Talk Your Book: Private Credit’s Next Act

0:00Ben Carlson:Today's Animal Spirits Talk Your Book is brought to you by Churchill from Nuveen. Go to nuveen.com slash alternatives to learn more about Churchill Asset Management and their private credit capabilities and middle market lending. That's nuveen.com slash alternatives. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:35Clients of Britholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:44Ben Carlson:Welcome to Animal Spirits with Michael and Ben. Michael, I gave an analogy on the show today. I just came up with it right off the top of my head on the spot because that's what we do in podcast land. Private credit is a lot like the housing market. I think we pulled forward a lot of stuff this decade in many different ways, right? But housing, you had a decade's worth of returns in really probably like 18 months, right? 50 % gain. And it got pulled forward for a number of reasons. The 2020 has kind of pulled forward a lot of things.

1:13Michael Batnick:The pull forward that you're talking about with private credit, is that fund flows on the way in?

1:17Ben Carlson:Don't you think that we pulled forward because of the way the bond market, the rates market moved so quickly down and then up? Yes. I think that's why we saw this massive uptick in flows going into private credit at the same time when you had these new evergreen fund structures. So it made it easier for money to go in than it would have in the past.

1:36Michael Batnick:Well, private credit was amazing in 2022 when the 60-40 got killed and bonds dragged stocks down with them. Private credit was like, hey, we're over here. Look at us. Up 11. No vol. Water's warm. And, you know, investors responded how you thought they would. Right.

1:55Ben Carlson:And that huge tidal wave of cash flow going in, some of it had to come back out when the tide went back out, which is obviously what happened. It is interesting to see that just there are still redemption requests, but there really hasn't been any high profile credit events yet. Nothing.

2:13Michael Batnick:Well, even the ones that we saw in 2025 weren't really high profile. They were still relatively small deals. And there's never one cockroach line. I don't know. That was kind of a while ago at this point. No, it was almost a year ago.

2:25Ben Carlson:Yeah. Maybe there was one cockroach. There was two. Two cockroaches. And it was, maybe it was someone's first rodeo. I don't know. It's still relatively early in the sense that whatever fear of disruption that AI is going to

2:41Michael Batnick:bring, we have definitely, it's impossible to say we're out of the woods yet.

2:47Ben Carlson:Yes, of course. And we haven't had, we talk about it on the show, we haven't had a real credit event. We haven't at a real credit cycle to know how is this stuff going to handle an actual credit event, not just people worried about the possibility of a credit event. So on today's show, we talked to Ilona Gornick. She is a managing director, senior investment strategist at Churchill, which comes from Nuveen. And I thought she made a really great point that these private credit books, these funds, it's not like you put your money in and then you make all the loans on one day. And they're all the same term.

3:16Ben Carlson:It's different loans of different varying terms. And I thought one of the better points she made is just that like everyone is kind of in this together. The private equity companies that are making these investments, they want these things to succeed. They're not just going to give up on them and sell them immediately the first sign of trouble. Right. It's the kind of thing like even if there is trouble that happens at some point, and there will, there will be a credit event at some point. I don't think we've forever gotten rid of recessions and the credit cycle and all that stuff. They're just longer now, these cycles.

3:44Ben Carlson:Some will do better than others, but it will be a slow drip as opposed to like a big cataclysmic earthquake on day one. We get into a ton of stuff about private credit. We kind of give an update where we stand, how things have changed since the post-GFC period, all this stuff. So here's our talk with Alona Gornick from Churchill Asset Management from Naveen.

4:07Michael Batnick:Alona, welcome. Great to be here, guys. So early in your career, you were at Oak Tree. During the post-GFC world, there was a lot of things that were trading for discounts. Distressed investing was a big, big corner of the universe. And it's been a decade plus with very little distress. Things have been pretty common credit land. I'm wondering what those experiences, what your time there taught you about investing for a universe that looks a lot different. Yeah, so I'd say the time at Oak Tree was absolutely eye-opening as far as having a front seat in that world that was very new to all of us.

