Animal Spirits Podcast - Talk Your Book: What Is Private Credit?

Episode Date: December 18, 2023

On this episode of Talk Your Book, Ben Carlson and Michael Batnick are joined by, Marco Hanig, Managing and Founding Principal of Alternative Fund Advisors and former Principal at AQR to discuss: the basics to Private Credit, the differences between a loan and a bond, why Private Credit is earning a premium yield, and much more! To learn more visit: https://alternativefundadvisors.com/ 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 Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   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. Wealthcast Media, 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. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Alternative Fund Advisors. Go to Alternativefundadvisors.com to learn about the AFA Private Credit Fund. That's Alternativefundadvisors.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben 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 Ridholz wealth management. This podcast is for 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. This was an interesting discussion. We haven't had anybody from the private credit space on the show before. So Marco was generous enough to take us to school and we spent, I don't know, the first 20 or so minutes of this conversation talking about these markets, where they came from, where the returns come from. Private credit is still a relatively new asset class. It is. And to the extent that there is a premium over what you can get in publicly traded credit, bonds,

I think the way that he explained this is pretty simple. There's no free lunch anywhere, obviously. But the premium comes from just sourcing, just making these loans. right? Like the lender is sort of acting as a bank. Right. And a lot of it, a lot of these loans are made outside of the banking system because the bank can't make those loans anymore, which was funny to him, I was asking who the winners and losers are. And he's like, the banks are. They probably, they would love to make these loans if they could, but they really can't anymore because of capital requirements or loan

requirements, all these things that came out of the 2008 crisis. It was my understanding, and I use those words very loosely, because I don't know anything about regulation, that banks weren't making these loans anymore because they couldn't. But it sounds like banks aren't making these loans anymore, not because they're not allowed to, but because of capital requirements. Is that your understanding as well? I think so. Yes. It sounds like a lot of it is regular. And this is like there's a lot of unattending consequences that came out of the Great Depression that were like this too, like that banks couldn't do certain things and it was supposed to protect them at the time or protect consumers. I think this is an interesting one that

it seems like these lending platforms and private equity shops, essentially, are the ones that are benefiting from it because they were able to make this market. Is private credit the new private equity? Probably. I mean, it's probably a lot, especially for advisors and family offices and even like institutional investors, it's easy to understand. You don't have as long of a lead time. If we're talking loans that are three to four years in length or whatever, that's easier

to stomach than I think than like a 10 to 12 year private equity lockup, right? So, yeah, it's an interesting space. So we had Marco Hanagan, who is one of the founding principals at Alternative Fund Advisors. So here is our conversation with Marco. We're joined today by Marco Hanig. Marco is a managing and founding principal and the CEO at Alternative Fund Advisors. Marco, welcome to the show. Hi, Michael.

Glad to be here. We're going to be talking today about private credit. And I think that people, investors have heard the term private equity for a long time. The idea of investing in privately held companies is not that novel, but the other side of it, the credit side of it, is perhaps a little bit newer and less familiar to investors, but the popularity has certainly exploded in recent years. Maybe let's start with what is private credit? Well, private credit, in essence, is any kind of loan that is not a bond, so not publicly

traded, and not issued by a bank. So there is now a large infrastructure and network of private lenders, sometimes also called alternative lenders, lend money to typically middle market or smaller companies, and they are direct loans. And if you're investing in private credit, you're basically giving money directly to a borrower. And just to cover all the basics here, who are these lenders? Where did they come from? Because it seems like it's a relatively new side of the business that was sort of sprung out of the 2008 crisis and all the regulations that came from that. Yeah.

So the big driver of why there's interest and why there's been demand for private credit is that banks have stepped away from lending due to increased regulations, more requirements on their balance sheets. The lenders, they range from large names that you might have heard of like Apollo, KKR, Carlisle, a lot of large names that you're familiar with also from the private equity space. They will raise funds to help lend money to these companies. But there are also many smaller platforms. So the fund that we run, actually, we use lending originators. that play in very specialized niches, things like lending based on mining interests, litigation finance, which are loans to law firms. They are very specialized, and these are little ecosystems of firms that have an ongoing client base.

