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- [00:00]
A
Today's Animal Spirits Talk youk Book is brought to you by Churchill from nuveen. Go to nuveen.com alternatives to learn more about Churchill Asset management and their private credit capabilities and middle market lending. That's NuVeen.com alternatives.
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B
Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik 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 Ritholz Wealth Management. This podcast is for informational purposes, is only and should not be relied upon for any investment decisions. Clients of Britholtz Wealth Management may maintain positions in the securities discussed in this podcast.
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A
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, really, probably like 18 months. Right. 50% gain. And it got pulled forward for a number of reasons. The 2020 is kind of pulled forward a lot of things.
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C
The pull forward that you're talking about with private credit is that fund flows on the way in.
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A
Don't you think that we pulled forward because of the way the bond market, the rates market moves 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.
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C
Well, private credit, private credit was amazing in 2022 when the 6040 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 investors responded how you thought they would.
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A
Right. 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, like high profile credit events yet.
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C
Nothing. Well, we have. 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.
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A
I don't know.
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C
That was kind of a while ago at this point. No it was almost a year ago.
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A
Yeah. Maybe there was one cockroach.
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C
There was two.
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A
Two cockroaches. And it was, maybe it was someone's first rodeo. I don't know.
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C
It's still relatively early in the sense that whatever fear of disruption that AI is going to bring, we have definitely. It's impossible to say we're out of the woods yet.
- [02:47]
A
Yes, of course. And we haven't had, we talk about on the show. We haven't had a real credit event. We haven't had 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, these private credit books, these, these funds, it's not like you put your money in and then you, you make all the loans on one day and they're all the same term. It's different loans of different varying terms. And the, 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.
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C
Right.
- [03:34]
A
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. 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, after the post GFC period, all this stuff. So here's our talk with Alona Gornick from Churchill Asset Management from Naveen.
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C
Lona, welcome.
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B
Great to be here, guys.
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C
So earlier in your career, you were at Oaktree 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, 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.
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B
Yeah. So I'd say the time at Oaktree was absolutely eye opening as far as having a front seat in that world that was very new to all of us. I 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, 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, that don't rely on credit altogether, they can continue growing and continue accessing much larger slots of private capital than they did before. So 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.
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C
Maybe too much capital. I wonder if that's like paradoxically, 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 distress 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, 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.
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B
I'd add to that not only too much capital, but the form in which that capital is available. So to the extent that capital in the past was raised in committed drawdown funds at the manager's luxury to drop 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.
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A
It's funny, I was in the foundations and endowment space before and we actually signed on to be part of an Oaktree fund in I think 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?
- [07:54]
B
I think the transition I made from Oaktree over to Churchill really opened my eyes to a very different part of what private credit is. And that at Oaktree 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 of 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. You 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, you know, 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. I 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, 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 like positive success going forward along with the private equity firm that is typically involved in it has helped stave off that, you know, limited access to capital, that capital when you need it. If you're going through a time of distress or stress which has, has happened, but it hasn't actually taken any participants out of the market.
- [10:07]
C
I think the idea behind private credit, and I know private credit is not just one thing, we can unpack all the different, 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 in at different times and that can get pretty messy. We haven't stress test 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. 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 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, 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 that they can't just like blow these out and just take you know, $0.70 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 outflow is it's a combination of a lot of things. But it's like a persistent thing because the more people see in the headlines, the more oh people requested x 10% at a blue apple and x 10% at a B credit and whatever. Whatever. Like as long as that keeps appearing on the front cover of the Wall Street Journal, I guess it flows. Eventually anybody who wants it will come out, but like it just seems to be wearing this nasty sort of spiral. Forget about the software companies which you know is obviously part of the story, which we haven't seen stress there. What do you think about everything that's going on? I know there's like a really long winded question comment answer.
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B
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.
- [12:34]
C
Yes.
- [12:35]
B
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, you know, and this fund structure is really getting exposure to. And 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, you know, 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. And 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 are 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 how does it work? But you know, why, why am I investing and why do I want this for the long term versus kind of, you know, this idea of coming in and coming out. So this is, 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 the 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 don't, I think we're kind of 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. And 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 surgeon right in this asset class through these new vehicles. And then maybe it's kind of tempering. And I think that that's a healthy thing.
- [16:03]
A
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 0 to 5. The bond market got crushed. Private credit is a different structure than that, doesn't have the interest rate risk in the same way. So you didn't see these 20% drawdowns like you saw in like 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. So it almost feels like you pulled forward, I don't know, five years of demand in 18 months or something. Do you, 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.
