A (3:57)

So if we do think about the markets today, obviously exceptionally volatile fears of recession are growing given the volatility in policy and the behavior of markets. Latvi, talk to us what that is doing broadly in the credit space and in the private credit space in particular. How exposed is it? James just said it's a place where you can find more certainty.

B (4:18)

Yeah, I mean look, by design, private credit and private markets actually more generally are insulated from these fluctuations in sentiment. And actually if you look back the last couple of weeks, that's exactly what we've seen. We've seen a repricing of risk premium across the board in public credit markets and equities everywhere. You look off of levels that were historically quite expensive because actually as violent as the price action has been the last three to four weeks, if you look at basic valuation metrics on the public side, this is still not a cheap market. If I look at public IG spreads, they're still below their medians of the last 35 years. So we're not even close to pricing in the beginning of a recession, but we definitely broke out of the range. And then actually, even if you look at the real economy, most of the deterioration has been in the survey data. And that's also sentiment. Actually the irony is that the hard data looks pretty okay. We had a pretty robust actually payroll report last Friday. And so we have yet to see signs of deterioration in the real economy. And that's when private markets and private credit will respond. And so until you see signs that this sort of weakness in sentiment is translating into weakness in the real data or the hard data, I think private credit will remain insulated by that.

A (5:34)

James, how are investors responding in private credit? From your observation, you know, at moment.

C (5:40)

Of volatility like we're seeing today or we saw in 22, 23 or during COVID I would say our investors, especially the ones that have locked up capital in closed end funds, they see credit as being very defensive and ability to also get access to cash pay and regular distribution. And they see private credit as being a good hedge against potential inflation as well. Given that most of what we do and we lend to a borrower is exposed to floating rates. And so as we go around the world and we speak to pension funds, insurance companies, sovereign wealth funds, I would say they're very constructive about private credit. And we've seen over the last decade a pivot towards exposure from public credit to private credit. And again here I'm referring to subig. I would say another trend in the last decade has been the availability and the creation of these open ended evergreen vehicles that are giving access to mass affluent or wealth management investors, starting with the BDCs or business development companies in the US but also similar type vehicles outside of the US it's a bit of a newer, I would say history here for these vehicles, but certainly we see a lot of interest. In particular when times become a bit more volatile, we see a lot of interest towards private credit. And then I mentioned on the investment grade side, what we're seeing now is a pivot from insurance companies in particular from portfolios that are entirely public fixed income towards portfolio that are more balanced between public fixed income and private credit. And the one thing that I would add to what Lotfi said earlier is again a huge step back and you look at private credits, the performance of these platforms and these phones is solely linked to the absence of what I would say losers or defaults and subsequently losses. And so these portfolios tend to be relatively defensive. Certainly when it comes to the sectors in which private credit invests, they tend to be shying away from what is a bit more cyclical, maybe a little bit more exposed to market volatility. And so if you step Back and you look at the last decade, these portfolios have performed relatively well at times of increased volatility.

A (8:02)

At the end of the day, we're just talking about the debt of privately held companies. And these privately held companies are also going to be exposed to a lot of the risks in the world today. So talk to us a little bit more about the structure for those of us who do not live and breathe private credit, the structure of these transactions and these investments that really do shield from volatility.

B (8:25)

