Ali Hamed An Update on Private Credit - [Invest Like the Best, EP.172]


This episode is brought to you by coffin. I've become very interested in the best software tools in investing and when I asked twitter for the best Bloomberg Alternative. The overwhelming winner was an excellent new product called Coif and it's a web based platform that you analyze stocks. Etf's mutual funds and other asset classes in one place. I've been using everyday to track. What's going on in the market and I think if you try it you will to. Cohen has a ton of high quality data powerful functionality and clean interface. The best part is that it's free you can sign up at. Www DOT CO DOT com. That's K. O. Y. F. I. N. DOT COM Hello and welcome everyone. I'm Patrick Shaughnessy. And this is invest like the best. This show is an open ended exploration of markets ideas methods stories and strategies. That will help you better invest. Both your time and your money. You can learn more staff to date that. Investor FIELD GUIDE DOT COM. Patrick o'shaughnessy is the CEO of Shaughnessy Asset Management. All opinions expressed by Patrick and podcast. Guests are solely their own opinions and do not reflect the opinion of o'shaughnessy asset management. This podcast is for informational purposes. Only and should not be relied upon as basis for investment decisions clients of Shaughnessy Asset Management May maintain positions in the securities discussed in this podcast. I guess guest is popular past guest. Ali Hamad who joins US FOR AN UPDATE ON PRIVATE CREDIT? We discussed what has happened. So far what parts of the market frozen and where opportunities may lie we also talk about how the world has shifted digitally since the beginning of the Kobe pandemic. Please enjoy my conversation with my friend. Ali Muhammad Ali. I've been doing a lot of these updates on specific areas of the market in the Kobe. Era Haven't done private credit yet. I've been really excited to talk to you about not just private credit but sort of all UC in ecosystem that you operate in. Maybe you could begin by giving me a sort of state of the Union. What are you focused on right now? What's been surprising? Or unsurprising about the world of private credit and how it's reacted to Cova thus far sure so I think first reaction is everyone sort of froze for at least the first thirty days. I mean the problem is no one under OCHO pandemic and no model matters anymore assigned. Yeah we're having a conversation or investment committee meeting this morning we were having genuine conversation of what over fifty percent of your heart city rent and then I look out my window and I'm looking all these buildings like all it's truly insane and so I think that the number one difficulty in transactions closing our that there's such a variance of apple. Come that people don't really know what safety is anymore. And so I think the first thing that started to happen is anything that was a short duration assets started happy at worked out quickly. A lot of people say well. The short duration my asset less correlated the market. I am because if I buy something. That's long duration. Like I don't know it's been happening. Your three. By by sending at sixty days and duration like a bowl or surgery merchant cash advances can probably figure out what's going to happen sixty days from now in this case. The world changed so dramatically. So fast that if you have an asset that's due in sixty days you're dealing with it now because maturity coming up and if you had a five year loan out to somebody you know you can. Defer payment for a few months ensure three sixty payments may not come in over the life of asset. You'RE GONNA be okay if sixty or thirteen day. Seventy Day asset. You're probably not taking phone for anything else. And also a lot of people. Their funds weren't set up to do trades as quickly as they occurred. I think a lot of stuff that happened. In March you really had to have a certain fund structure or a certain level of discretion to go make certain trades because it trades went away quickly so there a combination of people freezing if they didn't have to do anything the short duration or assets the faster. You're trying to move and the other two things that we started to see. I was basically people spelling. Uncertainty wasn't really distressed in distress. You kind of have a saying and the thing didn't go as also supposed to Gal and so you can buy cheap in a high yield exchange all the work you're GONNA do try to set but in this case basically people are just giving us a bag of stuff and they were like. Hey here's a bag and I don't really know what's in the bag. The bag seemed okay. I don't know how to bag is GonNa do and a pandemic you want the bag also. It's really cheap and find certainty. Didn't feel very good. I think a lot of people said let's just wait. Let's in our hands look folks on a portfolio and let's de risks and not. Let's go find a million things to do. I think that's GONNA come. Miss could end up being selfish. Look on my God could end up being like a pinnacle moment. I career of the type of stuff that we're about to get to do but there was a total shutdown anything that didn't need to be focused on immediately. Can you give me an example of what a bag of uncertainty looks like? So let's imagine you were looking at a fund that was making small business loans. That is a big bag of uncertainty. What will you do? I don't know seems like restaurants is not going to help restaurants a lot because restaurants don't need any anyway of shutdown maybe they do have more resiliency and then what is it a fault. Rake GonNA BE IS GOING TO BE. Ten is going to be thirty. Percent is going to be a hundred percent. Were looking at stuff. Dah is not really left. Bird even senior teases Not Above fifty percent chance. That are training discounts. This kind of crazy and also things haven't behaved like you might expect them to you. So the subprime I got on the call with a guy who was originally in super super deep subprime. Consumer loans and his company is doing well. But they're not profitable and is investors are trying to figure out. Should he keep origene this environment am I? I think that I got on the phone. I said I bet you. Your