The Risks of Private Credit, How to Mentor Struggling Young Men, and Surviving Layoffs

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1:23Learn more at brex.com slash grow. Welcome to Office Hours with Prof G. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question for next time, you can send a voice recording to officehours of PropGmedia.com. Again, that's officehours of PropGmedia.com. Or post a question on the Scott Galloway subreddit, and we just might feature it in our next episode.

1:56First question. Hi, PropG. I've been occasionally seeing news of the quiet expansion of the private credit market and Wall Street's excitement towards it amidst the current economic turmoil. I've also been seeing banks and 401k funds beginning to hop into this lucrative market, potentially exposing people outside the high net worth threshold to the risk associated. At first glance, it seems to me that the absence of credit ratings, higher interest rates and loan amounts, coupled with higher management fees for funds participating in this market parallels the conditions that led to the 2008 crisis.

2:33Given your interest in credit and debt, could you better explain this opaque market to me, and is this something we should be worried about? Thanks for your insight and content. So private credit is essentially loaning money to private companies who have not been able to access the public markets as easily, and also the big banks have gotten out of the business, are mostly out of the business, so they're getting back in. So a lot of funds have raised money and are finding companies that need to borrow money and loaning them money. So that's private credit, offering credit to private companies or in the private markets.

3:06And it's grown from a quarter of a trillion dollars,$250 billion in 2010, to over$1.7 trillion in 2024, and is projected to surpass$2.5 trillion by 2027. So what does that mean when you have an abundance or a huge growth in the amount of capital available for private credit, it means that more money is chasing fewer deals. And what that means is that private capital will start making bad decisions. And that is lending money to companies and charging an interest rate that doesn't reflect the underlying credit risk of that company. And that if we hit a bump in the economy, a lot of those companies won't be able to pay back the lenders, and you might see kind of a collapse.

3:52And it's sort of a downward spiral, and that is there'll be a chill. Good companies won't be able to raise money, which will put strains on their finances, meaning they'll pull in their horns. They won't spend as much money, so the other companies won't. We'll see a decline in top-line revenues, and kind of we have sort of this downward doom loop. So in sum, private credit funds are struggling to find quality lending opportunities, leaning to thinner returns and riskier deals. So this is driving around returns, which you would argue that means it's a good time to borrow money in the private markets if you're a company that has, say, just mediocre credit.

4:26Projected returns for business development companies, BDCs, a key private credit vehicle, have dropped from nearly 15 % in 2021 to just 5.2 % today. So private credit used to be a niche business where you get a big number to justify the risk you were taking. But now at 5.2%, That's just above breakeven. BDCs can serve as a rough proxy for direction of private credit market. Jamie Dimon recently warned against the private credit market, but JPM is reentering the space with a$50 billion plan, despite having exited in 2015, which is likely going to take interest rates down even further. So everything's fine until everything isn't.

5:05The economy is strong right now. People are buying things. And then private credit lenders are getting their money back in their interest, and they're able to make money off the spread. they borrow and then what they lend out at. What happens is when the music stops, right? And there's a bump in the economy. I think private credit may be one of the biggest bubbles in the world right now. And that is everyone's chasing returns. And because banks had gotten out of the business, they were able to charge more. Everyone got very excited about these deltas between money they could borrow at, at big or credible institutions and the rates they could lend at.

5:41So everyone dived into the business, which has brought down rates to probably what is below an interest rate of return to reflect the underlying risk. And it's fine because the underlying risk pops up in lumps. And that is, okay, it's okay to lend money at these rates as long as the economy is good. When you see that the rate was too low to justify the underlying risk is when shit gets real. And also, I think you could see rates going down even further now that big institutions like JP Morgan are getting into it. What does this mean? I think a lot of those smaller funds in private credit are going to struggle.

6:17And that is they're going to have some blowups. I know it just feels to me like an asset class that has been overinvested, which drives down returns, which leads to a bubble. What does that mean? It means if you're a private company, it's probably not a bad time to borrow money on good terms. I mean, essentially, the model here is what happened in the subprime credit market where people who shouldn't have been buying homes could just do non-doc loans where they don't even have to fill out anything with their credit report. And they could get loans. You ended up with chiropractors owning nine condominiums in Miami, which was fine until it wasn't.

