Animal Spirits Podcast - Talk Your Book: How Private Credit Works

Episode Date: March 17, 2025

On this episode of Animal Spirits: Talk Your Book, Michael Batnick and Ben Carlson are joined by Phil Bauer, SVP and Portfolio Specialist at Calamos Investments to discuss how private credit differs from high yield, intricacies around specialty finance lending, opportunities in commercial real estate lending, and much more! Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Calamos. Go to calamos.com to learn more about the Calamos. Axia, alternative credit, and income fund. It's calamos.com to learn more. 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 Redholz wealth management. This podcast is for information. informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Michael, the hot topic for financial advisors, as far as strategies go, the last 18 to 24 months is private credit. We had a great talk today with Phil Bauer, who is a portfolio specialist at Calamos Investants. We didn't even get into it.

He's an ex-pro baseball player. with the Reds, I guess. I don't think we bring a lot to the table as far as talking baseball, so maybe it's a good thing we didn't talk. I'm sure we could have come up with the sports analogy at some point. What inning are we in of private credit?

We missed it. It was just sitting there. Damn it. But I thought this was a very... And Phil actually emailed me, because we've been talking about private credit a lot and trying to figure out, like, how do these rates make sense,

and how does it all work when you add the fees on top? And I thought Phil did a very good job explaining what private credit is, the different areas, how to think about investing in the space in terms of vintages and... Well, you know what is a great observation that we spoke about it after we're like, huh? Like, why do bonds need to be publicly traded?

Right. You know what I mean? I'm kidding, of course, but also in all seriousness. In the case of private credit, people gripe that the fact that like the marks are artificial or whatever, well, you're making a loan to a company and they either pay you your interest or they don't, and they either pay you your principal or they don't.

And if they don't pay your principal back or interest back, then they'll mark it down. If they don't, and you assume that you're going to get your money back, that's it. Right. Doesn't matter if something is trading at 80 cents versus 100, if it doesn't go to zero eventually, right? And if it does go to zero, it doesn't matter how, yeah,

but your point, the market is there to tell you if there's potential risk coming. But yeah, and we get into the whole all interval funds and how those work in in the different areas of private credit that you can invest in because there are a lot of them, there's different types of investments you can make. So I thought this was just a really good talk.

So here's our conversation with Phil Bauer from Calamos. So, Phil, you guys launched a strategy in September of 23 and are already approaching half a billion dollars in assets. Private credit has been all the race, on Wall Street, probably started like the explosion. It feels like it started maybe in, I don't know, mid-23. And why do you think now? Like, why is it, why is it such a hot topic these days? What is it about the instrument, the investments, what is it that as investors so excited?

Yeah, Michael, I think when you think about the dynamics that are starting to come together, the first is really that the asset class has proven itself. And so when you look at just performance history and returns from a net investor perspective, right? It just has done really well over a 15 to 20 year period. And so just to put some numbers behind that relative to the bank loan and high yield markets, which is how investors historically had generated income within their portfolio, you've generated three to four percent net of fees excess return over a long period of time. Right. And so at the same time as I think people are, I think, getting more and more comfortable with the asset class. You've had this explosion in funds that have been structured

to be more accessible to a wider audience, right? So you have interval funds, you have non-traded BDCs. And so both of those coming together, I think, has been kind of the perfect storm for investor demand. And then at the same time, in 2022, you saw that stock and bond correlation can spike, particularly when inflation is volatile. So I think you put all those three together and you get a lot of demand coming into the space. Well, that last piece, I was about to say, I'd like to stop the puzzle. It is pretty obvious when you think about it, that 2022 was a horrible year for investors, especially traditional 60, 40 investors where, yeah, you've got stock volatility, but you're expecting your bonds to offset it.

And in a year where bond volatility or bond drawdown causes the stock drawdown, you've got nowhere to hide. And so private credit, one of the features of it is the floating rate nature. So there's no duration. You didn't get killed. People got fed up with their bonds losing 20% or more. and boom, enter private credit. Yeah, exactly.