They understand that market very well and can serve the needs of those borrowers. So you said that banks used to be the primary issuers of these loans. Were banks making these loans from like balance sheet capital? Were they pooling the money of outside investors and then making these loans? What was the ecosystem like before these private credit companies filled the void? Yeah, banking is pretty straightforward, right? You have deposits and you pay close to nothing on your deposits. And then you are allowed to lend based on those deposits.

That's banking in a nutshell. And the real challenge for banks has been on the deposit side. You know, you recently saw with SBB Bank concerns about does a bank have enough deposits to support its asset base. But there's a deposit, that's the liability, and then the asset is the loan itself. The way that these private credit funds work is that the investor simply invests in a fund, so that's where the money is coming from. Think of that as the equivalent of a deposit.

And then it is being lent out at a rate and you get that return directly. So if the loan is originated at, I don't know, say it's a 12% loan, the manager and the fund might take out several percent of that and you earn whatever is left over. So it's a very different model than the banking system. I guess just said differently. So banks in 2023 are still, they're still making loans. They're just not making loans to this segment of the marketplace. And I guess maybe a good starting point is why.

This was a regulatory shift that no longer allowed banks to make loans to which type of companies are we talking about? It's a question of both size and type of loans. So banks are still lending. There's no question that banks are still making loans. But the requirements on their balance sheet and the regulatory capital ratios that they need to maintain is such that many of those loans are no longer economically. for them. For example, think of a credit line. Suppose that you're somebody who wants to have a credit line that you draw on periodically. If you get charged by the bank regulator almost as much in capital requirement as if the loan was made permanently, it's no longer

economic for you. You're earning money on a small balance, but you have a large credit line out there. So those are the kinds of reasons that have led banks to step away from certain segments of the market. Now, the investment-grade segment of the market, large companies continue to issue regular bonds in the public markets, right? Then there are also large, large borrow from banks, and those large loans get syndicated. That market still exists. It's really the lower end of the market where there's less and less desire by banks to lend. Before we get into the investment implications, we surely wanted to do that, who is benefiting from this change and who was hurt by this change?

Because obviously there have to be winners and losers from this new market developing. Yeah, the benefit is to borrowers that can now do things that continue to have access to credit, right? In many cases, for them, it's a difference between being able to get loans or not get loans at all, right? And getting them faster. So the borrowers are definitely better off by having a new channel that provides them with loans. The people that are hurt are banks, quite honestly. And then the big benefit, of course, is to the investors, because if you invest in a bank and you're giving a bank your deposits, you're not making very much in terms of interest on that. But if you are really lending doing a private loan, you are earning rates that are in the high single digits, no double digits.

So it's really the investors that really have benefited from being able to make these loans directly. What's the difference between a loan and a bond? Are they the same thing with different names, or are there substantial differences between the two? Bond, by definition, is just something that's publicly traded. So, I mean, there's a whole process, an underwriting process. But bond, once it's issued, you know, it gets traded. You can buy it and it can get bought and sold. A loan, once you've made that loan, there is no market for it.

So it is issued and, you know, it's then on your books until the loan gets paid back. When you say that, you said earlier that these are for lower players, I can't remember the exact words that you use, but do you mean, you mean lower like as in smaller or lower as in lower credit quality or both? They can be both. So these are firms that might be, you know, call them double B, B, you know, credits from a creditworthiness. and some of them can be large and some of them can be small. So there is a wide spectrum. And in some cases, at the very large end of the market, some of those companies I are also thinking about,

is this something that I should be issued in the public market or through one of these syndicated loans or from a private lender? So that end of the market is actually quite competitive and heavily competed. The more you go into smaller and smaller loan sizes, the less competed. Marco, how did you end up getting into this pace? What's your background here? Yeah. So my background is I've been in the funds business for my entire career, first with a company

called William Blair Company in Chicago, and then with a company called AQR Capital, which is a large quantitative hedge fund in Greenwich, Connecticut. And at AQR, I was fortunate to be responsible for launching their mutual funds business, and really we created what became known as the liquid alternatives business, the idea of having hedge fund strategies in a mutual fund format was pretty novel at the time. Towards the end of my tenure at AQR, I started to realize that we were doing liquid alternative strategies, but there was increasing interest in illiquid or private strategies, things like private equity, but also private credit, private real estate, and asset classes that you

cannot just access buying bonds or stocks. There was another innovation that happened at the same time, which was interval funds, which make it much more easy for advisors to access these vehicles. Traditionally, private credit, in order to invest in private credit, you would invest with a manager through a limited partnership, and it would be a fund that would have a typical structure of maybe a three-year duration, four-year duration. You invest in the fund, the fund would call your capital, invest it over time,

and then would give it back to you at the tail end. It'd be a subscription document, it'd be a K-1 investment. Interval funds, in contrast, basically look, taste, and smell, just like a regular mutual fund. So they have a ticker. They don't have a subscription document. They have a 1099. You can typically invest in them on a daily basis. There is one important difference, though, versus a mutual fund.