book hasn't seen any issues yet is like shocked. They had already seen that because it was just weird subprime consumer really hasn't seen a huge tick up into salt yet because a maybe just got laid off or be. Maybe they're not going out of house. They're not spending a lot of money or see. Maybe they're not paying their rent but they're paying their other loans because they're watching the news and seen had on rent right now just so many like saint near prime is probably going to have more variance subprime super primes knows. I mean I think a lot of people are going to their loan. Tapes and looking occupation of their borrowers super important to know what percentage we're GONNA ask Allie right now all kinds of stuff. Let's talk about what the important levers are for you in private credit so private credit sort of more of a niche asset class. Everyone's quite familiar with what's happened in the public. Credit markets with fed intervention investment grade and in high yield may be more awareness of. What's happened there but talk about sort of the important things that you're watching in the private credit markets generally speaking and where and how sort of what you guys deviate from. Say like the Beta of private credit if such a thing where to exist so I think one unique thing about private credit or especially lending in general is the diversity of the assets and without means as each asset is serviced or originated by a company with a bit more unique domain expertise normal. So let's imagine you're looking at a traditional asset in public markets and some servicer of home. Lots I think a lot of people are like looking at the servicers and wondering what you're GonNa go bank really trade in that space. I don't WanNa over imply that I'm an expert. I know in my world the I think people are looking at is the originators services. They work with that. Make sure that the assets to be like their secured by are getting paid back and when you're in a world that's as mainstream is ready or commercial real estate. There's a lot of services a lot of originators and so one originator goes bankrupt because we're now in a tough economic time and they're the bottom stack or they can't operate okay. Go find another backup service or and they can go servicer and you're paying your home loan. You don't really care who you're paying back in specialty lending a lot more domain expertise in each of these each of the lenders one of the things that you I've even talked about is when we look at sedan seen assets. One of the things that's most important to us is that the assets aren't hard actually service. We're looking for things for this. Automatic repayment with a repayment comes from someone other than the borrower. And because at times like this. If you're lending money through an originator and part of the originators core competency is their ability to go get the loans. They come back all of a sudden. You've actually taken implied corporate credit. And you have all these sort of technical startups and large originators. That aren't operating profit. Still rely on venture capital funded. And if you're lender lending through one of those. I think the first thing you're doing is working with your original or see if they're going to stay in business or figuring out ways that you can help them standpoint S. so as an example some of the things that these people are probably doing early on is line waving the repayment penalties. Because they want just the money to come back another thing they might be doing is lowering their advanced rate. Hey if you can raise. More equity is taking swings. I think they're saying you can raise more equity even a really cheap price. I'll lower my advance rate in exchange for a lower rate of return. So I think people are basically doing a lot of blocking and tackling with the partners they work with on a day-to-day basis services assets as sort of a first order. Because those are things that are breaking I. What are the scary scenarios for you in the private credit world is it basically? Just a wave of defaults. You've already mentioned this types of assets and we've talked about before the types of assets you're learning against are quite diverse produce pay for example people are still eating fruits and produce so. Maybe that one's doing well but is there systemic big systemic risk in the private credit world as much as there might be in the public credit world. We don't know yet. One of the arguments against it again and my point are the acids and private credit are a little bit more diverse. How many other people are finding it? Same Produce Right now not a lot. Then I think a lot of it's just really unpredictable and some people are GonNa get left holding a bag that navy desert you like. There's things that we did. That were totally skillful and are genuine and as other things that we're lucky so in terms of skill yeah like we underwrote to the fact that people are going to eat kershaw produce and we all still under road to the fact that stays incredible operator so even when I wake up and I look at the Wall Street Journal and it says Oh Man. Ferrostaal produces being thrown out and dumps. It turns out that I is really good at helping. Farmers redirect privilege to non-hostile auspey Talbot type buyers and into retail grocery. Get to sleep at night and a lot of our operators have been able to adjust quickly it turns out a lot of what we stance is tech enabled assets and. I could have never dreamed that the reason we're going to go to a recession is because people were going to be at home. Using their technology assets deals in many ways there's people who again were financing really high quality real estate assets hospitality assets. That is not that they were smarter. Dahmer taking more leverage than seemed appropriate. I certainly didn't have sales and revenue of hospitality. Going down ninety percent any model. I ever bill so I think you are gonNA see surprising. People get blown up because it was just such a odd event. I don't think it's going to be systemic. Do you think there's going to be enough people ready? And now that I have gained a bunch of my friends. You have lending signs asking if they need capital. I know that