6:50And that's the fear around the private credit market. And what people fail to realize is that we constantly obsess over the equity markets and look at the Dow and the Nasdaq every day. But actually, it's the credit markets that sort of drive the economy, and that is the cost of capital to companies to grow. And what happens to that cost of capital if they can't pay it back? Obviously, the cost goes up. So it's an interesting question. It's something I follow. But, yeah, this feels like a bit of a bubble. Question number two.

7:25Hi, Prof G. As a longtime listener, I deeply appreciate your insights, especially on the topic of helping young men. Your messages resonate strongly with me, both as a father of two college-age sons and in my recent career transition. After spending 25 years as a business executive in the biotech industry, I have found immense fulfillment as a public high school business teacher and basketball coach, which I've been doing for the past two years. This new role has given me a direct platform to influence and educate young men. And I have frequently played clips from your podcast in my classes that cover topics such as personal finance, investing, developing a personal brand, and the dangers of sports betting.

8:11Your messages truly hit home with my students and reinforce my teaching. I've experienced the immense satisfaction of connecting with young men eager for self-improvement. However, I'm increasingly encountering the frustration of not being able to reach those who are struggling, show little motivation academically or in extracurriculars, and seem headed down difficult paths. My question for you is this. How have you approached and dealt with young men you've tried to help or mentor who simply won't take your advice or support? What advice do you have for getting through to these difficult cases?

8:46the young men who seem to need the most help but are the hardest to reach. Thank you for your good work. I think you're living a rewarding, purposeful life. I love hearing about people who go out, make some money, have some success, and then decide they want something more fulfilling. You're kind of doing something, kind of the real version of what I tried to do. I made some money or tried to make some money, and then I went into teaching. But what you're doing is real work. I teach, at my peak, I was teaching, I don't know, podium eight or 10 hours a week. You're supposed to prepare 48 hours per podium hour.

9:21I never did that. But teaching every day, showing up, putting up with high school kids, I imagine it's very rewarding and also very difficult. So anyways, around your question around how to reach the kids that don't want help, the honest answer is I don't have any personal experience there because the kids I mentor reach out to me and are, by virtue of the fact they're reaching out to me, they want help. And a few times when I've had my friends ask me to speak to their kid, a couple of times I've gone back and said, your kid doesn't want help. I'm not saying he doesn't need help, but he doesn't want help.

9:53And he came and met with me because you told him to and just kind of didn't want to be there. And I'll even say to this kid, I'll even say, I've said this twice. I said, I like, I get the sense you don't really want help. And there's just no way. A, you maybe have decided you don't need help. That's fine. But you don't want coaching or mentorship because I get the sense you just want out of here. And that's cool. I don't, you know, that's fine, but I'm here if you need me, but you have to make that decision. So the first is I don't, I'm not entirely sure how to reach kids that don't want help.

10:21You have to affix your own oxygen mask first. What I try to do with my kids is I try to get them to force them to get engaged in things. And as a parent, what I would say is the moment you think, so first First off, don't fall into the myth that your kids, by virtue of your DNA and just how awesome you are, are going to be really inspired and passionate about the shit you're inspired by. I envision my kid would come to CrossFit with me in the morning and then want to hear fascinating life lessons from dad. And then we go home and watch Game of Thrones or Dunkirk or a World War II movie. And then we'd sit up late at night and more lessons from wise dad.

10:59Not at all. My kids are interested, just not that interested in the things I'm interested in. And what you realize is if you want to be a good parent, especially a good dad, boss, you got to lean into what their interests are. And, you know, I'm taking my son, my youngest to Chicago, and we're going to go to what we do in every city, the tallest building in Chicago, and to the observation deck. That is the seventh circle of hell for me. But that's what it means to be a dad. It means going to the shit and getting engaged in what they want to be engaged in. And long-winded way of saying, you immediately want your kids to, you want to find something they are engaged in and just drive a truck through it.