You can only get out your money quarterly. and there's a limitation on how much of the fund's assets can be redeemed at that time. So it's a 5% limitation every quarter. If only the total redemption requests in that quarter add up to 3%, then everybody gets 100% of their money back. If 7% of the investors want to redeem their assets, the limit is 5%. Everybody gets back 5 cents. These aren't draconian limits here. it's, this is, these are private loans with no market.

And so if everybody wants their money back, that's just not possible. Correct. Yeah. And so if you think about the reason why people are interested in investing in private credit is because the return of private credit is higher than that of public credit, right? Well, and why is that? There are two reasons why you would expect there to be a premium. One has to do with this liquidity aspect, right?

in a bond, it can be publicly traded, it's, you know, you get compensated for in essence being locked up for some period of time. So that's the liquidity premium. But the other big one is that for private credit, you can't go out and invest in private credit. You don't even know where the credits are. Bonds you can invest in easily, right? You just go and, you know, you look on Bloomberg and you can find the bond that you want to invest in. Private credits need to be originated. And so we call that the sourcing premium or origination premium, you get compensated for actually finding the underlying borrower, structuring the loan, monitoring the loan, processing the payments.

So you're really investing in a lending business to some extent. So a dumb question here, but the companies that are borrowing money, why are they deciding to borrow money instead just to sell some of their? equity? The answer is pretty simple. If you can borrow at less than what you think your cost of capital is, you will always borrow. Look, I'll give you an example of the things that we tend to lend on. The private credit space is really composed of. We like to think of it as four different segments. Private credit can be cash flow-based lending or asset-based lending, and it can be to large companies or it can be too small companies. So think of it as four

quadrants. Cash flow-based lending basically means I'm lending you money and the repayment is predicated upon you being able to meet your interest payments. And so the typical way that you underwrite that is through some cash flow multiple, right, where you make sure that the interest payments are only a fraction of what your cash flow is. Asset-based lending is different in that for asset-based lending, you actually require collateral. For example, you might have aircraft as collateral, you might have cars as collateral. In our case, you might have real estate as collateral. You might have mining as interests as collateral.

You might have equipment, inventory. Basically, you have something tangible. So when a loan gets in trouble, in one case, you basically need to work out some sort of a restructuring of the loan, if it's a cash flow-based loan. For asset-based loans, you actually have the real collateral there. So if things really go wrong, you can tap the collateral for repayment. So is that your niche, the asset-backed market? Yes.

So we focus on the asset-based market. We focus on asset-based lending because of these repayment characteristics. The other thing to know about the asset-based market is typically the kinds of loans that I was talking about for equipment, inventory, or receivables is another big one. They are really working capital loans. So if you are a mining company that has to drill something, you know the deposits are there, but you need to invest in the project. to drill, you have a very short duration loan that covers that project. That's a typical asset-based loan. Another example would be for real estate, suppose you're a real estate developer and you're doing a project where you have, you're trying to buy the land and you're going to go through a

permitting process that might take 12 to 18 months before you can actually get a real construction loan. So there's a period where you get some bridge loan financing, and that's the kind of that we would be investing. I'm curious about the rates, the interest rates that investors receive or that lenders demand for these type of loans. I guess interest rates are gravity, whether it be Fed funds or the 10-year. Obviously, these things have to trade off on a spread like every other or like publicly traded bonds.