Just at a high level, when I think about it from an asset allocation perspective, you brought up the generic 6040. That 40% is really designed to do two things, right? It's designed to play defense and generate income. And so we could debate what the best way to play defense is. Obviously, core bond, treasuries didn't do well in 2022. Some people are now using options and structuring something that is a little bit more unique to protect on the downside and diversify it.

from stocks. But when it comes to generating income, right, there is no more effective way in our minds than diversified private credit. And that has proven itself, right? You remove the duration component. You're taking pure credit risk. And then as people are thinking about those two things, right, those two goals, anything in between is really a relatively inefficient way of really generating one of those two objectives within your portfolio. And so that's why private credit has really come up and is a growing part of a lot of these investor portfolios. One of the things that Michael and I have talked about is the fact that the yields in private credit are so high, and when you take the yields and then you take the fees that a private credit manager is making,

our question has been like, how does this work? We had a friend who works in private credit who told us like, hey, listen, it's always kind of been like this. These yields are nothing new. So maybe you could go through a little bit of a history of private credit. We've touched on the fact that the banking industry has pulled back, and so private companies have come in. but maybe just talk about that yield component and how that all works, like how this is still

functional where investors are able to earn such a high hurdle rate and then the people who are the businesses borrowing the money are still able to operate like this. Yeah, exactly. And so I think the important component of private credit is that none of it is really new. These are all loans that were getting made for a long period of time. They were just sitting on bank ballot sheets. And so coming out of the GFC, you had regulatory authority say, hey, banks, you are uniquely risky entities, right? You are levered 10, 10, 12 times, and you utilize your daily deposits to fund these loans. Like, maybe that doesn't make a lot of sense. And so the first, I would say, area that that got disrupted from a bank perspective was this lending to small and medium-sized

companies. And then also providing the leverage for private equity buyouts. And so that's really where direct lending kind of started making its foray into, I think, investor portfolios generally, but also you had asset managers raise specific pulls of capital to target this area. And so direct lending coming out of the GFC was really where private credit became, I would say, an area that investors were looking to tap. But as you come through that, you've noticed that banks are also getting out a lot of these other areas. And so, but our whole viewpoint on this is that a lot of these other areas that banks are now getting forced out of, particularly as it concerns the blowup of SVB and the blow up of First Republic, right?

That is the opportunity set going forward. As more and more pools of capital have been raised to target direct lending, it's become a little bit more crowded. We can get into kind of the opportunity set going forward we think is morphing a little bit, but it's all based, a lot of it is based on just the fact that banks are getting forced out of these markets. And so private credit is stepping up to fill that point. All right. So we've had, Ben and I have had a couple of conversations with managers about private credit in general. Let's maybe drill into your strategy to get a little bit more granular. So all right, you mentioned direct lending. The opportunity set has changed you. It's about half of your

strategy in terms of the assets. So for people that are not familiar, what even is direct lending? Yeah, so direct lending is lending specifically to a corporation. Right. So if you're a company and you need to tap the financing markets to grow or to operate your business, historically you've had two choices. You could go to a bank, right? And in, you know, in the new regulatory regime, they have to originate that loan and then syndicate it out, which takes some time, and there's uncertainty. In the direct lending market, you basically go to a lender or two, and they have the money sitting there. They can provide it for you.

So you have that certainty of execution. And so direct lending is just lending on a bilateral basis. And who are the lenders? In this case, is that actually you guys? So it is. The way that we operate is we have a partnership on the Calamo side with Axia, who is a private market specialist consultant. And so they sit in a really interesting area of the ecosystem.

because their entire business model is advising institutional investors how to allocate to private markets. And so through that, they advise on over $350 billion. But because of that, they have kind of a knowledge base of who is good at what across private markets. And they also have a ton of capital put to work across those managers. And so we co-invest alongside those GPs at a no-fee, no-cary basis typically. And so that's how we can build a portfolio that is allocating across the full spectrum of private credit. And so you mentioned that direct lending is 40 to 50% of the portfolio. That is we're lending alongside the Apollo's the areas of the world, those types of GPs. Those loans, what's the typical profile of a company in terms of size, sector, industry? Does it change or is it relatively stable over time, the companies that you're lending to?

