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- [00:05]
A
Welcome to Educational Alpha. I'm Bill Kelly, CEO of CHI association and your host. Bringing you on the ground conversations with business leaders, educators and industry colleagues from around the globe. Educational Alpha is sponsored by iCapital, the financial technology company with a mission to power the world's alternative investment marketplace. Part innovator, part educator and part navigator of the alternatives industry, iCapital offers intuitive, scalable digital solutions that have transformed how private market and hedge fund investments are bought and sold. With iCapital, financial advisors, wealth managers and asset managers around the world now have access to everything they need to deliver the return and diversification potential of alternatives to high net worth investors. To learn more, visit icapital.com in this.
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Episode, host Bill Kelly welcomes Scott McMunn, CEO of the Loan Market Association LMA, to discuss the dynamic shifts in private credit and the significant role that trade associations play in today's financial landscape. Scott shares his career journey from asset management to leading the lma, highlighting the challenges and opportunities in the evolving loan markets. The conversation dives into the growth of private credit, the influence of non bank financial intermediaries and the burgeoning fund finance market. Listen in.
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A
Scott McMunn, welcome to educational Alpha.
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B
Hi Bo, good to be here.
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A
I think a lot of interesting discovery and I often have said that there's more associations in the world than we necessarily need and since that is what pays your or my salary, I'm not going to necessarily push that narrative, but it does require a fair amount of cooperation and collaboration and I was so pleased that our common friend Andrew Allwright introduced us and last time I checked he's finding his inner Edmund Hillary ascending or descending Mount Everest.
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B
I think he's a Biscamp is my understanding.
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A
All right, good. So hopefully he's doing well, but I appreciate the intro and I'm looking forward to this discussion. So maybe starting at ground zero ourselves, maybe a little bit on your background and what led you to the Loan Market association and we're going to be talking quite a bit about that and we just had mentioned the fund finance market before we came on and that's probably we're going to spend the bulk of our time, but your street cred leading up to that is always an interesting place to start.
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B
Yeah, so you mentioned our good friend and Andrew and I met nearly 30 years ago. So my first career out of college was a small UK bank at the time called Abby National. I joined there purely because it was a finance role that paid more than other graduate jobs. So the finance industry was the attraction because salary was a little bit higher. And I got to say I was probably very naive starting the career about lack of understanding of what the finance industry was. So you end up in a role and fortuitously that institution was really embryonic and entrepreneurial. One of the first that institutional investors in Europe to invest in asset backed securitizations. Back in those days, the early pioneering days of private credit where we involved in BPC's mezzanine loans, asset based lending which have now evolved into such a sizable and chunky market. And through those first 10 years of my career Bill, I was involved in some really exciting, groundbreaking types of transactions. The early securitization market, the early bridge to securitization, the early asset based finance market and even the early structured synthetic CDO markets which back in those days were more red cap type relief trades rather than the arbitrage trades that we saw. Gfc so that was the early part of my career. I'd moved from there to run a prop business at Deutsche bank which again incredibly exciting and the opportunity to build up a significant and large entrepreneurial type business just pre GFC and then I'd move from that side to set up an asset management business within RBS which again moving from proprietary to actually managing other people's money and trying to come up with strategic opportunities, investment thesis and ultimately as well sell and market products that were attractive to a broader mix. So the early part of the career was very much in the loan industry and I never thought for one moment I would be interested in going into runny trade association that was pitching or advocating or lobbying for that particular industry. I left rbs. I had a couple of start business ventures that I looked to do. One trying to set up a private equity firm and then the latter one trying to set up a US mortgage fintech. And again great learning curves. Raising money from VCs, launching a business, being the jack of all trades, running everything from IT, compliance, hr, marketing, copy brand, which was great. And I got approached by a search firm with a Would you be interested in looking at running the loan market Association? And I was very hesitant. I would probably say to a degree, even negative. But