11:40My kid has, my youngest has decided he's interested. He's using Wix to build a website. So I'm helping him build it. I'm like, okay, let's ask AI how we market and drive traffic to the website. And I give him 50 bucks to buy keywords on Google, and we've been watching YouTube videos on how to buy keywords because he's just all of a sudden very interested in e-commerce and building an e-commerce site. He's super excited about doing videos on YouTube, how-to videos or unboxing things. So I try to set up the computer so he can do it, just really try and lean into their interests. One of the great things about afterschool sports is, I don't want to say it saved me, but I had a lot of male role models.

12:24And some of them were my coaches. I played baseball in high school for a little bit until I got cut from the JV baseball team. That felt pretty good. But I always found time to play sports. That was super important. So how to reach the kids that are difficult to reach? I think some of it is, as men, we need to step up. Also, just a recognition, we need a kind of a zeitgeist in our society that any young man or boy who doesn't have a male role model, we need to immediately surround that kid with male presence. So one, just approaching a young man and saying, if he wants to spend time with you, go to a game with you and maybe your own kids, come over, wash your car with you, do something fun, hang out, go grab coffee, whatever it might be, right?

13:11Go to a game, watch a game. So I think some of it is just getting involved and just spending time. And I'm a big fan of what I call garbage time. And that is, I found all the really wonderful moments with young people that I've had have just been kind of hanging out with them and they start to say something and you respond and you have that kind of moment of connection where you're able to help them. But let me just finish where I started. Thank you so much for your work and getting involved. And what do we need? We need more men like you, more men who decide to get involved in young people's lives.

13:41Thanks for the question.

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16:46Welcome back. Our final question comes from Reddit. AgitatedRing33-76. Where do they get this shit? Hey, Prof G, I'm three months into a job, but my company had a layoff this week. I survived, but my boss, who was basically the entire reason I took the job, got cut. This is tough, but also clearly an opportunity as I know find myself basically the highest ranking person left in my department. Any advice for someone trying to grow their career and take over more of a leadership role during a chaotic post layoff time? Or should I start looking for a new job? No, no, no. Whenever there's a company that's about to go through a layoff and people start calling me and say, in any change, in any tumult, there's opportunity.

17:23And by the way, you may be on the wrong side of that. You may be one of the people on a list who's going to get laid off, But whenever there are layoffs or change or acquisitions or divestitures, there's opportunity because basically you take the etch-a-sketch and you shake it and there's going to be new lines drawn and they might be advantageous for you. So you want to stick around and wait till you see the next card being turned over. If you want your boss's job, I've always said what you need to do is start acting like your boss. In other words, do the job you want. Start doing it. So what did your boss do?

17:54Where did they add value? And start taking on some of those responsibilities. And go to the person who your boss reported to and express an interest in that role and say, look, I'm interested in this role. I think I'm qualified. I want to start doing this job. Can I do X, Y, and Z? Can I take on those responsibilities? But I can tell you as someone who's managed small and medium-sized firms pretty much my entire career, I love it when people would come into my office and say, I want more. I want to step into these shoes. This is what I'm thinking of doing. Does this make sense to you? Do you have any advice for me?

18:24And also, what do I need to do to get, you know, have a shot at being placed in this role? So, no, don't leave just because your boss got fired. Wait for that next card. There's opportunity and change. And again, do the job you want. How do you get the promotion? You make it easy. You start saying, all right, when they meet, they're like, this person's already doing the job and they're doing a great job. So let's just change their title and their compensation and have a transparent conversation with someone who's an advocate for you or your boss's old boss and say, I think I'm ready for this role.

18:55What do I need to prove this to you? But I am interested. Thanks very much. That's all for this episode. If you'd like to submit a question, please email a voice recording to officehoursofproptionmedia.com. Again, that's officehoursofproptionmedia.com. Or if you prefer to ask on Reddit, just post your question on the Scott Galloway subreddit, and we just might feature it in an upcoming episode.

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