Yeah, I mean look on the fundamental side, of course, you're not insulated from a world in which earnings growth contracts and the economy slows down and the unemployment rate rises. Now the reality is we've never really tested what that looks like for the asset class because it's a relatively new asset class. The last real recession that we had was 2008, 2009. Back then the asset class was actually quite small. Covid is an interesting case study. I would argue personally that it's a pretty unique shock, to be honest, because it was very short lived and then more importantly was followed by a spectacular policy response both on the monetary and the fiscal front. So it's really hard to look at a data point and say, okay, this is how the asset class will perform if the economy goes into recession. I would offer two observations. The first one is that at least as far as direct lending is concerned, direct lending is part of a bigger umbrella and that's leverage finance. Losses and defaults do go up every time you have a recession. So it shouldn't come as a surprise that whenever you see a cyclical downturn that you'll see some pressure in terms of losses. Now the question in my mind is how will direct lending do relative to other adjacent markets on the public side? And that's really the high yield bond market and the broadly syndicated loan market where you could argue you have four decades of history, actually you know exactly how things play out. I agree with James. I think there's more flexibility on the private side and so you can reduce frictions that typically arise when you have rising financial distress. And so whether it's cost of bankruptcies or challenges in coordinating among the creditors, et cetera. So that's one, I think positive aspect that plays in favor of private credit. Two, there is a misconception. I think a lot of people think of private credit as being more cyclical, lower quality, its smaller issuers. Yes, the bread and butter is still for the most part meta market. But I completely agree with James. If anything, it's Actually more defensive than a lot of parts of public markets, certainly in high Yield, which is 14% commodities exposed in the broadly syndicated loan market. And then I think the second important nuance that I would highlight is in aggregate losses will go up across the board in a bad state of the world, with the economy in a recession. I guess the one difference between private and public is that on the private side those losses are going to be very unevenly distributed. And what I mean by that is that a full blown default cycle will likely catalyze a lot of dispersion across managers on the private side in a way that you will unlikely see on the public side. Why is that the case? Because on the public side there are well established benchmarks that fund managers are trying to beat. And so there is a high yield index that as a fund manager on the public side you're trying to outperform every year. There is no analog to that on the private side. And so it's hard to find sort of two private or direct lending portfolios that kind of look alike a little bit. And so from the perspective of a capital allocator, I would say that makes manager selection a far more important ingredient than on the public side. And I think one of the outcomes of a full blown recession is basically this idea that dispersion is going to go up across managers.

A (11:33)

And so James, if you take what lotvi just said, are there particular areas or sectors of the market that look compelling right now relative to others?

C (11:42)

And by the way, I fully agree with lotfi about the likely dispersion amongst private credit platforms. And I think we're already starting to see in areas where we track, for instance, situations where a direct lender has taken the keys of an asset following a debt to equity swap or restructuring. And what we've noticed by the way, is that in Europe, for instance, these situations tend to be with companies of smaller size and they tend to be in sectors that are more cyclical and they tend to be, for instance, buyouts that were consummated pre2019. So the whole kind of vintage of 16 to 19, it takes about four to five years effectively for a discussion between a lender and a private equity owner to materialize into a high default. And we're starting to see those situations in the sectors that I mentioned. Where do we find opportunities today? I would say we continue to think that there will be opportunities in particular as volatility comes back in the market in our core business, which is senior direct lending in the us, in Europe, to a lesser Extent in Asia, because that's a smaller market. Why is that? Because again, if you can provide certainty to a private equity owner or to a borrower that needs capital to acquire maybe a smaller asset, that certainty is going to be even more critical. And we saw it in 2022. The M&A volumes came down in 22, but the market share of private credit increased to a very high level. And in particular in Q2 and Q3, in 2022, there were very few deals underwritten by the banks. And that's in particular important in large cap, large sized buyouts. So that's one, I would say the strategies around junior debt, flexible capital, creative solutions whereby you can provide capital to borrowers, good companies, but maybe they need a bit more time, in particular in an environment like this one, because IPOs may be delayed or an exit may be delayed, and the owners of these businesses need more time to create value within that asset. I think we're starting to see an increasing number of situations around the world where our capital can be very helpful to these borrowers and the owners of these businesses. We see opportunities around energy transition, we see opportunities in investment grades around this kind of pivot that is happening between public fixed income and private credit. And by the way, today you can replicate a portfolio of public fixed income. You can replicate it almost entirely on the private side.

A (14:18)

Interesting. So, as James said, there's a lot of opportunity in private credit markets today. But lafi, we do hear a lot about systemic concerns around private credit, that too much risk is being accumulated there, in part because it's less transparent than public markets and other parts of the market. Is that concern about risk which could spill over to other parts of the financial market, warranted?

