008 it actually has been

going down. That that's

>> exactly

>> that's exactly it. So it doesn't mean

that we're not going to have periodic

crises and we're not going to have big

market drawdowns, but I'm not overly

concerned about another 20089 type of

financially financially driven

recession. And I know a lot of the

central banks and regulators are looking

into this now and I think that's a great

thing. But again, looking at the data

that I've seen, I'm I'm not overly

concerned about that. and the the level

of debt in the household and the

corporate sector relative to IBIDA,

relative to earnings, relative to GDP

has gone down. Obviously, it's still

gone up a lot.

Where the debt has gone up a ton

relative to GDP is is in the government

sector.

>> That's exactly so that was I'm glad you

brought that up. uh that is the one

balance sheet I hadn't mentioned and

that is actually probably where in my

view the biggest medium-term risk is the

balance sheets of the private sector are

pretty good where we've seen this huge

buildup of debt of course is in

government debt um now part of it is

understandable there was the bailout

after 20089 you can agree or disagree

with that but there was a big bailout

bailing out the banks and that debt was

put onto government balance sheets then

of course we had COVID where the

governments had to interven intervene to

stabilize economies and and household

balance sheets. So they took on that

debt and then of course there are all

the other reasons you know aging

populations and I won't run through all

those details which we all know but that

is where I think the the real risk is

because so far investors have been in

most cases for the major developed

economies

um pretty

complacent I might say about the rise in

debt. Obviously in the UK, we had the,

you know, Liz Trust moment, uh, the

so-called mini budget, and we saw

markets react strongly to what was

believed to be irresponsible fiscal

behavior. But generally since then, we

haven't seen markets get too aggressive

about it. In the US, we did see a little

bit when Trump first announced uh

tariffs uh a year ago or so, uh a little

more than a year ago. Um we did see some

not quite normal movements in in U US

government bond markets um and the

dollar.

But you know, my view is this won't go

on forever. I I think I if if

governments don't look as if they're at

least trying to get things under

control, I think that we will

potentially start to we already see

quite high longer end yields. But, you

know, those could keep marching higher.

And the danger is because interest

payments as a percent of revenue in most

countries is rising. If interest rates

also rise over time, this could become

one of those self-reinforcing cycles

that can get quite ugly. So, you know, I

don't think we're there yet. And

predicting the timing of these types of

things is always very difficult, but I

do think that governments do need to get

their act together because I do not

think investors are going to sit and

take this forever. And my my sense is

the

potential for volatility is coming

sooner rather than later actually.

>> Yes. So you referenced several

interesting things. I mean I think in

terms of how the US Treasury bonds have

been trading in times of stress.

Normally they perform very well and I

risk off asset. I actually think that

they have been selling off on some of

the most stressful days which the the

BIS has has found as well which is just

just does not give me any solace. But

don't you think that there's so many

insurance companies and just natural

buyers of government bonds so-called

like safe paper that the government can

get away with so much? I mean look at

like 2020 the in 2021 the the interest

rates were so so low even when the

governments were spending so much money

on government stimulus which is needed

like what's what really causes a crisis

in the US Treasury market I understand

in the the UK government bond market it

can be a a little different

>> it's all about sentiment and I think

it's all about perception

so again theoretically anyway you

markets are pricing everything in that

we know today. But I think that if

investors think that a government

ultimately is going to get its situation

under control that they're actually

making an effort and look, we're going

to get there. We still have competent

people running whatever version of the

Treasury we have in any country and the

central bank and we think that you know

in the end we're we're going to be all

right. People will keep buying. I think

when it's it's the loss of faith which

and that's very hard to predict again we

saw I I it was such a it was a great

little experiment um you know a little

test tube here in the UK where I'm based

as you know you know watching that you

know situation when uh Liz Truss and her

her treasury secretary announced the

mini budget and we saw this quite

aggressive move in the longer end of the

UK curve. Now there were other technical

factors going on with insurance

companies and other things but it became

one of those self-fulfilling moments.

And of course what happened is what what

always happens and I think is what will

happen down the line is that market

reaction stimulates a reaction by policy

makers.

>> Yeah. Nick, how do you think AI is

impacting the macro economy right now?

Can like can you make any firm calls on

GDP or earnings growth credit outside of

the particular companies that are doing

it because of AI? Obviously Nvidia

earnings per share is up 80%

year-over-year. But in terms of the

macro economy, not just the

semiconductor companies or the companies

spending the money, the hyperscalers,

how does this impact the overall

economy?

>> Yeah, I mean, okay, there's some things

we can say with some certainty. So for

example, we know and it's already kind

of it's been raised the how much

investment is going to be going into AI

related infrastructure. I mean there's a

pipeline and so you kind of know what

this pipeline is. Maybe it can change a

little bit, but bottom line, we know

there's an utterly massive amount of

spending going on in the US and every

elsewhere, but particularly the US on AI

related infrastructure and the companies

that are going to benefit from that

already [laughter] have I think largely

seen that reflected in their share

prices. So that we can say with some

certainty and I I would argue that that

does provide a buffer to the US economy

over the next couple of years at least.