I put my best foot forward and said if you want me to run it, this is what I would like to do. I'd like to look at the association reflecting where the loan markets are today rather than where the loan markets were 10 or 15 or 20 years ago. And by that what do I really mean? Where the capital is coming from, where the various players in that ecosystem are and it was very much institutional investors, what we now call NBFIs rather than the traditional banks financing. And the product innovation had gone from the old traditional CLO model to now macro funds, single strategy funds, long short funds, long dated private credit funds, GPLP structures, and even now we've got UCITS and ETFs which are almost the retail equivalent here in Europe from your 401k funds over in the US. And I think that was almost like wow, this is amazing. And then you consider what the loan market is in Europe and what the LMA covers. We have nearly 900 members across the whole of EMEA. So we represent Europe, Middle east and Africa, all with different nuances and different challenges and within everything from broadly syndicated investment grade deals through obviously leveraged finance, but covering commodity finance, trade finance, export credit. You spoke about funds finance, credit risk insurance, srt. So the whole range and plethora of asset verticals within there, not even getting into real assets, it was really powerful. And then you put on top of that the cherry and the icing which is technology and the innovation in tech and how that's been applied to loan markets. And I don't simply mean operational technology. You're looking now at tokenization, web, three large learning models, AI data scraping and the various tools and you pull that together and trade associations represent such a significant voice and have such a significant power. If the members are engaged, then I was probably naive. I'm 12 months into this, literally 12 months in a week. And I look back and I totally underestimate the power and the voice of a trade association where your members are pulling for you. So it's been a bit of a journey. I'm not sure I'm at base camp yet. I think I'm still rising to that base camp. But the journey has been incredible in the first 12 months in one week.
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A
And we all need the Sherpa too to stretch the analogy which the members of the broader community. And as you know, I'm on the tail end of my 11 years at Kaya and I will say it's the best run of the entirety of my career. But it's interesting and I'm curious to get your views on this because you have a similar pathway in that you worked in the industry for large banks and asset managers as I did in the entirety of the first three plus decades of my career. And there is a broader ecosystem around the associations and other support actors that I didn't really interact with because I was focused on prospects, clients, my book of business, the regulator And I knew in my periphery they were out there but a I didn't know them well and clearly didn't understand the value that they could add. So I don't know if that was your approach and how well you knew LMA as either a member or sort of passively in the course of your career.
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B
Just before I cover that, I'd like to go back to your Sherpa analogy. I think where I've been really supported through the first 12 months as well has been through people like yourself and peers who are now in trade bodies as chief execs, who have came from similar paths, who were a little bit more mature and ahead of me on the journey, who have been able to provide that counsel and that shepherding of lessons learned things to consider rather than just gung ho charge in with a view and a bias based on the old worlds. So I think that's been really helpful and certainly helped me over the first 12 months. But to come to your second question there, I think you're exactly right. I in my previous role I managed to get the firm to join The LMA maybe 25 years ago purely because it was a means to an end. The LMA was set up to facilitate secondary trading through loan documentation standardization. And joining the LMA and having access to the transfer form and the transfer agreement meant that my investments and deals and trading wouldn't be caught up with general counsel and internal legal for weeks and weeks and weeks. You could trade almost immediately as a commodity product with a pre approved document. And I never engaged with the body to speak about lobbying or exposure drafts or rating agency consultations or anything of that nature. It was very unsure and I don't think I reflected or understood then the power of the associations. And one final point I'd say on that even today, and I see it now sitting on the other side, there's some member organizations who are really engaged, really understand what they can do through the trade association and there's other members who are happy to pay their subscription fees and not be involved and both are valid. But the power and the voice is so much stronger when you have greater representation, greater involvement and you have more voices contribute to that. It may be hard for you and myself, Bill, to get the compromise of all those voices and get to the neutral point because diversity creates a broader distribution and there may be a way to tell, but more voices is certainly better and stronger and gives us more of a gating influence.