a bunch of my friends who running pigmy asking viney topical. So there's definitely people see on the sidelines and I also think that things that are going to get purchased I are going to be. Things are perceived as less risky and again think people are generally wrist off right now so the thing that I'm most afraid of is going out and bidding on something. That looks really safe. Because I think that he's GonNa be so much capital sledding to those things in the short term just like you saw that in public markets kind of people try to slice as the flight of things that they thought. Were hide faulty. They weren't really like taking a swing at riskier assets. I think you're GonNa see the same thing happened in private i. It's just that everything happened. Product happens in slow motion because they're private transactions and the other reasons slow motion occurring is default. Just take time lots of times. Default triggers are not. Hey if you have one monthly cohort that trips Performance Covenant? Fault on you instead of things. Like if you have two or three cohorts in a row or if you have a Corley cohort or if you break. A borrowing base in barring basis can be fixed because a servicer or originator puts cash back into the. Stv that you're running against so a lot of the things that required all just take sixty to ninety days and we're still within that five sixty day window and and all happens and you gotta find about it. Your lawyer sounds like an angry email and their Laura Ingraham aback student and I think wrong. It just couldn't take time and finally one more for a nice thing about private. Credit is short of thought clarity. Because we're not dealing with March markets dealing quitter be needs. We're not dealing with senior lenders. One of the things that I've always said about being a senior lender your junior under your juicy nerve returns ensure give losses the Kerr the loss of the courage you and outsize way but the more scary thing about being junior lender. Is You have a senior. Who's really your boss. And they make decisions because of other things happening their portfolio. Do you have a senior lender in your senior lenders? Some bank that has a bunch of other issues going on. You might be screwed. Not because of anything you did. But because they're just trying to solve an issue and you to pay them back and so you can't work something out with your borrower and whether it makes sense for everybody so there's all these exchanges happening and they're just take the time to talk just to put some points of calibration out there for people you sent me to really interesting data points. One from the MANHEIM auctions index and one from ally financial. Maybe just share those kind of not the specific data points of you. Don't have them top of mind but sort of the general trends that those data points point to where we sit there. You have to ask yourself. How bad is this going to be free? Even goalposts of what? You're going to be willing to do the things I sent overt Mannheim's posting I think it's eleven point eight percent down in terms of car prices and that's despite the fact that people aren't really trying to sell US cars to put that into perspective in the last National Crisis Car prices down auction about five and a half percent at most this is quote unquote twice as bad Alex. Nanteuil seventy five percent of their four times. Nancy Antar into ferment. Twenty something percent of the consumer loans Sherman and all. That means you just don't know what's going on in there and kind of back. The planet mentioned you're buying uncertainty. It doesn't mean at twenty percent in April have defaulted on ally loans. It just means that you have no idea what's going on and if you go to our website kind of easy it says hey you have an issue. Would you WANNA be on to ferment? Not Making hard. But it's definitely a blocks and then the other thing that we don't probably the easiest indicator of looking at what's going to happen. Humor credit is just unemployment. The numbers everyone listening to this already knows that the numbers are six million. People unemployed were at levels that? I've never seen before and I don't think most people have seen into question is not really. How do they get more like? How long do they stay that high and again that's all in this spirit of it's going to take a long time for transactions to start happening again. It's just going to take time for people to actually go back into their models and drop base-case and drop the bear case. I think one of the things that people always used to in lending say okay. We'll underwrite to a two times loss ratio and what that means is things have to get twice as bad as your base case. Rita lose income and often. What's called four times as bad before people lose principle or whatever the numbers are in this case you might genuinely have to under this like ten times loss coverage and no borrower capital who need to is GonNa take capital at the advance rates and the conservative levels at a lender would have to lend out right now. The eight hundred pound gorilla in all this is the government and they're fairly swift fiscal monetary response to a lot of what's going on and I would say very high apparent appetite for more of that sort of support. Do you think that investors are properly discounting that government participation in prices? Another way of asking the question is you said there's just so much uncertainty and especially in consumer you know unemployment's a key number but if a lot of people are unemployed with fantastic unemployment benefits. Does that change the picture? Does that mean maybe the stuff that's trading at crazy low discounts to are crazy high yields might actually be attractive. Because there's this kind of backstop that we've never really seen before. I haven't seen that yet because I don't think anyone is ready to underwrite to it until they actually see the results. I think what you're seen instead is also instead of people looking to the way they're solving uncertainty is not by price in their loans higher yields and instead the way they're solving for Asia's adjusting to advance rates. Joe If you're going to advance lend money to somebody yet just ten percent