Um so that's you know just factual stuff

you know investment is going to be very

large and that will support the economy

>> and I want to make a point because

people may be saying but oh my god this

is giant risk if the return on

investment capital isn't there this boom

turns into a bust the money stops and

it's like yes in 12 months like let's

talk in 2027 but I think in in terms of

what forecasting macro is a lot of it is

it's it's easier to see the next three

months than the next three years and the

ne the next three months just so much

capex is going to go into GDP. That's

just a fact.

>> Yeah. And over the next year and and and

a bit beyond as well. And I think

there's some other things that we can

say with some certainty. Europe is

extremely serious about increasing its

spending on defense and improv. Now, it

may not go as smoothly as as [snorts]

I'd like or we'd all like to see.

Obviously, many governments in in Europe

are constrained fiscally as as as is as

should be the US. But we know Germany

has announced some huge packages of

defense spending and that's real money

and that's going to come through and

that is going to support the European

economy and I think that also is going

to provide support to economic growth in

Europe going forward spending on defense

and and infre related to energy

sufficiency self-sufficiency and and

other areas as well trains etc. So those

are two things that I think are quite

positive in in the sense that look there

there's actually you could argue

downside protection to both the US and

European economy over the next few

years. Now I think then the the next

question where I think what you're

alluding to at the beginning is you know

what does it mean for companies? What

does it mean for productivity growth?

What does it mean for jobs? What does it

mean for private consumption? from my

own personal experience is that yeah I

mean it's hugely powerful uh stuff um

and it is transforming the way work is

done and I think in the medium term it

will boost productivity but how much and

during these transition periods there

are also a lot of losses I mean we saw

that going back to globalization so

great globalization is bringing down the

price of goods and it's creating more

efficiency and they frees up capital for

the US not to put on inefficient sectors

where China could be doing it better and

you know certain segments of the economy

did extremely well but we also know

certain segments and certain uh income

groups uh education groups uh did very

badly and I think we'll probably see

something similar during this

transition. I think there there are

going to be winners and losers. Um, and

I think you know what you hope

governments have learned from the

globalization

situation with hindsight, you know, is

you've got to look out for who's

vulnerable, what segments of the economy

or what sectors of the economy are

vulnerable and you need to support them

or you're going to get some we already

have big political problems, but you

know those will get worse. But I don't I

think it's hard to make have strong

conclusions on the productivity side and

and you know what it's going to mean at

a GDP level.

>> So but would you characterize it as a

the AI boom AI capex boom as causing a

global economic boom or would you not go

that far?

>> Well I think it's certainly supporting

the global economy and again it depends

on country by country their exposure to

the sector. Now Korea is doing

incredibly well. Obviously, the market's

incredibly volatile, but the underlying

economy is benefiting from this um and

consumers are bending from it because

there's a lot of wealth being created in

Korea right now. So, you know, Korea's a

beneficiary. Taiwan's a beneficiary. You

know, I I won't run through them all.

There are certain countries, you know,

that are part of the whole supply chain

for this huge boom that are benefiting.

So yeah, I suppose you could say the

global economy is being supported by

this though it will it's quite

concentrated in certain sectors and

certain countries.

>> That makes sense. Would do you have a

view on the dollar?

>> H yeah currencies yeah currencies are

always particularly in the short term

very hard to predict. Again looking at

from a structural point of view I would

say okay more recently the dollar has

been rebounding. So we saw last year

this sort of close to 10% drop in the

trade weight to dollar which I

personally thought was rational because

you know US debt is continue to grow at

an extremely rapid pace and there seems

to be no attempt at all to get it under

control. We're running TR fiscal

deficits if you use IMF data sort of

anywhere from 6 to 8% of GDP every year.

And I think that that has been reflected

in a weaker dollar. So to the degree

that that is not brought under control

that we continue to run these deficits

in the 6 to 8% range and our debt level

our government debt continues to rise at

a rapid pace the way the uh you know

congressional budget office for example

you know independent body is forecasting

and other others are you know I think

the the the dollar may in the medium

term start coming back under pressure

again so you know there's a lot of um

focus in the news about I live in London

so you know I hear it a lot you know the

UK fiscal deficit and that you know

governments change based on this and and

in France of course governments have

we've seen quite a few prime ministers

come through based on concerns about the

budget but the one thing I would say in

in Europe's defense um and the UK's even

is that they are targeting much smaller

fiscal deficits they are trying to get

there the reason governments have fallen

in France is because they can't pass a

budget that's going to be reducing the

deficit the way they want to, but

they're really trying the and even in

the UK. I mean, you may disagree or I

may disagree with how they've done it

through higher taxes, but they are

trying to bring the deficit down. And if

you look at IMF forecasts, you know,

you're they're looking at the UK fiscal

deficit coming down to close to 2% over

the next five years, whereas in the US,

there's no attempt. So, and the reason I

mention this is it's all a relative

game. Currencies are a relative game.