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A
Yeah, I agree and I think the 8020 rule might be important play as well. And while both you and I would love to have on any given Monday 100% engagement across 100% of our members. Talk about an embarrassment of riches, I just don't have the capacity to manage that. So we're very fortunate that everybody has their role. And the support, no matter what, means a lot to both you and I. And that sort of is stating the obvious. So I do want to talk about the pace of change and innovation and what's gone on and what you might once describe as a sleepy bond market, but clearly innovation maybe dating back to swaps of coupons and you could turn a fixed income instrument into virtually anything. But then maybe the advent and more so of what's gone on in the private credit market since the gfc. But before we get to that, it's interesting if you look at your background, I look at not so much your member base, but certainly your board of directors. I see the names of what I would describe as more traditional banks and insurance companies and that is maybe belies the fact that banks, insurance companies are going much more wide as well. And maybe it's semantics, but I did look at your About Us section of the website and three words. I love improving liquidity, efficiency and transparency. Who could ever take the other side of that? But the focus seemed to be in primary and secondary syndicated loan markets. And maybe syndicated takes on a lot of definitions and maybe I'm showing my age and old school nature. But when I think about syndicated, I think about a lead bank and an underwriting group and a public offering. But I guess it could be syndicated on any platform. So I'll let you run with that. And we can use this as a wedge to talk about a lot of the work you are actively doing in the private markets as well.
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B
Yeah, and I guess I would say it's the before and after I think you've got to consider for me, Bill. And so I came in a year ago and certainly there was an established, established an existing DNA or a Persona of we represent the syndicated loan market. And again putting a little anecdotes and jokes in here, the LMA had been called the London Market association, the Lawyers Market Association. Obviously the original thesis was almost the London Syndicated Market Association. But the reality is when we speak about those verticals earlier that I commented on and I look at the membership base isn't just syndicated loans, isn't just the London market, isn't a lawyer's market. It's far broader than that. And if you look at the provision of capital, my kind of view and the numbers are broadly, they're a little bit of a guesstimate but I think they're broadly accurate. 20 years ago it was maybe 90% of financing came from the banks. Now I think we're probably 80% of global financing is coming from the non banks. Whether it's through syndicated investments where the banks will arrange and underwrite but then distribute and syndicate out almost in that GFC originate to distribute model. Obviously a little bit different to some of the challenges that the GFC had led into, but that's definitely one part of it as well as obviously private credit where a lot of these firms now have their own capital markets team underwriting and arranging and sourcing teams and are able to provide capital in a quicker and more efficient way than banks. And I think it was Jamie Dimon that did say that. He said in a certain banks are just so more efficient at doing certain things. And if you take the other side of that trade, the non bank financial intermediaries are also a lot more efficient than banks are. And some of the things now in terms of getting money to the ultimate borrower and the transmission of that capital and the distribution of where that risk should actually arise and go to. So I think I take a little bit of objection to we should be the syndicated loan market now. And I think to totally reflect the loan market not always palatable to some of my members who have been here for 25 years and are the big arranging banks. But we now need to represent more strongly the NBFIs and be a lobbyist and advocate for their business because it's still providing capital and the transmission of capital to borrowers which is this whole efficiency of the loan markets.
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A
Bill, all very fair points and even some of the big PE shops are moving more into the syndicated loan market themselves. And clearly, and I think Dimon has said as much himself, is that there's a certain regulatory arbitrage or advantage in the private markets that the banks don't enjoy. And like most arbitrage they usually have a tendency to get squeezed out and it's not sustainable necessarily. And maybe we can cover more regulation in a moment, but it is complicated and blending at the same time. And maybe last point on this, there is a debate that I see more from a US centric standpoint about will the banks ever come back? And I guess the answer is who knows? Maybe, maybe not. But there is that regulatory burden about the tax on their balance sheet and what the regulators expect. But there seems to be enough juice over and above the risk free rate now, which is higher, that there might be some interest even with the cost of capital for the banks get more involved. What is the view in all of Emea where you mostly reside and apply your wares? Do you think the banks maybe they never left to the same degree they did in the us? I assume there are going to be substantial players going forward in many parts of the capital stack.