So it changes. We're pretty thematic in the deals that we do because the market environment changes quite rapidly. So in 2022 and 2023, once the Fed started raising interest rate, you basically caught the banks off sides. And so you saw that high yield issuance and bank loan issuance essentially evaporated. And so if you were a company, the typical company that is tapping the direct lending market historically had earnings that I would say from an EBDA perspective were between kind of 10 to 100 million. And what you saw was that even larger companies, companies generating four or 500 million dollars a year could not tap the bank loan market because

banks were just not providing any types of financing. So even those type of of companies had to turn to direct lending to get any type of financing solution. And so that was a specific point in time. That was an absolute chip shot from our perspective, from risk to take. And so we did a lot of that. It's called upper middle market direct lending. We were lending to a company that is generally generating kind of a hundred million plus in earnings.

But the sweet spot today is actually going down market because the bank loan market has come back with the venue to win back all of that market share, right, that direct lending took from them. And so from our perspective, what we're looking at today are. the lower middle market. So companies that are generating somewhere between 20 and 50 million is kind of how we think about that. And then also non-sponsored deals, so small companies that are not private equity owned. And there's also a pretty good opportunity set in Europe where you just haven't seen the same sort of spread compression. And so that competition at the upper end has caused spreads

to compress quite drastically over the last 18 months. And you're also seeing some covenants get stripped. And so the ability to be a little bit more thematic and pick your spots is honestly why we think the value profit for this type of fund is what it is. So direct lending, that means that you're lending to companies that are private equity backed? So sponsored direct lending means you're lending to a company that's private equity backed. That makes up about 80% of the market. The other 20% is lending to a company that obviously is not owned by a private equity firm. So this could be a smaller, medium-sized company that it could be family owned, but it's private. So one of the advantages to going downstream is, as you mentioned, the competition is fierce. Terms of the loans

are getting relaxed a little bit in favor of the borrower, not the lender and the investor, that is. But isn't one of the risks that these companies are more susceptible to a potential downturn in the economy? And this is like the trillion dollar question, is what happens to these loans in the event of a real economic downturn and not just a six-month, you know, bear market in the S&P? Yeah, I mean, at the end of the day, you're taking credit risk, right? And so underwriting the credit of the company is first and foremost the most important part. And so getting comfortable with the fact that these smaller companies might be a little less diversified. On the other hand, in today's market, we think you're more than getting compensated to that from a spread

perspective. These companies are also less levered. And so there's a larger equity cushion if something does go awry. So the average LTV of the portfolio today is 40%, which effectively means that you have 60% of equity cushion below you that has to get worked through before you take a dollar of loss. And so, you know, there's clearly credit risk. If there are companies that get disrupted, then, yes, you could have defaults. Typically in credit, you have a recovery. But I think the biggest point, particularly within private credit, is that you are never, if the vehicle is set up correctly, you are never a for seller.

And so that's where you tend to get hit is that, you know, 2016, 2018, 20, 2020, 2022, you see high-yielded bank loans sell off dramatically because portfolio managers have to sell. In private credit, because you have matched funding, you can work your way through those situations and ultimately have a much lower drawdown than you would otherwise if you were forced to sell off. I was going to ask you about high yield because high yield typically comes with not perfect equity type of risk, but in a bad downturn, high yield's going to sell off big time. So you're saying one of the big reasons for that is just because people are forced sellers and they have to get out. So it's not necessarily that things get so bad there. It's that investors

kind of compound the errors. And in private credit, you're not going to get that. Is that what you're saying? I think that's a major. part of the value prop of private credit and why investors have, I think, gravitated towards it, to be honest with you, even during the GFC, right? High yield bonds probably had a peak default rate of about 15 percent and an average recovery rate of 50 percent. And so if you were able to hold through, your loss from just a NAV perspective would have been about seven and a half percent. Yeah, because spread blew out to like 20 percent, right, in the GFC? Exactly. And so the investor experience was very different from that. And so the ability to not be a forseller and to actually