So, if it looks as if the US is being

more fiscally irresponsible than other

major economies, then you see the dollar

weaken. So,

yeah, my view is if things don't change,

we will see more medium-term downward

pressure on the dollar. And my sense

also is that many, not all, but many in

the Trump administration are okay with

the weaker dollar.

>> As you know,

>> I think you're right about that.

>> So I think there's a a view among some

in the administration and papers have

been written on this that that a weaker

dollar will help boost exports, reduce

imports, and bring more manufacturing or

industrial investment back to the US. So

therefore, a dollar is weak dollar is

good. So I don't necessarily agree with

all of that analysis, but that is I

think certainly a view of among some in

the Trump administration. So therefore,

a weaker dollar may be tolerated.

>> Do you think that Europe is going to

attempt to have an AI data center capex

boom in the same way that the US is or

or China is? Okay. You you've seen the

articles and some people making fun of

like France investing €40 million euros

in an AI lab, which is a tiny fraction

of the amount being invested in the US.

I mean, do you think that Europe is

going to try and say, "Hey, let's let's

invest a lot."

>> It's certainly going on in Europe. It's

not non-existent. It's it's just

relative to the US, it's small and not

growing as fast as I think many would

like to see. It exists. It's going on.

there is actually a lot of exciting

interesting stuff going on in Europe in

these areas. Um it's just that on a

relative basis it looks small. I think

that I think one of the structural

problems in Europe that they're trying

to fix but it's always a problem because

it's all these national governments

trying to come up with a common policy.

I mean it's the the fundamental issue

with Europe. Um it's also one of its

strengths in my view to be honest. But

but it does lead means things happen

more slowly in Europe than they do for

example in the US is I mean they need to

get they need to create a unified

financial market. I I think one of the

biggest problems you find and this has

been written about a lot is you know you

get great you know entrepreneurs you get

great innovators in Europe they have

amazing university highly technical

skills as we all know and then you know

they grow a company they start a company

they get it to a certain size and then

they're looking for capital and they

can't get you know the same access to

capital in Europe that they can get in

the US so they go list in the US or they

raise capital in the US or they just

move to Silicon Valley so you're

heading. I don't think there's a lack of

ability or lack of capacity or cap

capability sorry in Europe. I think the

problem is that on that side is that you

know getting access to the financing is

more difficult than in the US. So often

these companies end up in the US.

>> Yeah.

>> That's something they've got to fix.

They know it. It was in the driver

report. They're working and and to be

fair they are working on it but it's

just slow.

>> Yes. the listings from the London Stock

Exchange moving towards the NASDAQ or

the New York Stock Exchange is is quite

sad.

>> Yeah. No, it's too bad. A lot of

fantastic companies in Europe and the

UK, but a lot of them, especially when

they're just starting out, are are

particularly in the tech sector, are are

heading to California. So Nick, just to

to wrap a bow on this, I mean, so you

think that the odds of a financial

crisis are lower because the debt

service ratio isn't as high as it as it

has been historically.

>> Yeah. Certainly that, you know, just

focusing on the private markets element.

Yes. And that's why I'm not overly

worried about a big blow up in a, you

know, in a structural way in in in in

the private markets. That doesn't mean

again that there not going to be

problems at fund level or company level.

this dispersion is real but um but in

addition to that as I mentioned I think

also you know household balance sheets

are actually pretty decent the

systemically important banks are well

ring fenced and the corporate sector is

the balance sheets look at an aggregate

level pretty solid so you know doesn't

mean we can't get a big market

correction and then that leads to a

slowdown in growth and you get a couple

of quarters of negative growth that's

called a recession possibly but what I'm

most worried about and I think what

would hurt our industry the most um you

know would be that big deep nasty

recession Allah 20089 and I think the

risk of that is quite low based on the

more system systemically important

indicators.

>> So what do you think is is going to

cause a financial crisis if and when it

happens which of of course it will do do

you think that the debt service ratio

has to be way higher? Yeah, I mean I

think you'll you'll start to see Yeah, I

I think you'll start to see those

indicators turn in the other direction

and they were for a while. They were

during that period when rates spiked

postcoid we we were seeing things move

in the they again they didn't get to

levels that were overly concerning but

they were moving in that direction and

that could happen again again I do think

it potentially it it comes out of the

government sector the US yields but also

other major economy government bonds are

used as the benchmark for you know many

financing so if we were to see those

structurally move higher that could

start stimulating problems. So there

there obviously there are always risks

out there and I think but my my my sense

is it's actually the government sector

where the biggest risk is.