Can you just talk about how that works in your world? Yeah. Loans can either be fixed rate or floating rate. many of the loans in the space are a floating rate. They can be SOFA plus 6, SOFA plus 7. I mean, we're talking about, you know, very nice spreads over, you know, over the risk-free rate. And in some cases, if it's more of a complicated story, the coupons and the yields can be

in the mid-teens. So not, you know, not every loan is a mid-teens loan, but these days, low to mid-teens is completely normal and the market segment where we play. And how much does this market follow the general marketplace? Well, they're talking about the credit space or high yield or treasury bonds. Is there some sort of spread that you're following there? Or is it more at ease in credit than that, depending on the asset or the lender or that sort of thing? Yeah. So this is one of the things about private credit that really is attractive to financial advisors. Private credit does not mark to market with the same velocity.

as bonds. Of course, private credit is affected by interest rates in the longer term, but think about the difference between investing in real estate and your own house versus the reed market, right? The reed market, those rates can be jumping up and down on a daily basis and can be quite volatile. I think what we all know is if you're trying to sell an liquid asset like your home, you have an idea of pricing. in the neighborhood moving up gradually or moving down gradually, but it's a very slow moving smooth process. You certainly don't reprice your house every day that market rates move around. So the same thing is true for private credit. Over time, it is susceptible to markups or markdowns based on

rates, but it's a very slow moving adjustment. And so the volatility for private credit is just a fraction of what it is for public. So I think it's your, I don't know if it's your former boss or the head of your former firm, Cliff Asness, has spilled a lot of ink about this. And he called it like volatility laundering. Do you even care? Because obviously, you're right. There's less volatility.

But if it's not being marked is that it's like Schrodinger's cat kind of deal. Does that even matter? Do you think because there's more of a lockup that that's, it's like out of sight, out of mind for your investors and it doesn't really matter? Because I can see it both ways. It seems like the fact that this, these funds are liquid and they're locked up longer. it doesn't really matter because they're not trading on a minute-to-minute or daily basis. But how do you think of the volatility effect of this space?

Well, I won't pick a fight with Cliff on this podcast. We'll take that up separately. No, it's a topic that AQR has written about. A lot in Cliff has written about it, particularly in the context of private equity. Right. You're not in this crosshairs yet. Just wait. Yeah, after this podcast, I'm sure I'll be getting a call.

But in the case of private credit, really, it's a question of those are much, much shorter duration assets, right? They're three-year, four-year duration assets. And what I was saying in terms of how fast they move, they do get marked to market. It's just that the movement is slower. And this is not a fictitious thing. It's just, I use the housing analogy, they just don't move on a daily basis in terms of the the negotiation between two private parties.

I don't know if Cliff has said this exactly, but wouldn't it stand to reason that behaviorally investors would be willing to pay for that volatility laundering, as he calls it, because it's very nice to not see the prices jump around on the screen every day. So that illiquidity premium, is there any danger of that turning into a discount that investors would happily pay for the comfort

of not being marked and therefore they're not going to get the returns that they did in the past? I honestly don't think that's the case. Remember, the supply demand dynamics on that are really, the rates are determined between the supply of the lender and the borrower, right? Those are the supply and demand dynamics. That's one part of the market. And then there's the question of the investor giving money to the lender, right? So the lending platform stands between the borrower and on the one side and the investor.

on the other side. Actually, I'm going to tell you something that relates to Cliff. In addition to writing about volatility laundering, he had a piece on pet peeves many years ago. One of his best. Yes, one of the many classics. And it talked about also the question of laddered portfolios versus bonds. Individual bonds versus bond funds. Correct. Individual bonds versus bond funds. And And, you know, Cliff will jump up and down, say, well, academically, you know, the bond that you have that you're holding your brokerage statement, in theory, it should be marked up or down every day, right? The reality is, it is not marked up or down on your brokerage statement every day.

And investors feel better about not seeing that movement. Now, if you had to sell it during the holding period, of course, the, the, you know, the mark to market would be what would apply. But you need to think about this marking also in the context of what is your holding horizon, right? If you know that you are going to own this bond or you are committed somehow to owning something for five years, then you don't really much care about the volatility in between. Is that typically the holding period you tell for your clients? And it sounds like to me, you said this is an attractive asset class for advisors. Is that who most of your clients are?

Yeah, our fund is only distributed through advisors, basically RAs, private banks, and family offices. Okay. And you typically tell them, listen, this is a three to five year asset class, not something you're holding for six months or 12 months or whatever? Yeah. I think if you're investing in this, you should not be thinking about this is something that you move in and out of.