be able to lean in during dislocations because you're not a four-seller is very additive from an investor perspective in my mind. And that's really where the way that I think about private credit is really getting back to the basics of fixed income, where you are underwriting a loan to hold it, right? You are clipping the coupon and then you are just reinvesting once it refinances are matures. Yeah, that all makes a lot of sense to me. I guess the one question that I would have is, or the big question that I have, is you all are the professionals, you're underwriting these loans and doing diligence and all that sort of good stuff. For the investor, let's call the middleman, let's say the financial advisor, how would we vet your product versus a

competitor? Like, realistically, I'm not looking at the sub documents. I'm not looking at every loan that you're making. So what sort of diligence am I supposed to do for my investors to get comfortable with your product versus somebody else? Michael, the yield. Pick the one of the highest yield. Pick the one of the highest yield. Yes. We didn't answer the the yield question specifically, but definitely don't do that. The way that we think about it is if you work with an open architecture type solution like ours and a couple peers, then you are basically outsourcing that due diligence to us, which we think is a great way to access the asset class because you're getting diversification by GP. In our case, you're getting diversification by risk

factor, right? Because we're allocating to a lot of areas that aren't direct lending or corporate specific, right? And then you get, obviously, diversification by loan level, which hopefully mitigates that idiosyncratic risk of default in any specific situation. So I think building a foundation with an open architecture type solution is really the great way to accomplish that. Michael mentioned that you have a relatively new fund, and it's already got a decent money in it. So Calos AXA Alternative Credit Income Fund. Did I say that right? Yes. I called it by the ticker Cappex, because that is a mouthful. All right. So I think the private credit space is interesting how quickly it's evolved to now where we're having these more liquid vehicles. So explain to us how it's possible to have this type of investment strategy in this type of fund structure. Because it's a mutual fund fund structure. So it's similar. So it's an interval fund fund structure. But it is it is effectively a mutual fund in every way. It's daily subscriptions. It's 1099 tax reporting. And you are investing in a ramped up portfolio, which I think.

is the biggest benefit to investors. But the difference between an interval fund and a mutual fund is that on the liquidity redemption side, we only offer redemptions on a quarterly basis up to 5% of the funds nav. And so that's why we're allowed to take illiquidity risk. And that's why 90 to 95% of this portfolio is going to be in pure private credit. I'm curious, because I feel like a lot of these interval funds have that same 5% rule. Who was the first one to make that up? Why does everyone have that 5% rule? It seems like that seems to be like the industry standard. Is that a rule or regulation? Yeah, it's a regulation.

So that is, that's actually a big difference between the interval fund structure and the non-traded BDC, which they're very similar. But the interval fund structure, you have to, by regulatory reasons, provide 5% quarterly liquidity. Okay. And then in a non-traded BDC or, you know, other evergreen funds, that is, that is discretionary up to the board. And so it is for regulatory purposes that you have to provide that.

And to your point with about investor behavior during a downturn, that caps the ability of investors to just say, I'm out of here, right? If there's a little bit of a credit problem or whatever, investors can't really sell this en masse, which is good for you because you don't want to be selling these loans when the excrement hits the fan or whatever, right? Yeah, exactly. And it's why these types of fund structures, I think, will continue to take off. It's because you will not be a forced seller if there is a technical dislocation, which is what tends to happen. and so you protect that, and ultimately you protect the investor, but it really prevents the portfolio manager for having to sell something below

below fundamental value. Michael and I always talk about how whenever these types of funds or any types of fund, it's funny in the last few years, people always say, the biggest risk is a recession. Like, of course it's the biggest risk. But like, how does a strategy like this go wrong for an investor? What does it look like? What are the big risks that people should be thinking about when investing in this type

Both strategy. Yeah, the big risks are concentration risk and vintage risk are the biggest in my mind. And they're pretty related. And so when I think about the biggest risk in the market today, if you are investing in a private credit fund that's just doing one thing, like upper middle market direct lending, sometimes that's going to be attractive. And sometimes that's not going to be attractive. And so in 2022 and 2023, it was highly attractive. Great vintage year for those types of loans. But in 2024 and 2025, as we alluded to with increased competition, those are less attractive. And so, So making sure that you monitor the amount of diversification that you're getting is hugely important because we could go into a credit-oriented recession and you could see, you could feasibly see a 20% default rate, kind of a worst-case scenario.