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B
I certainly think similar to the US the banks reduced their risk appetite and the banks reduced their balance sheet volume, let's call it like that. And the banks reduced probably trading balance sheets. So all of these three things. You used the arbitrage word, maybe the right word is more of a gap, but it certainly created a gap or a wedge where there was an opportunity, opportunity for other forms of cuddle to come in and receive the required rate of return that their investors wanted. So I think that happened Now. I like the analogy of Jurassic park where the life fades away. I think it was that the Jeff Goldblum character had came out with or coined. And I think capital finds a way as well. And at the minute the capital has found a way through the innovation and the thought process and the entrepreneurship of a lot of large and small, let's call them credit funds, whether it's public and private. So I think that's really what's happened. Now do banks come back? Who knows? I'm not sure. But there's always something around the corner where there's further innovation or some market challenge that causes something to be done differently. Maybe the difference, Bill, is that the forms of capital and the forms of where money is coming from now is less immediate. It's not like there's mark to market triggers. It's not like they're on margin. It's not like there's immediate shareholder pressure that the likes of the banks experienced in 2008, 2009. A lot of the provision of capital now is in locked up 9 year, 10 year, 12 year money through a GPLP structure which has a little bit more permanence. You mentioned the risk free rate view. And if you look at the absolute number of returns, let's call it 10%. So of that 10% return ballpark, 50% of it is a risk free rate, is 3%, 3.5%, 4% of that and we're talking about leverage here, is that through credit risk you've got a high yield credit five times, four times levered. There's a little bit of credit risk in there. How much else of the 10% actually consists of maybe liquidity risk where it's private, there's less mark to market, there's more opacity in the information flow. So you get paid a little bit extra for that. So all of these things I think now come into play. Bill, when you look at probably a permanent change of where capital can come from, but how the weighting of that capital evolves I think will change based on rates, the ability to raise money, the attraction of other forms of the alternatives bucket that a lot of these managers source money from. Does VC become interested again in two years? Is private equity more interested in two years? Infrastructure, real estate, other forms of alternate. These are all factors, I think that play into that flow in the ebb of capital.
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A
We're only 20 minutes into this discussion, Scott, but I just want to underscore because I think despite what the next 20 minutes might look like, I think you just made one of the most important points of this whole discussion which is I think when it comes to, to private credit, I think the average investor has a tendency to fall in love with the coupon. And the point you just made is so very important that you really have to understand the risk factors you're taking on and how you're being compensated for them. And you have to break that coupon down into those various components and I guess the risk free rate is a given, but you're being paid 10% for a reason and you have to understand where those risks are. So I really did like that point. So maybe turning the page, one is going to bleed into the other, but I did see that you recently had your agm, your annual general meeting and then also probably there or beyond the fund finance market has been very, very topical as well. So maybe starting with the agm, what is on the hearts, minds and souls of your member base and what do they see as some of the opportunities and risks in the market and then what is LMA doing about them?
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B
So, so let me touch on the AGM because I think for me it was a very successful AGM for a couple of reasons. I don't know what your association was like, but my association, we'd never really had a competitive election process. There was typically in your world and in my world we live in countries that have almost two party states. I think almost the AGM was very, very similar. There was a usual number of people that put themselves forward, typically rotating board members, but this, and I trust that was due to some of the members seeing the change that maybe the LMA was taking and the repointing of the LMA we actually had 11 candidates go forward for seven spaces. So I'd like that to improve next year. But I was really pleased to see we actually had an election with candidates who were all viable and credible which meant there were decisions to be made rather than the usual lazy, it's the same people and they roll for another one year or three years in the case of the lma. So that was really powerful. I think the other point to me which I was really pleased around was we actually had a 25% increase in voting turnout. And again actually I think through the choice and by actually encouraging my membership to give a voice, we actually increased the turnout of people who cared enough to direct who would be on my board. So those were really exciting and powerful things to me. In terms of what are the immediate and topical points. I think I went into 2024 with much of my membership being interested in a loan market that was inefficient. And by that I meant more settlements operations. And we're in the world where you probably see it more on your side Bill, with your diversity of your members. But you've got an equity market and a bond market and a derivative market and an FX market which is either T +0 or T +1. We have a loan market then the leverage space does have high