at night and you percent advanced rate instead doing at fifteen percent but is sixty percent advance rate. You're not saying I'm going to give you the government's going to continue support these people and so I wanNA keep it at ninety percent but just lent you now at twenty two percent because the world's changed I think either people are not doing anything and are GONNA wait for the results come in or they're just adjusting their advance rates to levels where you get wildly wrong. It's hard to lose money. Can you define advance rate for those? That don't know what that meant to. Let's imagine you have one hundred dollars of less. Imagine Patrick you're going to go out and make one hundred dollars loans and you're asking me to give you debt. Capital Finance does loans. If I give you eighty dollars against one hundred dollars alone. That's an eight dance right. Which means you're fronting the first twenty percent losses and so it's basically just our way of talking. How much leverage service I would say the innovation. The quicker things that are happening to the market are lesson my world but more at the originators that we back world. So I'll give you an example of the company called stem that we work with and stemmed finances streaming revenues for musicians. A lot of them have their tourist cancelled and so a stem is getting the opportunity to work with artists that they may not have already worked with Anson Anson and so they're reducing risk by working with really high quality partners and this could be like a huge moment for them there's other businesses there's ecosystems that are doing incredibly well the Amazon ecosystem the youtube ecosystem the SNAPCHAT ECOSYSTEM. These are businesses that usage is up and add revenue really isn't as are down as you'd think partly because for social and for these digital assets ads are being told from TV and instead of going on to Google for example because Gupta cheaper way to do it easier to measure higher are Hawaii. And you're actually starting to see these businesses finance media assets at better than ever prices because traditional media companies need cash and are willing to sell those media assets. And so you're getting again to with large media companies. That would have never taken a phone call for expensive capital before where the asset itself isn't performing badly because people are still at home watching and advertisers still need to reach people and they can't reach sports fan for example to espn right now than you either medium to do it in for media company. It's bankers aren't going to give it any credit for snapchat account for Free Youtube account for an instagram account. There's no way they're looking at the balance sheet and saying. Wow that Youtube Library has value. And so these businesses there's like a mismatch and understanding and does really are originators or seeing the biggest immediate impact and the other questions to ask themselves. Do they pull back origination? One of the things. That's going to happen and already to happen is origination. Demand has gone up because thanks are going to be less. Traditional lenders are GonNa be Lending Lass and so these newcomers who do new types of financing where the world's at that's complicated. I don't want to really figure it out. Now's the time you are trying to figure out how to get a new type of financing and so we're seeing their demand go way up and the question is do they pull back completely. Because who knows what. The world's going is the losses they would incur by toy back completely and making origination fees greater than the losses they would incur. They saw harder faults as a model. You have to run. What do I think the worst case scenario is what losses what I incur in that default rate scenario? And how does that compare to the loss of revenue I would incur if I do nothing? Some of them are hey. Is this a tiny? We take market share one of the things that I think all under should be doing. If you'RE GONNA stand in the market you call every bar or that you've ever talked to. Who said no to your loan because of price and ask if they want alone right now if you still believe their high quality credit. So there's a lot of blocking and tackling decision. They're making at their level. That are goes bids are transacting. Faster contracted my world. We do some that up as saying a focus on quality your credit worthiness not on rate of return is really the smart play here. Meaning same rate of return but up your quality versus your rates of return higher. That's absolutely one piece of it is probably the biggest piece of it. Which is our number one. Advice is don't pull back completely being more conservative if you have twice the level of demand maybe don't make twice the amount of loans and instead keep making the same amount of loans but just increase your pricing. Because if you charge higher prices you can incur greater losses because the fees that you're charging the rate your charging will cover some losses and lend the people or finance people are higher quality credits. Then used to be able to get because your command entire so. Yeah so we're basically just saying there will be a time to go toggle on risk again but for now if you can make the stem out loans you were making before but it lasts rest. Go for the other thing is. We're looking for diversification in really tough times to lend. Maybe it's just me. I cared less about diversification and I cared more about five higher quality credits and so in our credit books for some of our portfolio companies. Do they have the option to breach a concentration limit but we felt like the answer was financing a higher quality credit. We would say yeah. You should go do that. Because we didn't really want Beta exposure credit markets at the time because everything was overvalued. Now you aren't willing to take that same concentration risk because again sacking or things are breaking in ways that we could never imagined and so there's all kinds sort of de risking things that you can do in the short term. The other thing though is we're trying to discourage companies from chasing assets that are going to see low defaults next three to six months. There is going to be certain