And so, you know, if you have a 50% recovery rate, that's 10% down, that's a rough experience and very different than what has been the historical case, but is something to keep in mind, right? So making sure that you're diversified. And then the great thing about the Evergreen solution is that you're constantly replenishing. in originating new ideas. But the biggest risk with that is you need to make sure that you have an origination engine that is able to put money to work in a very disciplined manner, right? And if you're only doing one thing, that becomes challenging. You mentioned earlier that there's not fees on fees. So just to be very clear to the listener, what exactly does that mean? How do you guys make money? In a co-investment style, you are getting access to those deals,

typically free. And so you can build a portfolio in a very smiter that way. And then the end investors just paying the management fee effectively. And the big difference between this fund in a lot of historical private market solutions generally is that there's no incentive fee, which if you look at incentive fees across credit, a lot of them are structured so that you are paying on accrued income. And so you are essentially paying regardless of performance. And so we wrote a paper on this to kind of bring this to light. Right. And so by not having that, you effectively have the cost of the fund, which we think is another component to the value. prop here. If you had to estimate how many of the, how many private credit funds have an incentive

fee versus how many don't? Because you're right. Most of them I see have an incentive fee. Yeah. So in the in the registered space, it's over 80% have an incentive fee. That's becoming less and less common, right? Virtually every BDC does, I will say most BDCs do. But as the interval fund space continues to, I think, gain traction. And that's the clear trajectory in our mind, it's becoming less and less common for these types of private credit funds to have incentive fees. So I'm looking at the website for your fund, and it says private credit portfolio yield 10.7 percent. Walk us through what that means. Is that a gross yield? Is that a net of fees yield? How does that work when investor looks at that and say, what does that mean to me?

Yeah, so that's a net yield, but that is of the private credit book. So that's 90% of the portfolio. So we also have a liquidity sleeve, which is, you can think of it as cash IDCLOs and high-quality bank loans. That would bring the all-in yield to closer to 10%. But the way to think about that is, you know, with base rates and everything is priced off of three months sofer. With three months sofer is four and a quarter percent, right, that gets you halfway there almost. And so the typical spread within private credit in our portfolio is about $6.50 over. So six and a half percent, which, again, is very. in line with the two to 300 basis point premium that you've seen historically. And so that's how

you ultimately get to that yield. We use fund level leverage between 15 and 20 percent. And that is mostly for a pipeline management tool. We want to make sure that because you can invest in this daily, that if you click buy, that your money is fully ramped the next day. And so we are always pre-committing to deals. And so that's what the leverage facility is used for. That's very different than a lot of historic private credit funds. Ben, you mentioned the yield being so high historically, even when base rates were low. That was because a lot of funds are levering up. Your typical BDC is about 100% levered. And so that's ultimately how you get to those yields and why you can charge that fee and still hit a pretty reasonable distribution rate. Right. So you think it makes more sense to think

about what you said the 650 over. So you're talking about over the 10-year treasury. So it's over three months so far. It's over the base rate. Over the short term. Okay. Which again is a reason why private credit looks particularly attractive when you have an inverted or flat yield curve. It's really hard to compete less. Well, I'll tell you another reason why this looks attractive. I'm looking at the total return for the fund. And I mean, we don't have 10 years of history, but it's just up until the right. And tell me why this is like not too good to be true. I know it can't go up into the right forever and ever or can it. So we've been in a benign credit environment, to be very frank. And we originated this fund at the perfect time because basically what you don't

want, the biggest risk in private credit is having exposure to loans that originated before the Fed started raising rates, right? Because they were underwritten to a completely different interest rate regime. That's where you're seeing the increase in pick, the payment in kind, the headlines that you're reading about that. So that's your vintage year risk you're talking about. So that's the vintage year risk that we were referring to earlier. And so by missing all of that, we basically have a clean portfolio that is now every single line item in the book was underwritten to the current interest rate regime, which allows us to be highly selective and means that we haven't seen a lot of credit issues to date, not to say that we couldn't. Again, you're taking credit risk. It's just that you

don't have to be a forseller. And if you're diversified across risk factor GP and at the loan level, then there shouldn't be a lot of volatility or honestly risk of any one thing blowing up. Well, let me ask you this. How does the actual price work? Like, what's setting the price on a daily basis and what would cause the price to go lower? Yeah, I mean, fundamental credit issues would cause the price to go lower. So we price on a daily basis. We price based off of, and this is super important, how valuations work.