You know, there's a tendency a lot of times to saying, well, you know, we're going to rebalance the portfolio and tweak it around the edges and we're going to allocate a little bit more here or there. No, this needs to be sized in such a manner that you can say this can be a permanent allocation in my portfolio. If it goes up a little bit, the percentage or so in value or not, it's not going to be that big a number that I would need to touch it and rebalance it. So looking at a chart of the cumulative performance since inception, there is no denying that this is a much smoother ride than anything that is publicly traded. We've been through that already. So my question is, where do the actual daily marks come from? Because of course,

the loans don't trade. So I'm just ignorant to that. I honestly don't know. How does the price get set on a daily basis if somebody's looking to buy either today versus a month from now versus two months from now? Where do those marks come from? Okay, so that's a two-part answer. We are structured as a fund of funds and we get a monthly statement from each of the underlying funds. And each one of these funds has its own valuation policy that takes into account changes in yield or any potential defaults or changes in the overall market. And then our fund takes these monthly statements, and that's how we value the loans on a monthly basis. For the in-between days, we have a fair value process that interpolates on a daily basis between those month ends.

What does this look like? Is this a concentrated portfolio? try to spread your bets, leg into positions, take big positions, whatever. How does that whole process work? Yeah. So we have about 570 positions, underlying positions within our portfolio, originated from 15 different lending platforms. So we select managers that have expertise in certain market segments. I think I mentioned mining as one, and I mentioned litigation finance as another. state bridge loans would be a third. So what we do is we don't necessarily think about diversifying across geographies, for example. What we do is we try to diversify against different collateral types. So for example, you don't want to have too much of your collateral tied up to the real

estate market or to the, you know, auto or, you know, retail or whatever. So you try to spread your you're collateral. And then, of course, you try to have a very good loan to value coverage as much as possible. So you're doing a risk return creative on saying how safe an investment can I get relative to the yield that it's providing. So when you say that you're investing through a loan platform, what exactly does that mean? We operate as a fund of funds. Okay, got it. So we're investing through 15 different funds, and each one of those funds is a loan origination platform. So the funds that your investors are ultimately investing in, those are the companies that are making the direct loans? Absolutely, yes.

So you can look on our balance sheet. You can see the names of each one of the individual lending platforms. Those are the people that are responsible for originating the loans and for doing all of the underwriting and all of the processing of the loans. What does the default rate look like in private credit versus public credit? right now, to the amaze of many, probably myself included, we've seen all of these rate hikes filter through the economy, and yet still chugging along, you're seeing bankruptcies are going up, but certainly nothing dramatic. Default rates are still pretty modest. What are some of the general differences? I guess, how long of a lag does the private market operate on? Can you talk

about those sort of dynamics? Yeah, I don't think that per se, there is. is any lag between public and private markets in terms of being more or less susceptible to defaults. I think that's very much of a situation-dependent question. As we're looking across the market, right now defaults are definitely lower than many people expect. It's not zero, but it's low. In a meltdown scenario, could there be credit losses on the private credit side? Absolutely. Does it worry you at all that this is still a relatively new asset class? Or do you think that, listen, a credit cycle is a credit cycle. And we're looking at the underlying holdings and loans, and that will be what it is.

The credit cycle is what it is. The question is how much it affects you as a lender, right? And the reason why we are so excited about asset-based lending is that we don't need to spend a lot of time worrying so much about the economic cycle. We need to make sure that the collateral is still there when things go south. How are you selecting managers? What do you all look at to determine whether or not this gives you confidence to invest? It's manager due diligence. We look first as to whether the strategy that they're pursuing makes sense, whether they have a sourcing advantage.

Do they have an ecosystem where they can actually generate loans at attractive rates, ideally with repeat borrowers? You look at the strength of their underwriting. You look at the loan to value of the underlying position. you look at loan covenants. So you want to make sure that the platform that you're investing through has the kind of credit quality that you would like to see. What sort of income are these things generating right now? How frequently is it distributed? And then part two to this question is, as you are making the investments in these loan platforms, you could get excited about the returns that you're generating in terms of interest rates. But is there also a level at which

you say, I don't know, like, yeah, the return sounds great, but they could be able to repay that loan. So I know that was like a three-part question, but if you can unpack it, please. I will. So actually, we recently wrote a piece on leverage, or particularly hidden leverage in private credit. So one of the things that happens in the good times is you can sometimes lend at, let's call it, for sake of argument, let's say you can, you know, lend at 12%, and you you can borrow at 8%, you can make money on the spread, right? So you can lever up and earn extra return. Once you start to have credit defaults, the leverage can really hurt you, right? And it amplifies your losses. So one of the things about looking at different parts of the market,