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B
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, yeah, I think that kind of comes out and 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, 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 if I'm not doing it and five others aren't doing it. But they're, they're 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 I, 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. I 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 doing so. You need to have typically private credit along with your private equity capital.
- [18:56]
C
In that I was reading this morning, PitchBook has their Q2 private credit rep and they said direct lending deals were, 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 back borrowers, it's the same story, maybe even a little bit worse. So I wonder, is it, 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? Because I'm sure it's, I'm guessing it's probably a little bit of both.
- [19:44]
B
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. But 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 disrupted, if you will, for the second quarter. 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, right? They might buy a tiny two, three or four little, you know, tuck in acquisitions and they will use debt to do that. So I think for the most part, while it might be a bit of a private equity and we do need to watch private equity from the lifeblood of private credit because that's where our deal flow comes from. LBO activity is not the only source of financing deployment opportunities for us. We do need to see what is add on activity, refinancing activity and the like look like as well.
- [21:38]
A
So you, you mentioned before kind of some of the differences of what Oak street did versus what you're now doing at Churchill Asset Management. What was it that really drew you to this space which I know private credit and the lending business, it's been around for a very long time obviously. But this, this still seems like a very new asset class to a lot of people. Like what was it that drew you to this space and what you're trying to do?
- [21:56]
B
Yeah, I think the biggest kind of difference and, or fulfillment moment, if you will, is I loved my time at Oak Tree. I love learning so much there and the ability to see any, any asset because it is a huge, huge and incredible organization. I think at Churchill and this private credit and direct lending space is really this relationship orientation where the deal that you pick and the, and the private equity firms that you work with, it isn't just a transaction. You really have to absolutely love this, this credit, this sponsor the management team because you're going to be there and with them and support them for the next five, six, seven years. We're not going to trade out of this and even if we do it once with them, with, with one, with one deal, we're going to want to see more deals from them. So how you behave in one deal really affects your opportunity to see the next. So I do think the relationship orientation has been kind of eye opening and, and a lot more of what's attracted me to this, this asset class and, and you know, just a very different kind of feel for how you sort of treat, treat folks you meet and it really helps you kind of source that next opportunity. And then also I'd say when things get tough, you know, and, and, and how do people really behave when, when it's, when the going gets tough, you don't just kind of quit. You really have to understand motivation and behavior behind that motivation. And if you, you do treat people the wrong way, you're probably not going to do a deal with them again.
- [23:25]
A
So I guess that gets down to the investor side of things and obviously where there was maybe a mismatch is that you said These are right, 5, 7, 10 year terms, this is a long term asset class. And that was obviously where a lot of the mismatch was with people who wanted to redeem so quickly is they did not expectation set well enough to know that this is not something that you just jump in and out of. This is a long term asset class, that you should be holding this for the long term, not jumping in and out every 18 to 24 months or something.
- [23:51]
B
Particularly as the portfolio you have exposure to has so many issuers in there that have staggered maturities so that at any point in time they should all be giving you exposure to a really beautiful blend of interest coming from very different industries and will be rolling off in time, over time. But yes, I'd say by and large, if your exposure to private credit is intended to give you a premium to that fixed income or that risk free rate, regardless, you should know that there is a cost to that illiquidity, if you will, you know, and coming in as you cannot just sell these assets. And we don't, we don't just sell these assets and we're giving you that, that gift of a great premium. Carefully selected a company that is supported by equity and debt investors that are all looking for the success of that business and not trying to come in at different, you know, opportunistic points.
- [24:51]
C
Alana, One of the reasons that, that this asset class became so popular with the Wealth Channel, it was, was what happened in 2022. So interest rates went up very quickly. These, these deals have the benefit of, of having a floating rate attached with them. There wasn't really a recession so you got like the, the, the positive double whammy of higher coupons, very few defaults, no interest rate risk. So it was awesome. Now rates are coming down or at least they're expected to mostly come down and that sort of front ran or, or began like money coming out was all right. This was awesome when you know, rates were whatever percent. Now they're coming down and it's, you know, relatively less attractive. But I wonder where like the push and pull is of. Okay, yes, the, yes, you will have like lower, lower income because they are attached to current rates. But maybe there will be a little bit of potential stress relieved because the cost of capital is coming down and now these businesses are at a healthy place to actually like stomach the rates that they're paying. So when Ben and I were talking to private credit people, I guess in 2023 it was like, yeah, 11 is awesome if you can get it. But like doesn't, isn't this, isn't this hurting the business? And at some point they're gonna be like, all right, we, you know, we can't, we just can't pay this. So where are we with lower rates and how do you think about those dynamics?