things that appear that seem like wow. They made it through the pandemic their default rates in pick up. And I bet you've asked the person at all private credit investors going to be chasing. And then you're GONNA have a bubble there of received higher quality assets whereas the stuff that used to be uncertain and did get hit even if it ends up being a better place in a long term is GonNa get completely ignored for awhile so step one is sort of defense and quality and everything you just described her re underwriting things. Maybe don't stop it. Don't double focus on bringing your average quality alone up once that phases done. What areas are pockets? Do you think will then represent the biggest upside opportunity and the answer may just be. We don't know yet. But what are the areas that you're at least thinking about or considering that as uncertainty declines might represent places to look that? Aki doesn't seem to hard for US. To figure out a couple of initial action so last year and the year before we used to underwrite acid that we thought were really great. And at the last minute some. Jv investor. Who doesn't do a lot of private credit would come in and just take the deal from us at three hundred basis points before they ever shut up. The first thing we're going is going back to all those lenders who probably how unstable capital basis because the lenders were borrowing from weren't a stables. They thought they were and I think a lot of it's going back to. What does the stuff that we always liked and just increase in the price that we're willing to offer them and go pick up coupons that we've always wished we had and that'll be a really good opportunity but more importantly there is a new economy? That was already getting created in this space. Just hit the gas on it so for example ECOMMERCE with obviously taking market share from physical retail. This forever made BECO- faster and a lot of people who aren't shopping on Amazon and shop. Five which is crazy. This is many people still weren't now. That's how the and everything and the Amazon economy is going to do. Incredibly incredibly well. The third party so Amazon are going to do well and on. Top of that. E commerce generally has so much more variable costs than physical retail. One of the interesting things people used to look at these technical mascots and say wow. They're newer so they must be riskier. I think now they're going to say wait. These technical of assets have more variable costs to they're more dynamic in changing market environments. They're actually less risky than physical retail. Which is sort of an interesting dynamic. It used to be the beginning ECOMMERCE company. You're borrowing at a higher rate of return in a physical retail store. That will never happen again. This spotify ecosystem is going to be really interesting. People are still at home watching spotify e Stop Chat Cock. Instagram ecosystems are going to be interesting. If you're an sports advertiser for example and I kind of alluded to this earlier and you need to reach sports fan. If you're Nike you still got to sell shoes. But no one's washing ESPN or CBS. Or Fox. Sports right and so. How do you go reach those sports audiences? You've always been getting hit by INSTAGRAM snapchat. And by the council on the top ones you may have been motivated. You might have allocated an experimental amount of your budget to those new platforms and those handles. Now that's how you reach. People and those businesses are going you forever be viewed as Google is a cheaper higher. Roi Way to reach audiences. And I don't think that's ever going to change the youtube economy. An economy was already quite large events to become a permanent part of the American workforce gig workers. It used to you. They'd your gig worker. You had less stable employment you now have quote unquote more flexible employment. You might not be unemployed and if there's less work on Uber You may have start working Princeton car and so I think that bats Luethi occupation can be might actually make you a better credit restaurant or worse credit risks and to. There's a lot of economies that we already marching towards that suddenly became what the economy now is and a lot of things that used to be perceived as oh that's tech enable. That's new new means risky. That might require a higher cost of capital are now wait. That's tech enable even during ten damage which is going to be everyone's future investor conversation forever now. Even during their sustainable. Even when things are unpredictable they can talk all up and down the costs. They're less risky. And I think that was an interesting shift. I don't hear more you and we've talked so much about the youtube economy such a fascinating ecosystem maybe starting there with Youtube but also just the other online ecosystems that you think are most interesting and maybe surprisingly interesting as a result of this everyone home online all day. Start with Youtube. What have you seen so far whether the usage or advertising or other things going on inside that ecosystem that is compelling or interesting yes to this extent so basically when you see an ad play on a youtube video. Fifty percent of revenue actually goes to the person who made the video not to youtube itself so they split the revenues it and certain categories. You wouldn't really want to buy the assets cheap sort of an odd place viral videos. You have no idea how much money does longer make videos inappropriate content advertisers. Try to avoid and Youtube is having its own identity crisis of like what is it really trying to be how much government and says I to have etcetera but is the second biggest in the world. Not Really Niche five feature of capable or if. It's not the teacher of cables. Buy Car with Detroit. Cable is and it's how people are doing their homework. It's how people are learning how to do things right now. And a lot of categories. You can actually price the assets and how much revenue library that is due and Youtube. It basically. If you're looking at this is just YouTube. If you're looking at any facebook instagram snapchat looking at any of these digital content assets. The handful of toggles the first is views so right now views