B (14:43)

We've been pushing back against that narrative. Obviously, again, I said it earlier, private credit as an asset class is not immune to a cyclical downturn. And so we have to define what the risk is. Are we talking about a risk of increased losses in direct lending portfolios? I think that risk is, of course, there. You cannot. The risk profile of the asset class is very linked to the state of the economy, et cetera. But if we're talking about the risks to financial stability or what you refer to as systemic concerns, I would push back a little bit because to me, what is the counterfactual to a world in which an asset manager is lending to a middle market company, or increasingly, as James was saying, to a large cap company, the alternative to that would be a world in which that role is taken on by a bank, basically and so I would argue that an asset manager doesn't have any mismatches between assets and liabilities. You take the capital from the LPs and then you deploy it generally for the same duration. And so there's no misunderstanding there. Leverage is of course there, but it's used in a pretty reasonable dose. I mean, I'll take the BDCs as an example. There are legal caps on leverage. It's typically 2x, and most BDCs actually never exceed 1 1/2x. And so I struggle a little bit to see some of the amplifying channels that we had back in 2008, 2009, and those were really mismatches between assets and liabilities, or call them liquidity mismatches and then leverage, those two amplifying channels are just not there today, or private credit. So I do think that those concerns are overstated to some extent. And I also think that oftentimes, unfortunately, there's a bit of a confusion between cyclical risks, the risk of a rise in defaults and losses, and then risks to financial stability. I think risks to financial stabilities are largely overstated. The best example I can give you, and I think we had a conversation about this in March of 2023 when we had a regional banking crisis. If that crisis had happened 15 years ago, where you have like failures of two decent sized banks, the odds of a recession would have increased dramatically in my view, because people would have looked at things like the senior loan officer survey and credit availability, et cetera, and you would have had most likely a credit crunch and eventually a recession. We did not have that in the aftermath of March of 2023. And I think part of the reason why we didn't have it is because private credit has acted as a very solid line of defense against the risk of a credit crunch, in my view. So the fact that credit has been disinterminated away from the banking system is in some ways a good line of defense against these sort of fluctuations in the business cycle.

A (17:22)

And the lower transparency doesn't bother you because of all of these factors?

B (17:27)

As long again, it's a privately negotiated contract between a borrower and a lender, and the lender is obviously acting in the best interest of the investor. And so as long as that triangle basically functions very well, as long as information flows well within that triangle, I don't think there's necessarily an opacity problem, but it is a privately negotiated contract. Obviously.

A (17:50)

Very enlightening. Latvi, thank you so much. Lots of food for thought. Thanks, James. Thanks Latvi. Always a pleasure to have you on exchanges.

B (17:57)

Thanks for having us.

C (17:58)

Thank you very much.

A (17:59)

This episode was recorded on Monday, April 14, 2025. I'm Alison Nathan. The opinions and views expressed in this program may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. This program should not be copied, distributed, published or reproduced in whole or in part or disclosed by any recipient to any other person without the express written consent of Goldman Sachs. Each name of a third party organization mentioned in this program is the property of the company to which it relates, is used here strictly for informational and identification purposes only and and is not used to imply any ownership or license rights between any such company and Goldman Sachs. The content of this program does not constitute a recommendation from any Goldman Sachs entity to the recipient and is provided for informational purposes only. Goldman Sachs is not providing any financial, economic, legal, investment, accounting or tax advice through this program or to its recipient. Certain information contained in this program constitutes forward looking statements and there is no guarantee that these results will be achieved. Goldman Sachs has no obligation to provide updates or changes to the information in this program. Past performance does not guarantee future results which may vary. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied as to the accuracy or completeness of the statements or any information contained in this program and any liability therefor, including in respect of direct, indirect or consequential loss or damage, is expressly disclaimed.