turnover, high institutional investors and a lot of loan funds. We certainly are nowhere near T + 0 and T + 1. So there's a big focus on that. I think the other focus points has been around certainly potential regulation and regulatory review. Whether it's on private markets which I know you want to touch on, or even if it's just generally around NBFIs. What are the regulatory views and provisions and potential opportunities available to look at the NBFI sector And I think from my members sense the application of new technology. How will large learning models, how does AI come into play in the financial services space? Where are the guardrails that we need to consider? How can we look at new forms of distribution, web3 tokenization and other channels of fractionalization to increase the ability to diversify risk? Those are all interesting topic points of the membership group. I think for me I'm sitting over here when I look at my recent conference, the lma. We do an annual conference and if you pick apart the main subjects of that conference, it probably reflects the current different topical hot themes. So the usual heads off panel with the various syndicated loan heads, a buy side panel which was quite interesting from real money, longshore, macro and micro fund money. That was a really good panel and within that we spoke about sustainable finance and ESG and how that is actually being applied and relevant and costed and is it actually working. And then in terms of product verticals, we had a really topical panel on credit risk insurance and the emergence of that. The asset classes that were being included in that credit insurance was increasing and the number of participants was increasing. And then obviously you mentioned fund finance. That was another topical panel and we're seeing the growth of either provision of finance from my bank members and non bank members, but also some of my GP and LP members, the actual increase of using those type of facilities to create some optionality around their GP and LP portfolios. On a softer side, we had another couple of good panels on Africa and the Middle east and the developments and the growth in both of those markets. We also covered technology and the pace of change in technology and how that was impacting loan markets. And then perhaps more specific, we had a really topical panel on liability management exercises and what was happening around different borrower groups and the changes of where the loans were trading, how sponsors were trying to look at either moving assets up or down the structure and monetize or protect some of the value. And some of these panels and I think the key point I'd make, Bill, some of the panels were more taking some of the negative or headline grabbing headlines that were in the newspapers and then the financial press and actually trying to dispel those myths and myth bust them and bring them back into reality with are they real, are they not real? And if they're unreal, where is the real truth? So that's what we've been trying to do. And certainly funds finance has a lot of negative headlines and a lot of it is unjustified in my opinion. Somewhere in private credit there's a lot of negative headlines because it's easy to get your subscriptions and sell news and draw attention to it from a big headline. But the reality is there's a lot of good being done by some of these new markets and these financing tokens.
- [26:52]
A
And a couple things to stitch that together. You talked about the very beginning of the agm, a lot of conversation on inefficiencies, particularly at the middle and back office. And I think oftentimes we think about the word inefficient, we think about sand in the gears and something that's breaking the process down. But it is an opportunity for operational out. And you mentioned panels on Africa that there are opportunities there because those are very inefficient markets as well. So we we should absolutely embrace that term. And that brings us all the way back to the finance market because I think this was probably the child of inefficiency as well. Because the pension plan counts on cash flow. There's a certain commitment strategy and that's based upon a pacing in and then a normal and orderly redemption. But these DPIs have been negative since 2020. I don't think there's an LP out there that would write off the private markets, but they need to have have some ability to have some kind of a smoothing or at least a more predictable return of their cash. And I think you're absolutely right and I want to spend a few minutes talking about this. When you hear about nav lending and subscription lines, I think oftentimes, especially from the LP side, this sounds more like financial engineering or financial engineered returns as opposed to financial returns. And, and I guess that's true to some degree, but you're solving for a very different problem as well. And one last point, and I'll let you take this, is that we talked about right before we came on, that the secondary market was born out of necessity, maybe back at the gfc and it was maybe a window where you went for a very distressed sale and the bid ask spreads were very, very wide. And maybe the thought back then was, well, when calmer waters, the secondary market will go away. It's become a viable part of the ecosystem and certainly coming out of 2022 even more so. And I look at the advent of some of these tools that we've just talked about, like subscription lines and nav lending, I don't think they're going to go away, they're going to evolve because there's going to be a continuous need there. But it's got to be born out of transparency on both sides. And what is the current state of the union that both your members, which are probably more on the insurance bank GP side than they are the LPs, but I know you've been very active in the LP community as well. And what's the consensus about the effective use of these tools and where they fit into the broader ecosystem of our world?