across most of them are up as low as twenty percents high one percent up because people are home watching. Cpm's which is the cost. Advertisers are willing to pay for view. Might be down fifty percent but that means advertising slot the views are up twice and CPM's down half and you end up kind of Landis Damn place you were before and then on top of that in this story which is one of the things that sort of interesting in do at home queuing. I were watching Hulu last night. And when you look at the commercials who usually pay a subscription you have and so maybe I'm showing cheap I am. It has ninety seconds around the commercials. They weren't able to fill those ads spots. Wow that is like sort of an interesting thing. The other thing that was interesting about these digital assets is a lot of them work on exchanges and to the way the Google ad exchange works your target. Not that I know. Have any relationship with target name but which is why using them as my example target may decide that they want to spend three million dollars a month on Youtube advertising as they do is they go to the Google Exchange. They type in right. Now we're willing to spend three million dollars a month on women between the age of twenty eight and thirty six who live in and XYZ states and we're not willing to pay any more than X. amount for thousand impressions is a real exchange. So every time somebody visits so google page their information center the exchange and then if a target was blowing by bid on them and add pops up the interesting thing about these exchanges. Is there some of the stock market? You actually get real time sentiment on how these retailers and how these advertisers are willing to spend as we've seen CPM's decrease in back up sort of even in the last week. The first couple of weeks of April sort of GNARLY. Last week I actually sort of bottomed out and we're actually starting to see an increase in revenues over the last week or so and so there's actually been a great stabilization of these tech naval assets. That don't rely on US reopen the economy and don't rely on people walk into the store and people who knew about them but maybe had never taken a class on youtube or had never released followed your favorite sports team on an instagram account. For the first I'm redoing that and they're not gonNA stop. What about parts of the of the sort of digital world that aren't advertising based so you mentioned maybe e commerce something that you see interesting trends in put some more meat around the Non Media Properties advertising driven part of? What's interesting digitally I? I'm being careful to only say things allowed to assay but there's ecosystems in ecommerce tremendously well so one of the things that people don't appreciate sort of diversity of how each industry is doing so for example the luxury is going to struggle luxury brands. Even if they're on ecommerce they can't lower the prices even if they wanted to devalue the brand quality sued is doing very well but it depends on the category ensued. If it's perishable is actually a new more sustainable well one of the reasons curse pages doing so well is because you can't horde grapes but you can hoard corn so it's all these little nuances that matter one of the things that we've sort of come to admire is at third party ecosystem. Arthur PRICE SALARY. Augusta's on Amazon. So people don't really appreciate it. But two-thirds e commerce revenue on Amazon is done by small businesses that sell through Amazon. Kick the number something like one hundred fifty billion dollars of revenue per year. Right now is being done by those people. And it's an economy that people really sort of ignore and these are small businesses. This is a huge part of the economy and these are small businesses that are taking market share from physical retail. And there's going to be brand affinity and we're GONNA get used to those products and they're probably gonNA become loyal shoppers of those products. The Shah Faezeh systems been tremendously. Well these are people who are still selling products online. When they used to advertise on facebook they used to compete against every other brand. But since one dollars have pulled back. It's actually a higher R. Y. For them than it's ever been to be advertising and they're going to be able to take market share from physical retail brands that shouldn't and can't be advertising right now and again people have brand affinity and these are probably going to be a relationship that just don't come back immediately so there are a lot of these permanent shots happening and again it goes back to. It's almost wild thing that you've commerce has ever thought of his more risky than traditional small business when it turned out in this environment doing at least for now tremendously better than anyone I've ever imagined. What have you seen so far? In the early stage venture capital world specifically around the types of deals that have continued to get done and at what prices venture capital has actually reacted way faster than private credit which seems counter intuitive. You might think oh in private. Credit THINGS ARE BREAKING RATES. Must be hi. How the HECK ARE MERGING CASH DANCE? Doing payday loans doing again that we do sort of punitive. Mca or payday. But how are all these sort of? High Risk Assets. They must be breaking like crazy ever. All the dynamics I mentioned earlier in call. It really is sort of moving in slow motion right now. Venture capital on the other hand is moving really fast and the reason is venture capital companies by default are always running out of money and when they raise capital. It's not because they're choosing market timing because raise money. Eighteen months ago. They have six to twelve months of runway last. And there's no board member on the planet. Right now telling an entrepreneur. Oh yeah things are definitely going to be better in a few months if you can raise your going out and raising now if you don't have to do you're going to lower your burn. We have seen across all eventually across. All startups are having a lot in the lay offs and a lot of people are trying to hunker down and see if they can push their fundraise off to the fall or winter or next