- [26:12]
B
Yeah, I'd say with private credit, given that the vast majority of what you get in private credit is floating rate, the double edged sword of it on the way up is yes, you enjoy significant yields, equity like yields, but the pressure on the underlying borrowers is significant. And to the extent that they can get through that period of time without having to cut really important expenses or really important capital expenditures just to pay their debt service and continue, they have to grow through that. That was a huge, you know, test, if you will. Now that we're on the way down and maybe kind of staying where we are, possibly ticking up maybe 2550, but not necessarily as high as we were before. I'd say the case for private credit isn't so much come in for the absolute return, but more so what's so compelling about it is a you've got diversification here that's giving you access to private companies. What's publicly traded out there? There are probably 3,000 plus publicly traded companies, maybe 4,000 in the middle market. You've got over 200,000 businesses that we can all pick and choose from to get you exposure to as an investor. So that diversification is enormous. I'd say second, you also have much less volatility and much less correlation to those public markets. So if things are going on in the news, you've got headline noise that's moving your portfolio around on the public side. That's not typically what's happening on the private side. Right. That insulation from public market volatility is a huge draw for private credit. So while the rates are somewhat down, I'd say we're not anywhere near the 0 to 2% that we were in for the past 13 plus years prior to 2022. And you saw institutions flock to this asset class, they, they wanted more than that risk free rate they want. They were fine with it at 6 to 8. They enjoyed 10 to 12 for a little bit and now maybe we're down to seven to nine. You know, we're not back down to six to eight yet. But I do still think the other attributes around diversification, lack of correlation, lack of volatility, and then ultimately lower loss rates than public credit is an amazing combination to still get out of this asset class even while rates are down.
- [28:37]
A
I feel like the middle market term is used a lot from private investors. I need you to explain what that is for people. What is the middle market?
- [28:44]
B
Sure. So I think of the middle market on the private side somewhat similar I guess to the public side where you have sort of small cap, mid cap, large cap. So with the middle market in the private universe, there's no universal definition for this middle market, but we think about it at least on the lending side, really. Businesses with a cash flow generation or EBITDA, anywhere from call it low 10, 5, 10 million of EBITDA or cash flow to upwards of 150 to 200 million and even getting bigger. But I would basically put it any private business that's operating sort of south of a billion in revenue, if you will, is kind of in that world of middle market. And you've got so many businesses there. And when we think about it, that middle market is not a monolith, as you said. What you see in the middle market from a lending perspective is segmentation and specialization. And it's typically upon size. What we do is we look at it from a lower core and upper. Some folks just may cut it right down the middle, lower and upper. But when we think about it, why do you even care about the size? There's typically common financing characteristics that happen by size. Typically, the. The size of your lender group will be very similar based upon the size of that business. Typically, your credit documentation and how conservative it is would typically be aligned by the size of that business spreads. What you charge for that, you know, deal will typically be aligned by size of that business. And then ultimately how you source the deal and how much information you have and how sophisticated, of course, that business is and what you can get your hands on in terms of financials will be typically similar by the size of that business. So you do see direct lenders specializing by, call it lower core and upper Churchill has been deeply rooted in this core middle market. We sometimes call it the traditional because I'd say that's kind of where it's been for a really long time. And the way we define it is generally between, call it 15, 20 million of EBITDA on the small end, to call it 7500 on the top end. That's kind of a strike zone for us. And that's where we've found a lot of meaningful advantages for us and for our platform and a huge amount of diversification that we can pull from that broad segmentation, if you will, of the middle market above that, above 150 to 200, there's definitely a lot to do. I'd say you're looking at what I call whale hunting. If you've got a 200, $300 million EBITDA business, it has choices. It can go to the private market or it can go to the public market. At that point, it can go down the path of getting rated or it can go to a few big direct lenders. But at that point you're looking at a billion, two or three billion dollars private deal and your execution risk on that increases. So you really need to kind of find multiple lenders. There you see your degree of overlap of those deals goes up meaningfully and that upper end. But in the core and the lower end of the middle market, you can actually find really unique deals proprietarily sourced. You don't see as much overlap happening. Maybe sole lender deals or two or three members in a club, but not 5, 10, 15 or 20. So very different when you think about middle market when it comes to direct lending.
- [32:19]
C
Alona, for people that want to learn about the new V and Churchill Private Capital Income Fund, where do we send them?
- [32:25]
B
Just head over to the website. It'll be pretty easy to find on Nuveen PCAP and we look forward to having anybody come in that's interested to learn more.
- [32:36]
C
All right, awesome. Appreciate your time. Thank you.
- [32:37]
B
Thank you.
- [32:40]
A
Thank you to Alona. Remember, check out Nuveen.com alternatives To learn more about Triple Asset Management, email us animalspiritscompoundnews.com.