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Funny anecdote. You'll like this one. While you were saying about the secondary side, one of the roles I was fortunate enough to be involved in over my career, I inherited and took charge of a large portfolio of LP investments when I moved firms and as an asset manager, we were looking to create a fund of funds backed by these LP investments. And the way to actually build an anchor was to go to some of these secondary firms and ask them to participate as an anchor investor and the fund, the funds vehicle. And if you recall back at the time of the GFC we were building out this portfolio, we're speaking to some really interesting counterparties and in the space of maybe about 8 weeks bill, the anchor valuation had went from NAV plus 20 to NAV minus 20 with the Vol and everything that was going on. And it was remarkable. And as you quite rightly pointed out at that time, some of it was bottom fishing and certainly some of these institutional investors in smart money were looking to catch falling knives and some of them would have had some wonderful returns and some wonderful investment opportunities from doing that. But the beauty of the secondaries is it gives investors the opportunity to pay up for particular vintages and particular managers or actually pay up for portfolio portfolios that are already seeded invested rather than startup investment vehicles where you're relying more on the manager to asset pick and stock pick. And I think that's testament and backed up by the growth of the secondary market and the number of really significant, experienced, very entrepreneurial players that are in that space and obviously the size of the market. So I think that's probably one of the starting points I'd make. If you fast forward to today what I see from my members as we have a significant amount of bank members through the LMA community and many definitely are large providers of subscription finance lines to the gps. Many of them are significant relationships of the firms and have been in that business for a number of years. Recently we've actually seen some of our institutional members raise money to invest in subscription lane and NAV lane loans that they can make in their own party as well as then participate in syndicated facilities that the banks will then put out to them. And then thirdly we're actually seeing some of these institutions look to include fund finance lanes built into their credit risk insurance product to either free up capacity for a GP or to free up limits to recycle the capital to do more. So there's some really developing growth opportunities I think in the space and from my members side I think it's about ensuring that we can support them in the growth of that market, ensuring that we can represent them and lobby for them with the regulators as and when or if indeed there's some sort of regulatory scrutiny. And we did see something of that nature in the UK over the course of this year. I don't know if you were aware but there was a through the course of 2024 a Dear CRO letter which went to the various banks looking can you aggregate look at your overall portfolio of risk that you have to this community? So that community being leveraged finance and private credit and private equity and private markets. And look at do you have a firm wide view of that given the different businesses that might be exposed to it. So that came out this year. So there are certainly member needs from the LMA to support their business and funds finance. And as you picked up quite rightly as a topical point for us, it will be a priority for 2025 and we've been promoting and evangelizing that through our own publications, our own blogs and thought leadership pieces and signposting. This is a big book of work for us going into 2025.
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A
Well I would encourage you to keep on keeping on that subject and with the backdrop a quote I love, love Warren Buffett. His favorite holding period is forever. And it kind of flies in the face of the typical GP model which is the 7 to 10 year fund. And does that mean every single portfolio company is going to achieve its maximum potential in seven to 10 years? Of course not. But I think that model then forces the GP to become more and more tactical as that fund reaches its expiration date. And I think as a consequence we're seeing a move toward Evergreen funds, which I think is as a headline, excellent. But that is forever to some degree and LPs will need some liquidity there. So I think like many markets, it'll evolve, it'll mature. But I'm convinced that this fund finance market will very much stay in place. So two things if I can squeeze them in in the remaining minutes, maybe starting with wrappers. So probably maybe a US based story, Scott, but a couple of joint ventures between between traditional GPS and more retail oriented banks or asset managers have gone to the SEC seeking approval to create ETFs in the private credit space. And better that it's private credit than real estate or private equity. But you're taking essentially an illiquid asset and allowing the average investor to trade intraday. And a couple things. One, the underlying is not trading intraday and then secondly, are we conditioning the investor to think daily liquidity is a good thing when it's not in the public markets and it's certainly not good in the private market. So your views on the evolution of wrappers and do you have a view on whether or not an ETF for this space it has its positives because it's getting some exposure, but there is some downside to everything in life.