And so we price based off a regression model for what is going on in the bank loan market. And in public, BDCs, the loans that are going there. And so there is going to be spread sensitivity there. Okay. And then on at least a quarterly basis, we re-underwrite every load in the book and help, you know, using the GP's marks as well, we remark everything in the strategy. And so on a daily basis, you're unlikely to see a lot of movement unless there is a, you know, something catastrophic going on in the public markets or a specific deal going awry. Could you see a scenario where there's a market dislocation where there is a nasty credit event? And yeah, the loan, let's just assume that loans are fine.

Maybe they, I mean, I'm sure that there would be some stress. But could you see this traded like a significant discount because investors, now I understand that's that's sort of the point of the 5% gate. But could there be a dislocation in selling? So it's always going to trade at NAV. Okay. And so there could certainly be a dislocation. Let's say next quarter that high yield spreads gap to 800 basis points over.

like that historically has been kind of the point where you should probably start buying some high yield. And so people might try to sell the fund. And so the way that we set this out very conservatively is that we have cash in a leverage facility in place to meet up to 5% in any given quarter. So let's say that, you know, we hit the 5% redemption limit. There are 5% of the fund investors want to redeem, right? You basically have a 30-day period over any quarter that you can submit that. We will provide that in cash the next day. So we are never set up. up to be a forseller of the liquid loans because of the way we set up the portfolio. Yeah, because you know exactly what you have to meet in the eventually that happens.

Exactly. And you have to mark the book, right? You want to make sure that the NAV is conservative so that investors that are coming in on a daily basis are not at a disadvantage, right? And so you need to be very mindful about that, right? But from a forselling or redemption perspective, we set this fund up specifically to be able to weather through that. Getting back to the vintage year thing, so your scenario where high yield, high yield blows out, the spreads blow out. How much does your book turn over where you could potentially get caught off guard if the environment does change considerably? Yeah. So historically, the movement from a volatility perspective has been about a fifth of the high yield and bank loan market. And that'll change, but that's historically what it's been.

And so you will see some, you know, if high yield funds are down 10%, you'll from a NAF perspective, like this fund could certainly be down, you know, to three percent in that type of scenario. That's it? Yeah. I mean, at the end of the day, you're taking senior credit risk, right? And so as long as you think you're going to get paid back, right, a lot of those selloffs are technically driven that have nothing to do with the underlying of the company. And so that's a real feature.

That's really the whole point of why investors are realizing that this is just a better way to take credit risk. It's basically fixed income pre-bill gross of doing kind of your. your duration management trades and your credit beta trade. So if Bill Gross was a fixed income manager journey today, he would be in private credit. He wouldn't be messing out of the ag, right? Yeah, I mean, I think, I don't think he would be the only one making that decision. Yeah, why would you want to get Mark Daly based on what other people are doing?

Right? If you're making a loan, you're trying to make a good loan and hold it and get the coupons. Exactly. And if you look at the volatility history of high-yield and bank loans, it's obviously significantly greater than in private credit. But if you think about, okay, what is my risk of loss? That is the risk of these types of portfolios of having a credit loss. And historically, it's been about one and a quarter percent within private credit, which is right in line with the high-yield bank loan market. And so there's really no reason for there to be a ton of volatility for a credit

profile that has done that for 20 years. Looking at the industry waitings, I think it's important to look inside the portfolio because you're right. Listen, I can't diligent. All right, you've got 2.6% of the portfolio and food products. Am I asking for the contracts? Show me the loans. Show me the loans. We would show you. And looking at what's going on under the hood.