4:53I think what I feel today in terms of kind of being able to level set the calamity, you know, sort of the feel of like everything falling apart is so different. in that the gravity, the magnitude of what we were able to buy at bargain and or when there was no one else on the other side of that bid was a completely different universe than what we kind of see today in terms of very strong bids, very high quality assets, not a credit-driven kind of crisis here, but in fact, growing businesses that don't rely on credit altogether. They can continue growing and continue accessing much larger swaths of private capital than they did before.

5:35So I'd say a big, big learning lesson would be that the access to capital is a huge, a huge driver in terms of offsetting or being able to mitigate or stay away from distress. And when you don't have that access to capital, you will absolutely run into that trouble. So today's world, 10 years plus later, we have massive, massive amounts of private capital that can allow these businesses, whether strong performers or those going through any issues or trouble, to be able to access that and continue moving forward.

6:05Michael Batnick:Maybe too much capital. I wonder if that's paradoxically part of the problem. I remember a headline, I don't know, a year ago, whatever, where it was like, this company raises a$20 billion distressed fund. And that was just preparing for potential distress. And we haven't even seen it. And people, there's just so much money in the system, which is leading to a lot of the really funky dynamics that we're seeing with a lot of these companies just being able to survive in a world that they might not have been able to, say, before the institutionalization of the private space. I'd add to that not only too much capital, but the form in which that capital is available.

6:46So to the extent that capital in the past was raised in committed drawdown funds at the manager's luxury to draw it down when they're ready is very different than the amount of capital that we're seeing raised that is immediately funded and must go to work, must be deployed right away. So I do think the type of capital, in addition to the amount of capital and the structures and the vehicles we're in, is creating a very different dynamic. And what do you do with that? Do you have scale on your side or are you running and chasing after any deal you could possibly do? And I do think that that is a different kind of world that we're in than we were before about 10, 15 years ago.

7:23Ben Carlson:It's funny. I was in the old foundations and endowment space before, and we actually signed on to be part of an Oak Tree fund in, I want to say 2011, 2012, that was kind of like, hey, we're going to put you down for this commitment. We're not going to call any money until distress hits. We still haven't really seen a credit cycle since then. And obviously, it's easy to understand why in hindsight, but how surprised are you that we, I mean, we've seen pockets of distress, obviously, but there really hasn't been a credit cycle since the great financial crisis. How surprised are you that it's lasted as long as it has?

7:53I think the transition I made from Oak Tree over to Churchill really opened my eyes to a very different part of what private credit is, in that at Oak Tree, I spent all my time on the high-yield side looking at big corporate issuers in the high-yield bond space. On the private credit side where you have these smaller companies with smaller financings and more like minded sides of the capital participants, the ability to live to fight another day seems to be a lot more aligned in terms of having all the lenders that came into that financing come in on day one versus in a very big liquid deal. You've got very different kind of mandates.

8:33You may have performing in at 99 versus distressed guys coming in at opportunistically 70, 80. I mean, everyone's kind of got a different focus and goal, and they don't all row in the same direction. So the ability to get an amendment done in a very, very big deal is very different. But on the private credit side where you have these smaller businesses and smaller financings, you can hopefully hold off issues that would come if you can't access more capital and that kind of credit cycle, if you will. because we've seen so much in terms of stress and test. We've had a full global pandemic where all the doors were shut.

9:09I mean, there should have been issue and reason. We've seen rates climb 500 basis points. We have tested these companies, these private companies, meaningfully. But for some reason, as you guys pointed out, we haven't seen full on just complete obliteration of this broader private credit asset class or even the companies inside of them. And in fact, growth and continued growth or companies staying out of the public domain. They actually just choose to stay private because they continue to access this capital. So I do think the ability to get kind of this combination of your private capital in a smaller, more like-minded group that will all want to see positive success going forward along with the private equity firm that is typically involved in it has helped stave off that limited access to capital, that capital when you need it if you're going through a time of distress or stress, which has happened, but it hasn't actually taken any participants out of the market.