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B
Just before I Answer that. One of the things to draw out fund finance and it's a quote that we've used a little bit at the lma, we're using it again as the biggest market you've never heard of. It is a trillion dollar market. It's significant, sizable, and there are so many parties involved. And the uses for the majority, the significant majority of all cases is to help the optionality of the GP support the valuation of the underlying investments. And in many cases it's not financial engineering, it's actually supporting the portfolio and providing optionality benefiting both the GP and the. And as you quite rightly said there, there's a big plethora and a large continuum of different types of fund financing that's available as well. Coming to your second point or the real question about the innovation in products and we have obviously ETFs and use them over here in Europe, so a little bit different to the 401k model and certainly ETFs are a lot more mature in the US but it's about the appropriateness of the underlying instrument in many of these vehic I think is one of the questions. And then it's about the appropriateness of those instruments going into a retail type investor with their ability to understand what they're getting now on the private market side. And this is, I'm kind of agnostic whether it's private equity, real estate and for private credit, whatever you want to call it. But in terms of private markets, some of the stats we've been seeing over the last six months, the private markets are now significantly larger than public. You know, the number of companies that are in the public sector versus private sector and where their quoted shares are. Most big companies are now certainly in the private space. And there's reasons for that. Public markets are very concentrated, particularly in the US and the large technology companies with the size of their market cap and how much they make up in terms of the size of whether it's the NASDAQ or the S and P or the big indices. And the retail consumer suddenly is becoming less able to take exposure to a diversified pool of assets. So having the option to have exposure surely has to be a good thing depending on the instrument in which they're allowed to do so. I think that's all about understanding the risk appetite and the risk continuum of the underlying investor I think has got to be really, really important. But coming to your point, you can make liquidity and back in the pre GFC period, a lot of the challenges and a lot of the issues were liability transformation and maturity transformation, which certainly was born out of asset liability mismatch. And that's kind of one of the challenges, I think, that has to be overcome when you look at the size and the scale and the appropriateness of this market. It's really about how you look at that liability mismatch or that asset liability mismatch and maturity transformation. So I think we do need to take that into consideration and one of the aspects that come from it. I'm sure there will be some ability to create liquidity for daily trading up to a certain point and trading access and exit as necessary, but it wouldn't be unlimited. It will be finite in capacity because these things don't trade daily in that kind of size and scale. And I think from that, then how do you assess valuation? How do you actually have. What is the right liquid price for an instrument that is certainly in the private markets is valued quarterly and formally through investment guidelines and investment criteria and valuation criteria semi annually, where you have some form of audited valuations. So they're not instruments typically, Bill. And a lot of these vehicles that are valued daily and frequently. So I like the concept, I like the ability for the average person to take exposure to a broader pool of assets. But there are a couple of challenges that certainly have to be overcome. And much of that is around the opacity of the underlying assets and the valuation of the underlying assets and in some cases even the performance of the underlying assets.
- [39:38]
A
I think they still do it today. If you read any column in the Wall Street Journal having to do with fixed income, they'll remind you in the first paragraph that the coupon and the price move in opposite directions. So you do have a very rapid separation when rates move. And I think Silicon Valley bank is very, very instructive because there was nothing wrong with the paper on their balance sheet. It was in a hold to maturity portfolio. And when rates moved up 3 to 400 basis points, those holdings were underwater today if you had to mark them. But if the depositors had sat back and weighed, they would have matured 100 cents and the dollar would've come back home and there'd be peace in the valley. So I think sometimes these liquidity windows can cut both ways. But I take and appreciate your points. So maybe very last point to cover, Scott, you mentioned your remit is largely in emea and you probably wander beyond that. But is there an LMA relationship or body in the US and in Asia that you either correspond with or, or maybe defer to because certainly, based on what I've learned In this last 35, 40 minutes, we need an association like yours in every precinct.