year. But there's a good amount of companies that it's not that they're bad just they had a raise and so the valuations were seeing right now are probably about fifty to seventy percent down of companies that are raging last month this month. That will start to come back probably in the next sixty days but they're gonNA stay down for a while in so much of the thing is. There's a handful of dynamics have venture capital funds. The first is initially all. These capitalists went on twitter until they were open for business. Screw the tourists. We don't really care about markets the thing that's important to us how you're GONNA do in the next five to ten years of it's a good. It's good again. We're still open and I remember talking to a bunch of my friends myspace. Not The guys. The problem was not. The market's down the problem. Is that a lot of people got sick. Some people died. We all had to go home. We stopped doing anything. That's going to affect everybody and then there is a huge influx of bread drowns and to VC's had a hard time doing new deals because they had a handful of the companies their portfolio if they are hospitality company Alive Events Company. Their shells went down by got either ninety to one hundred percent and so you might have had a company that previously had twelve months of runway. There never just became their gross. Burn or maybe away rounded Grossberg just became their net for have two months of runway. And so all the attention went to solving those problems and the attention went to. How do I help? My portfolio companies mitigate burn tremendously. So we can push out for a while and is neces- I the second order is. Then everyone went through their fund and said how much drive how to do. I have left and how much I dry powder white need to us to lead inside. Arounds into my existing portfolio companies and venture capital usually a series do series ideals series. Be Looser fee deals across from with growth deals and there's some sort of allegation of some third party firm investing one of your portfolio companies to create a new outside valuation. Many firms. Don't care about that. Many firms do but no matter what funds were looking themselves realizing that they were GonNa have to allocate much smarter than they thought they were going to need to to lead insider deals which means there's going to be less opportunity to do deals and so just less names are going to get printed and so again in the short term valuations. I we're seeing two times three times. Revenues TASSELS. We have an egg a company's growing really fast a never seen that before for perspective. What would that multiple in December infinity if you are a series a? Company growing one hundred percent year over year as a SAST business twenty times revenue was not crazy dirty time even dependent on the operator depending on the fine depended on the growth growth was being valued at such insane premium. One of those things. I was talking to people. As if you're growing one hundred percent year over year you could do any size around from any firm. If you're growing eighty to one hundred percent near rear you can figure out how to get around Dumbo. Be Hard anything below eighty percent just really hard and now the question people are asking is. Can you get the profitability with this round up? You need to and if not. Can you get your profitability with one more round? So again I would say venture capital for the last sixty to ninety days was actually probably the best environment I had never seen in terms of the attractiveness of the deals being done for perspective. Irr's or something. Yeah in the conversation. I mean the conversation having with people so I think we did about sore deals which is a lot faster trusting that period and this is what I'm seeing in the market and I would kind of list data points of I wouldn't mean the company brought them sort of characteristic of accompanying evaluation. Say This is what I've seen. This is what I'm willing to do. And there definitely was some feedback from entrepreneurs and operators. That was hey like. There's no way we're going to close roundabout valuation and I look. I hope you don't and there's a good chance you're not going to but opportunity costs right now is so high and you can only underwrite so many deals at once that this is the bar I would need to dig in and potentially due diligence and close a transaction. One of the mistakes a lot of operators made is pre cogan signaling was a single is always important. But signalling was maybe two important. Where if you are often down round two ambassadors and then something was wrong and so a lot of operators did during cove is said GonNa Reopen are round and the reality. That just wasn't enough to get around cleared and so then it became his awkward dynamic where they reopened the last round to quote on investor-friendly and then that didn't work and so then they had to go back to people and say wow we couldn't even closer last round now doubt the operators who actually had the best time. We're the ones who said we're not GONNA put a price on it. We have no idea where the world is. You have no idea what the market is. They are completely humble about it by all. The investors had no idea what valuations. They should be giving either. I remember. There was one deal that we were looking at where. Vc The operator but really experienced and neither wanted to throw a price. I because no one knew what to do and no one wanted to insult the other parties and but they were humbled out Basilica. Everybody gather bids. And then we're going to see where the market is and we're going to raise it. Whatever the markets but the whole reopen the round or posturing or acting like. Hey this isn't going to affect me. I think that really damaged people outside of the see. What else do you think has been the wildest? You mentioned junior debt earlier as an area. That's really interesting. I'd love to hear about the price. Disparities say within a single company between junior and senior debt. And whether or not you think that's going to become a fertile area of opportunity on the long side Yep probably in the next three months or so. Senior debt is a good position. Bnb during control. And