10:06Michael Batnick:I think the idea behind private credit, and I know private credit is not just one thing. We can unpack all the different subcategories within that. But I think the idea of, say, Blackstone, raising money, lending money to a company one-on-one, being able to facilitate some of the terms, work with them if there's a little bit of distress, is probably a better alignment of outcomes versus like the syndicated market, as you mentioned, where everyone's sort of coming at different times and that can get pretty messy. We haven't stress tested a lot of these companies, but in a weird way, over the past, call it six months, we've stress tested some of the asset managers or some of the vehicles behind how they came to market, particularly through the wealth channel, because it is a very compelling pitch.

10:54Michael Batnick:Investors like nothing more than steady income that is a lot higher than what they can get in the risk-free rate. Advisors love selling that. So it's a match made in heaven. The lack of marketability or liquidity or the daily marks, it's just like check, check, check, check, check for everything an investor would want. And a lot of money came in. And now money is coming out for all sorts of various reasons. It's sort of the perfect storm. But it's funny because we haven't, to your point, like we haven't really seen stress within the underlying portfolio companies like you would expect. So there's been a maybe not a credit event, but like a flows event where a lot more money wants to come out than can come out, which is probably for the best, right?

11:38Michael Batnick:That they can't just like blow these out and just take, you know, 70 cents on the dollar, whatever it would take to get the investors their money back. How long do you think this current moment lasts? Because I think one of the things that is driving the ad flows. It's a combination of a lot of things, but it's like a persistent thing because the more people see in the headlines, oh, people requested X-teen percent out of Blue Apple and X-teen percent out of B-Cred and whatever, whatever. As long as that keeps appearing on the front cover of the Wall Street Journal, I guess it flows eventually.

12:05Michael Batnick:Anybody who wants it will come out, but it just seems to be wearing this nasty sort of spiral. Forget about the software companies, which is obviously part of the story, which we haven't seen stressed there. What do you think about everything that's going on? I know there's a really long-winded question, comment, answer. Yeah, I think two things stand out to me around what we're seeing today is, one, there is a bit of news on news that's happening where the news headline around the redemptions is creating potentially more concern for people who didn't actually have the concern in the first place.

12:34Yes. So that's kind of like driving things where there's a fundamental mismatch on what's happening with real issues in the portfolios versus those walking away from that investment opportunity. And so trying to not be the last man or woman standing is a little bit of what's happening on the front end there. And then, two, I'd say the point about capital coming in and capital coming out as easily as it came in and as easily as it has come out, I think is really down to have you been educated fully in the right way about what this asset class and this fund structure is really getting exposure to.

13:15And while the fund structure has been innovatively created to make it more accessible to you as an individual investor at a nice lower minimum than a big institution and with some windows of redemption flexibility, the actual investments you're getting exposure to are still private. they still shouldn't and don't really trade. So to the extent that you're going to have your cake and eat it too, and to those points about the yield premium, the lack of volatility, the lack of correlation to public markets, really a nice risk-adjusted return combination, you have to really understand what that means in terms of the cost to that liquidity or that risk.

13:56And that's there. And so I don't think the folks that were kind of maybe at this point running out of the asset class and really embracing that that was really part of the deal and really thinking about private credit as a long-term structural sort of allocation to your portfolio rather than an opportunistic in-out kind of vehicle to do that with. And so I think I would point that to really, really educating in a different way. It's not only what am I investing in, and how does it work, but why am I investing and why do I want this for the long term versus this idea of coming in and coming out?

14:35So it's a big deal, but I don't think redemptions right now are the full story in terms of what we think in terms of how long this will last. There is a bit of overhang that happened from the first quarter. We're seeing it in second quarter numbers. Some funds are down versus their first quarter, so that's the right direction to go, including ours, so that's great. But I think we're going to see this sort of play itself out by the end of the year. As we continue to see portfolios show strong diversification and or the effects of that performance over time, meaning your issue credits are in check, you're not seeing big gaps up.

15:18And all the while, if we looked at this from a historical context, we often look at terms like metrics like non-accruals or defaults. Right now, we are in a historically very low period relative to where we've been over the last 15, 17, 20 years. So if we were even to see a modest tick up, I would look at that as more normalization rather than deterioration of these underlying portfolios in and of themselves. So I think we need to get through this noise. I think the asset class is maturing and any asset class that's going through maturity like this will see some healthy, you know, kind of moderation, if you will, because we've seen a surge, right, in this asset class through these new vehicles.