You've got software and financial services, both 11%. Then we've got real estate, professional services, insurance, commercial services and supplies, construction and engineering, oil and gas, IT services, health care, food products, telecom, capital markets. I mean, this is a very diverse portfolio. Exactly. I mean, in credit, that is absolutely paramount. Your winners do not make up.

for your losers, your losers will drive your performance. And so you need to be diversified. And so the way that we think about diversification is a little bit less at the industry level, per se, because even what makes up that risk is completely different. So we mentioned that direct lending is about 40 to 50 percent of the book. But even that is highly diversified by the size of the company in geography. But when you think about what else makes up the portfolio, it's a lot of these other areas of private credit that banks are getting forced out of, right? And so as a special finance. Specialty finance. Yeah. So what does that mean? So what does that It means that you're lending against pools of assets. And so there is a specific type of collateral

that in the case of something going wrong, you actually have, you can take ownership of and hopefully sell. It can mean a lot of different things. Like the two areas that we really like within specialty finance, they all have themes, right? And so one of the big themes has been private equity funds have really struggled to distribute capital back to LPs. And that really impacts them because if those LPs don't receive capital, they can't invest in the new fund. And so fundraising has really slowed in private equity. And so one way that they are trying to make up for that is they are looking for ways to tap liquidity and where they can actually work out or really work through the holdings in their portfolio so they can actually distribute back to LPs. And so our ability to lend to them.

So how long do you hold these loans for typically? What's the average maturity or duration or however you look at it? Yeah, the typical holding period is about three years. And so when you think about that at the portfolio level, about a third of the portfolio naturally runs off. I think it's important to mention that this is one of the benefits. of private credit when, and not specific to lending money to private equity funds, I need to make cash distributions. But when the bank was syndicating these loans, it could turn into a knife fight. I can it turn into litigation very quickly. When you're dealing with a sponsor or a pool

of capital, it's in your interest to work through some of the issues. And you have flexibility that you might not have if there's everybody with a knife or gun pointed each other's backs. Yeah, I think the two, two biggest differences between private credit and public credit is that you have covenant protections, which, so you can force the equity owner to the table if things start to go awry. So you can, you can actually have that conversation sooner. And then when you're actually having the conversation, there are usually two or three counterparties here that are lending the money. And so you can easily get in one room, which is 100 in the syndicated market. And so it's very easy to come up with a plan, work through it. And you have the leverage because

you have covenants in private credit. So what did we not get to? I mean, I think a couple of the the general themes that I think would be helpful for listeners to get a feel for for what we're doing within the portfolio. We mentioned kind of the specialty finance, what we're doing on the NAV lending, providing solutions to GPs that are just relatively desperate to distribute some capital so that they can fundraise a couple of other areas, commercial real estate debt. I think you've had a couple of guests talk about that opportunity set. I think that's going to be huge whatever the next two to three years. Why? Because effectively, 50% of loans historically on the commercial real estate side have been done by regional banks. And their largest holding was office. And so they are completely hamstrung at the same

time that you have $2 trillion of refinancing need over the next two years. And so when you have the primary lender out of the market, you actually have a massive void where you can come in, be selective, and kind of dictate the structuring and pricing for that. And so that's really what private credit is in our mind is finding those little areas where there's a supply demand imbalance. A lot of the times that's because banks are just getting forced out by regulatory authorities, right? and that you actually have leverage for your capital and you have a motivated buyer. And so commercial real estate debt, you know, nav lending, another one is significant risk transfer or regulatory capital relief where you are lending money to banks to help them get risk off

of their balance sheet. And so all of these have themes as to why you're getting paid what you get paid. For investors who've never been in the interval fund structure, when do you make the distribution payments? Is that on a monthly basis, quarterly basis? How does that work? Yeah, so everyone's going to be a little bit different. We distribute on a monthly basis, and it's mid-month. And so historically, we have distributed about 9.5% annualized. And the important component of that is that none of that is return of capital. That's all cash coupon that we've generated within the portfolio. Perfect. Where do people go to learn more? Please reach out to me at P. Power at calamos.com or go to Calamos.com to read up on the funds, see the commentary, see the fact sheet. But please do reach out.

Perfect. Thanks, Phil. Thanks, guys. Okay, thank you to Phil. Remember calamos.com to learn more about their CAPEX fund. Email us Animal Spirits at the compound news.com.