>> We'll leave it there. Nick, thanks so

much for coming on Monetary Matters.

We'll attach your LinkedIn as well as

the the BIS paper that you've we've been

talking about and your and your work at

ICG. So there's a lot in this interview

with Nick to break down. First of all, I

want to talk about some broad trends.

the huge rise of private credit over the

past, let's say, 15 to 20 years, it may

lead you, may lead me to think that

corporate indebtedness has risen a ton,

but that's actually not true. As Nick

points out, it's not that the rise of

private credit has led to a surge of

corporate indebtedness. It's that

private credit has replaced the credit

from the banking sector as corporate

indebtedness has actually been flat to

down since the the great financial

crisis of 2008. on the software mix. I

actually didn't know that European

private equity has a higher percentage

of software than the US. It's a little

counterintuitive and very fascinating. I

also want to uh address maybe a little

bit a difference in the statistics that

Nick cited versus some that you may see

elsewhere. Nick said that 12 to 14% of

portfolios in uh the US and Europe are

in software. You may see higher numbers

occasionally

uh in in Bloomberg or on on podcasting

including in this one. And I I think

both numbers can be accurate. I think

that the higher something like 20 to 30%

numbers refer to very software heavy

vintages in 2020 and 2021 when that was

really the the ultimate trade was just

borrowing a ton of money and buying

software companies at elevated

valuations. Secondly, software is not

the most rigorous term. So I I think

that you'll see some business

development companies report their

exposure as 9% software, 10% IT services

whereas some people uh like analysts

will say actually 9 plus 10 is 19. IT

services counts as software. And you

know if if there's a software service

that's in a for a hospital people may

count that as healthcare but other

people may count that as as software.

Now I want to include my own thoughts on

private markets generally. I think that

there is so much criticism of private

equity and private credit and I've

featured a lot of that on my show as

people know. I do think it's important

to acknowledge that the on paper returns

of investors in private equity and

private credit, you know, from the

beginning of the asset class until 2021

basically were good to extraordinary and

that those returns were a lot better

than the returns uh in for example hedge

funds as an aggregate asset class. Um,

so many of the critics of private equity

and private credit actually don't really

have as good track records as private

equity and private credit, but that's

different. I don't want to dismiss their

concerns at all. I do think that there's

been a lack of exits. So, the on paper

returns still look pretty good, but the

question is, can they sell these

companies at those valuations? There's

been a lack of exits. There's been a IPO

channel. when you get so big to whom do

you sell? Like if you have a company

that is worth $40 billion, the only

people who can buy it are yourself and

the other giant asset management firms.

So that's that's a a thought. And then

secondly, and this we we didn't really

get so much into this with with Nick,

but I I think there is a very reflexive

feedback mechanism in private markets

and in all asset classes where inflows

to an asset class create the good

performance and then that good

performance creates further inflows. So,

you know, I remember reading some books

about the great financial crisis. There

was so much money being flooded into the

subprime lending market in 2005 2006

that very few loans were the credit that

that the very few loans defaulted

because they could always refinance

because there's so much capital

available. And I think that um we should

be aware that a similar dynamic could be

at play and that the the excellent

performance of private credit uh has

been aided by the fact that there's huge

amount of inflows. So, it's not just

that performance impacts inflows.

Inflows impact performance. And we saw

some several high-profile cases of

outflows from certain funds that

required the 5% gating mechanism. It'll

be very interested to see what the

inflows are on these private credit

products, especially those available to

uh retail investors in the coming weeks.

Blackstone did report earnings last week

and it uh was looks pretty good. I also

will note that if the concerns of

private credit are not merited, there

perhaps is some value in the publicly

traded business development companies or

BDC's, many of which are trading at a

significant discount.

I'll leave I'll leave you with the

conclusion of just how much the Federal

Reserve matters. that chart that Nick

showed of what is earnings or EVA

relative to interest expense that is

heavily influenced by the Federal

Reserve and that those metrics got worse

in 2022 when the Fed raised rates.

Companies have to pay a lot more and

they've actually moderated since as as

Nick showed because the the Fed has cut

rates. That's the importance of uh the

Federal Reserve of of monetary matters.

And I think that people who say that the

Fed doesn't matter that much, that

interest rates don't have an effect, and

that actually high interest rates are

stimulative because the rich people are

getting more money on their on on their

cash. I think that that is overblown and

frankly nonsense.

um just the the vast amount of sums that

companies have to pay their creditors go

up tremendously when interest rates go

up and they go down tremendously when

interest rates go down. So we will be

seeing Fed share Kevin Worsh in his

second Fed meeting on Wednesday, July

29th. We've got some great coverage of

that on the Monetary Matters Network. So

stay tuned for that. Subscribe to the

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Until next time.