you're not really for seller because as long as you're has liquidity when I think a lot of people so far it seems like most people are doing a good job making sure they quantity which has surprised in a positive way about. You don't really need to react to anyone else. Instead you're reacting to the date of your portfolio of course you want someone to make interest payments I mean by the data. The portfolios are actually looking at the data tape and look at every single payment. That's making sure things are going okay. And if they're not going okay. That's all the negotiations and everything. I told you about starting to come into play which is now going to spend the next sixty to ninety days trying to figure out a workout plan with the originator with the asset book. To make sure that you don't get yourself into a knee jerk reaction where you try something you try to transfer the service you know the assets to quickly anything like that basically solution-oriented but if you're the junior guy you're not in control you have a senior linebacker. The senior lenders shots because if there is a default alone book they can call it a fall. You're the junior and you just have to basically act appropriately whoever's on top of you and so those are the places where we've now seen a couple of people trying to gather positions and we're starting to see those ten twenty percent discounts. It's huge and the gang are still buying uncertainty and not only. Are you buying uncertainty on loan book? You're also by uncertainty on. How the senior Lenders Act and unless you nervous senior lender really well and you know they're positioning. What else is going on with their lives. It's hard to kind of by their behavioral uncertainty. What are the big trends? Are you thinking about but that's personally investing wise areas that you're not involved in that you'd like to be which we joked before about how we both have felt this not regret but this funny feeling like Jeez. I wish I had done a little bit in real estate. And now maybe thankful that we haven't what are some big seismic changes in your thinking personally or professionally? Two months into this the biggest wine that I think that we're going to spend the next five to ten years. On is the new idea of what a small businesses and small businesses not a dry cleaner or drugstore and a our portfolio company. Clear Bank. Incredible jobs run are staying. What this small business economy looks like. Really it's online. I have no idea what's going to go in the bottom of buildings but unless the government does something that makes it feel a lot better to own commercial real estate or lease commercial real estate or physical retailer or so minimum amount of cash. It's a mystery to me so but we do feel convinced by is just Amazon. Price ecosystem is not going away. The youtube ecosystem is not going away. This spotify ecosystem is not going away so we do plan on financing. Small businesses are idea but the small businesses is is completely different. And I don't think we're going to have to get too much more creative than that until I'm in a different stage in my life. We there's so much to chop in the market was the market just grew by like one hundred percent and we were almost one of the only lenders that space to begin with and now we actually have our own proprietary data that we've been working off of for a few years and all of a sudden that's like the whole economy and it turns out that was less frisky and whatever else was doing so. I don't really need to do a lot more. Does that then mean? Basically those listening to interesting strategies would be figure out how to build business online or enable others that do that or is that second category already totally captured by Shop Affi- and Amazon is shopping APP. Store voice thought would continue to be like an interesting place for investment opportunities so I do think servicing. Those companies will be interesting. I don't know whether it's staffing whether it's warehouse management whether it's there's GonNa be stocks. I don't think we're going to figure that out for a few years because I don't think that we're really lean. We used to be known for being creative investors. The whole world just came to us. I don't have to be creative out for a long time. I can just doing as do in the market just exploded in so you. I'm sure there's GonNa be people who are trying to invest in that and the ticks shovels and Begosh for just going through this seismic shift of offline to online that we are already going through but now clearly that's where the entire world's going to be and so yes. There's always stuff that gets built around that but I would stay. Were leaning away from creativity for at least actually years old fascinating change from. I think literally our first podcast conversation was called creative investing. And it's funny to see the world have probably come to that the categories. You're interested in much faster. Maybe even you anticipated it used to be a novel idea that Youtube was gonNA take take market share from traditional cable. It used to be a novel idea that an instagram account could be a commercial activity and it used to be a novel thought that shop high was going to end up creating an entire economy atop to that and I think that became less and less controversial and now it's just the norm while he as always I really appreciate your time till unique categories though he covered again today and we'll have to keep checking in as things progress and good luck to you. Thank you so much for having Patrick. Hey Everyone Patrick your again to find more episodes of invest like the best go to investor field guides dot com forward slash podcast. If you're a book lover you can also sign up for my book. Club INVESTOR FIELD GUIDE DOT COM forward slash book club after you sign up to receive a full investor curriculum. Right away and then three to suggestions of new books every month you can also follow me on twitter at Patrick. Underscore Osieck S. H. E. G. If you enjoy the show please leave a quick review for us on I tunes which will help. More people discover invest like the best. Thanks so much for listening

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