- [40:45]
B
There are, which is a great segue, and you've made it right to the start of the call. There needs to be collaboration and interconnectivity between the various trade bodies and the way the markets are moving. And I'm going to go broader than loans here, Bill. There is a blur, sometimes even between bonds and loans and capital markets and loans, where even. And I need to be. I'm encouraged to have a good relationship with my peer who runs the ECMA association, the International Capital Markets Association. So obviously, very, very different remit and scope, but there is a need to be collaborative across the different product sets. But in terms of specifics, there's an established US association, the lsta, and there's an Asian association, the aplme. So, again, and we had a great time together, I invited both of my peers to speak at my annual conference, and we did a roundtable discussion. Myself, the CEO of the lsta, the CEO of the aplma, and we spoke about deferences, challenges. And if you ever play that back and you look at the blog from the conference, I think you can see there's a little bit of mischief between the three of us. But we had a good time and there's good connectivity there. It was really refreshing to me starting here a year ago. And I'll probably come full circle back to my Andy. All right. And the Abbey national days. When I started here just over a year ago, I'd reached out to my peer at the lsta. It's a guy called Lee Shearman, used to be on the CEO, institutional investor side of things. And we spoke, and I couldn't recall. I have such a bad memory. I'm really, really bad. And he said, Scott, we met 25 years ago. I was pitching and raising money for investors for one of the early CLOs. We met at a coffee shop at Baker street, just next door to the Sherlock Holmes Museum. And don't you remember me? So, you know, again, straight away, I had a great connectivity, a really strong common bond. And I really value the relationship from someone like Lee, that Sherpa character we spoke about earlier. But also making sure that we are engaged, given the commonality of members, the commonality of product. And in many cases, we have the same goals and desires, which is liquidity, efficiency and transparency in these loan markets, and making sure that the asset class is preserved, safe, marketed appropriately, and has the right kind of framework to get consistent Constant good flow of capital to borrowers.
- [43:23]
A
Great. And great to see that kind of collaboration. I think it's absolutely necessary and I think there are too many associations that begin and end the discussion about what's in it for my members. And I think you're wired like me, which is my members are so very important to me. But what's in it for the end client? What's in it for the investor? What's in it for the industry? What's in it for transparency? And if we can answer those questions in the affirmative, we've got something our members will absolutely embrace. So I do appreciate your time today, Scott. A very good discussion in Tor. I can tell you I'm about a decade ahead of you in the association space and my days are now numbered. But it's been an honor and a privilege to sit in this seat and I can already sense that that's how you take this. And I think that's a big part of the job description. I don't think it's brought up in the interview with my board, and maybe not yours as well, but to have the right person in that role really requires somebody that really embraces every aspect of this and understands that these jobs are very important, but they are privileged as well. So thanks for all that you do do.
- [44:23]
B
It's definite, a privilege. And again, there's a couple of things that I've seen that you swell up pride. But if I can make one comment just before we wrap up, there's another side which I've been really pleased to bring on board and seen some great results. You spoke about it a lot about when you spoke about operations. One of the challenges in the industry is the talent pool of tomorrow. Where is that coming from? How do you look at. We call it future lenders and particularly in the operations space. We have an industry where it's not as cool and as high powered as maybe the bond markets or going into being a VC or some of these other tech startups. It's really, really important that we continue to encourage and show our markets as being a viable and plausible career path to attract the best talents to give them the opportunity to grow, develop and also come in and actually enjoy the work that they do and see productive outcomes. And those productive outcomes, as you quite rightly said there, mean that the end user is satisfied. We help develop and grow economies and help manufacturing and employment and social growth. These are all the things that also need to come into the decision. I was really proud to launch Future Lend, which is a series of events that we do to promote the lenders of tomorrow for both the buy side and the sell side and give them the opportunity to connect, interact with each other. Think about how they build their personal brand, how they look at promoting their own skills and ideas and actually think about how they make decisions through that career journey even if they need to go backwards a step to go two steps forward. And that also is some of the softer parts that I think we can bring, Bill, through an association like ours with our members.
- [46:14]
A
Well, a great exclamation point and a great discussion, Scott, so I'll leave it at that. And thanks again for your time today and for all that you do.
- [46:22]
B
Very good. Thank you Bill. Thanks for having me.
- [46:26]
A
Thank you for listening to Educational Alpha. I'm your host Bill Kelly. Learn more about the Kai association and subscribe to the show at kaya.org that's C A I a dot org see you next time.