Canyon's Friedman on Explosive Popularity of Private Credit

The credit is very popular these days. Private credit has been seen as one of the great growth areas, investment world. Why is it that private credit is so popular these days as opposed to 10 years ago or 20 years ago? I think if you take a step back, the private markets in general have exploded at the expense of the public markets. Part of that's regulatory, part of that's just structural in the market. I think private credit particularly exploded when the banks took a step back. I think people figured out quite correctly that there was an opportunity to move quicker and more with more alacrity. To help finance private equity firms that were growing quickly moved quicker and more efficiently than commercial banks. Well, the banks would say, well, the private credit firms that are now dominating this business, large private equity firms, firms like yours, they are not regulated. So the banks, when they lend money, they're lending money typically off their balance sheet or money from the that's FDIC guaranteed. And therefore they have some constraints in what they can do and they're often regulated by the Federal Reserve. The private equity firms that have private credit businesses or private credit firms that just do private credit or. Credit kind of investments, they are not regulated. So therefore the argument that the banks make is that maybe these firms are not going to be really doing good deals and ultimately there'll be a problem when they when the economy slows down. How do you respond to that? I think it certainly could be correct. I think private credit has a lot of different forms and, and, and varieties. The straight down the middle of the plate Unitron landing, which is basically first lien plus second lien combined into one fat layer of, of the capital structure has gotten to be very crowded with the, with the, the explosion of private credit firms who have grown based on that product. And at this point you could argue this probably too much credit availability, chasing too few deals. So there's probably a half a trillion sitting on the sidelines. And as a result, spreads have come down, rates have come down, the the the depth of lending has gone up and the covenants have weakened. Generally speaking, the private credit world is operating with with sophisticated investors who take a certain amount of risk and with much, much less leverage applied to those loans. The leveraging commercial banks is generally much higher. Than the leverage you see in private credit. So the problems, while they might arise here and there, are much less likely to be. Systematic or existential for the financial system in the way that we saw in 2008 when banks were way over leveraged with a lot of not very good credit products, mostly in that case real estate based.