15:59And then maybe it's kind of tempering. And I think that that's a healthy thing.

16:03Ben Carlson:In some ways, it feels like private credit went through something like the housing market did, where there was this huge pull forward in demand from housing, right, early in the pandemic. And it seems like private credit, you talk about maturing, so much money flowed in because it was like this perfect storm. right? You said the Fed took rates from zero to five, the bond market got crushed. Private credit is a different structure than that. It doesn't have the interest rate risk in the same way. So you didn't see these 20 % drawdowns like you saw in a core bond fund. And it just happened that it coincided with these new fund vehicles being much easier for financial advisors to allocate to.

16:37Ben Carlson:So it almost feels like you pulled forward, I don't know, five years of demand in 18 months or something. Do you think that there is sort of a normalization period where you try to iron that out a little bit and smooth it out and you maybe get rid of the weak hands and then you kind of can move forward and things do normalize a little bit? Absolutely. I do think that that pull forward demand, I've never heard it kind of phrased in that way, but to the degree we've had some, seen some managers and some funds really pull forward some extreme amounts of capital to the extent that there are maybe more issues in some of those funds than others.

17:15Yeah, I think that kind of comes out in the wash and redemptions may hit certain funds more than others. But I will point to fundamentally where the supply-demand technicals are. I would say that if you talk to any manager, any good manager at least, hopefully they're telling you the truth here, but most great managers are going to let you know that they are turning down 60, 70, 80, 90 % of the deals they do see. And that's the case with Churchill as well. To the extent every manager is sourcing that much great deal flow and able to turn down that much, that should mean that there's more than enough to go around.

17:53If I'm not doing it and five others aren't doing it, but they perfectly will get done. I do think that that's an interesting kind of dynamic where the supply of potential deal flow is really out there. And if we've pulled forward this demand and bringing in that much capital into the system, it just needs to find a home, right? It needs to get deployed. And where do you deploy it? And is your sourcing, your ability to source that deal flow there for you? Or are you just kind of, you know, picking up somebody else's leftovers? Can you get there first? Can you find that deal flow before others. So while there is a bit of a pull forward potential demand in the capital, I do think we have meaningful opportunity ahead for private credit.

18:34I mean, if you think about the number of private companies alone that are out there in that middle market entire landscape, there's a very small percentage of them that actually have private capital and private equity backing today. So there is a huge white space of opportunity to keep buying and growing those businesses. And typically private credit along with your private equity capital in that.

18:57Michael Batnick:I was reading this morning, PitchBook has their Q2 private credit rep. And they said direct lending deals were down pretty substantially. What are the numbers? $29 billion across 138 transactions, well short of the$74 billion across 217 deals in the first quarter. And then they show like, if you're looking at PE-backed borrowers, it's the same story, maybe even a little bit worse. So I wonder, does this have anything to do with the flows and the underlying instruments? Or is this more of like a macro-related story where they're pulling back for various reasons? Or is it hard to untangle everything that's going on and really come to the source of truth?

19:41Michael Batnick:Because I'm guessing it's probably a little bit of both. Yeah. I'd say it's probably, in my opinion, more the latter than the former in that it's, From a private equity perspective, a bit more macro-driven and or kind of uncertainty that still persists around the rate environment, what your cost of capital will be, massive risk aversion to anything that has a hint or sniff of AI disruption. So really trying to find kind of a closing of the gap between the bid-ask spread of what someone wants to pay versus what someone wants to sell a company for and finding that point to transact. But we have seen a meaningful amount of deal flow kind of booked by the investment banks that participate in this ecosystem and win mandates to eventually sell a business.

20:26But they're just holding off to get to better clarity, to get to a better point, to then bring that company to market. So I do think that the ability to see more LBO activity is there. It just has been quite kind of, you know, disrupted, if you will, for the second quarter. I mean, we had a lot happen in the second quarter in terms of noise. So I don't mind that there is a bit of a pause. But the second thing I'll say is, while that's the private equity side of it, private credit doesn't live and breathe only on new LBO activity to be busy. We are still busy on refinancings or add-on incremental financing opportunities where we already have a loan to a business, but they are still trying to grow.