if you are investing in funds that are highly levered, those are going to be much more affected by credit cycle than the fund that's unleavened. So do you have some rules of thumb that you place in terms of leverage on the managers you invest in? Yeah, so we generally invest in unlevered funds and currently the weighted average leverage of the funds is about 9%. Now, at our own fund level, we have zero leverage. The way that we feel about it is if we're giving you a good enough yield to where you feel well compensated relative to public markets, there's no need to take on the additional risk through leverage that might squeeze out an extra percentage point or two.

So the net current yield is as of 12.1, 2023, it's 9.3%. What is net current yield and how often is it delivered to investors? So we currently are distributing one and a half busy at a 6% annual rate on a quarterly basis. At year end, there's a catch up to whatever the actual return was that was earned. So you have three quarters at one and a half percent each, and then at the end of the year, you have a larger distribution. Is that standard in the industry? I would say, it varies.

Some are higher, some are lower. We basically have an agreement with our board to make these distributions. Is there any carry here? How do the fees all work? Straight fees. We charge a fee of 110 basis points, management fee. All in fees are 145 basis. points, including all of the various operating expenses.

That's clearly the fees of the funds that you're investing in? No. That's the fees that we charge and the operating expenses of our fund. The underlying funds that you're investing in, some of those actually do have performance fees. And so if you look at the expense ratio and published in our prospectus, the quote, acquired fund fees can be, I think right now they're in the 3.5% range or so. That includes, by the way, the cost of borrowing. So if one of the funds, you know, borrows anything, they have to pay for that. But these private credit lenders also want to be compensated, right?

Sure, of course. We are getting the net. When I'm saying you can get, you know, say 12% or so yield on a loan, that means that the borrower is actually paying a higher rate and the lending platform has already gotten paid out of it. So from the investor's point of view, are they looking? looking for capital appreciation or is this strictly an income play? Like what what should an investor? Because listen, the reality is not all advisors, not all end investors are experts far from it on on all of the idiosyncratic risks in these markets. How should investors think about the asset class and how should they think about due diligence? Like this is an

income play. What else should they be aware of? This is without question. An income and yield is the motivation to invest in this. It's not a capital. appreciation investment. I think you want to invest in a strategy or a fund where you understand what the economic rationalist for why you're earning returns that are higher than public markets. So we like the idea of going into less competed segments of the market, smaller borrowers who by virtue of being less competed are going to be able to command higher interest rates. In terms of the due diligence, one of the things I would point out is there are a number of credit interval funds out there that actually are not really investing in private credit.

They invest in what I would call the less liquid segments of the public markets, high yield, syndicated bank loans, CLOs. They don't have the kind of liquidity characteristics that would be good for a daily valued fund, but they're not, quote, private credit. So one of the things to look at is, as you're evaluating funds, is how much is actually private versus public in terms of the portfolio. And then you can get into the nuances of within private credit, there's then asset-based, cash flow-based, large, small, there's different seconds of the line. Last question for me, this is a bit of a softball. Why would somebody invest in a structure like you have with the fund of funds rather than just going direct to the, the platform. I'm glad you asked that question. The reason why is that if you want to invest in these kinds of boutique opportunities, this lower end of the market, you just do not have

the ability to do due diligence on a plethora of small funds. The funds that we're investing and sometimes they have 200, 300, 400 million in assets, right? They're limited capacity funds. in order for you to invest in them and have a diversified portfolio, you just don't have the bandwidth to evaluate them individually. It's actually interesting when we're talking to advisors about our fund. Without fail, they're going through our portfolio and they're saying, oh, yeah, I know that particular lender. We've actually done some investing with them.

And so they just don't have the bandwidth to do that times 15, times 20, times 30. So we have plenty of advisors who listen to the show. What do they need to do to learn more? if they wanted to check out your fund. Alternativefundadvisors.com. Perfect. Great. Marco.

Thanks for your time. Thank you. Okay, thanks again to Marco. Remember, alternative fundadvisors.com. If you were an advisor, want to learn more, email us. You do it. Animal Spirits at the compound news.com. Boom.