Credit Exchange with Lisa Lee

“Whenever you have noise, that leads to more selling volume in our market – so volatility for us as secondary investors is a very good thing,” says Michael Schad, head of credit at Coller Capital, a secondaries specialist with $55 billion in AUM, on the latest episode of Credit Exchange with Lisa Lee.

Schad is positive about the overall health of private credit, describing it as a “very attractive and sound” asset class, with its rapid growth coming alongside a more recent maturing of the market.

He notes, though, that a decade is “not a very long time”, as some of the funds can run for that period of time. “Because the asset class was so new, people couldn’t really calibrate what would happen in a more volatile market environment, which we just happened to hit over the last couple of years.”

Schad explains that Coller generally engages in two types of transactions – buying fund positions where the seller is a limited partner (LP secondaries), and transactions where it is a general partner making the sales decision (GP secondaries). The latter have become increasingly popular more recently.

The firm is also a leader in the continuation fund market. Schad notes that the major evolution that has taken place over the last couple of years is that technology developed in the equity secondaries market for continuation funds, has been adopted “on steroids” in the credit secondaries market.

“[The reason] that was so successful... is that the way a continuation fund works in credit is very different to private equity,” he says.

“What you have now in private equity, it is maybe a single asset that gets into a continuation fund. In credit, what you have is actually still very diversified portfolios. So you still have high quality loans in a very, very diversified fashion that a GP brings to a continuation fund.”

“It’s just like nothing we’ve ever seen before,” says Bryan Whalen, CIO of fixed income at $200 billion global asset manager TCW, in reference to AI’s capital spend, equity prices and momentum on the latest edition of Credit Exchange with Lisa Lee. “What we’re looking at here is just everybody on one side of the boat, too much enthusiasm,” he says.

“It just feels like it’s the beginning of the end of the euphoria.”

The AI spending spree has broken the natural feedback loop to slow down borrowing. While the bond market is raising the cost of borrowing, these companies turn around and say, ‘we don’t care,’ Whalen contends.

If the market starts to question the fundamental elements of the AI capital spend, that could lead not just to volatility in the sector, but for the rest of the market. And that would likely lead to an economic recession, reckons Whalen, who oversees $170 billion in AUM.

“One of the predictions I would make is that the private equity industry is in a tectonic, Darwinian moment itself,” says David Golub, co-CEO of Golub Capital, a direct lending specialist with more than $90 billion in AUM.

Speaking on the latest episode of Credit Exchange with Lisa Lee, Golub also sees a ‘Darwinian moment’ for private credit due to higher-than-usual credit stress and lower-than-expected returns.

“The winners thrive, they adapt, and they grow, and the losers, they don’t,” says Golub.

This will all lead to more consolidation in the industry, and a core group of private equity and private credit firms of size unseen before.

David, who along with his brother Lawrence Golub has been in the private credit space virtually since its inception, also speaks about the history of the industry, the recent bout of negative headlines, and trading the illiquid asset.

Lotfi Karoui, multi-asset credit strategist at fixed-income behemoth PIMCO, says the top risk to markets and the economy is the potential unwinding of the AI capex cycle, on the latest episode of Credit Exchange with Lisa Lee.

“Then you’re going to tighten financial conditions,” says Karoui, which is bad news for equities. That will have wealth effects and probably affect the broader economy. The market isn’t blindly rewarding all capex financing announcements, he says. Right now, markets are seeing some indigestion regarding data centre financing – Karoui recommends looking at dollar versus other currency debt to see whether that’s fundamental or technical.

Karoui, who is also co-head of client solutions and analytics at PIMCO, is watching six-month oil futures and diesel prices to gauge whether the resumption of the Iran war is choking up economic activity. We discuss his inflation expectations (moderating), the direction of Federal Reserve monetary policy (on hold), and private credit (seeing some stress). He also finds pockets of fixed income in emerging markets such as Brazil and South Africa compelling.

“We certainly have noted from an oil price or fuel price perspective, just how comfortable businesses have gotten with oil price or gas price pass-throughs,” says Aaron Kless, CEO and CIO of direct lending specialist Andalusian Credit Partners, on the latest edition of Credit Exchange with Lisa Lee.

“They’ve really been able to manage that price volatility, and price spikes, quite well.”

Andalusian has a unique perspective on the macro-economic backdrop. Its executive chairman is Roger W. Ferguson, Jr., a former vice-chairman of the Federal Reserve, who also sits on its investment committee.

“Our view certainly is that there’s really no expectation of rate cuts, [and the] possibility of rate increases,” says Kless.

The firm focuses on the so-called middle market segment, which drives around 40% of US GDP and 30% of US employment.

“We continue to see real resilience in the consumer, even at the lower part,” says Kless, who was formerly head of non-sponsor direct lending at Apollo Global Management.

Kless also discusses the attractiveness of sports investing due to the recurring, predictable and sticky nature of the cashflow. The World Cup will help boost soccer in the US.

“We’re on the precipice of something really exciting around soccer,” he says.

“We get to participate in the market, or at least in the deal flow in the market. [There are] lots of smart and interesting things happening around what I would call ‘minor league’ soccer.”

Kless also talks about what makes a good investment in sports. For instance, pickleball as an amateur sport is interesting, but remains too emergent from a professional perspective for a credit investment.

“Last frontiers of alpha is in the sports and entertainment-related real estate,” says Jonathan Fascitelli, founder and CEO of sport and entertainment real estate firm Seregh, on a special edition of Credit Exchange with Lisa Lee, recorded at the FII Institute’s conference in Rome. Just 18 months since founding, Seregh already has more than $35 billion in their pipeline.

Seregh, which has the backing of Creative Arts Agency (CAA), Apollo co-founder Josh Harris, and Blackstone’s David Blitzer among many others, seeks to develop and invest in infrastructures around stadium and arenas. That means building communities that include residential homes, office buildings, restaurants, and more.

Fascitelli, who was formerly the CEO of Harris Blitzer Sports & Entertainment real estate, also talks about FII PRIORITY Europe 2026, of investing in the “collective effervescence” (the shared moment when everyone experiences the same thing at the same time – think recent moments involving the New York Knicks or English Premier League club Arsenal), and how that can combat the rise of AI.

“We’re clearly in late cycle, but we’re not obviously at the turning point,” says Ariadna Stefanescu, co-head of Permira Credit, in the latest edition of Credit Exchange with Lisa Lee. Permira is a global investment firm with buyout and credit businesses holding nearly €90 billion in committed capital.

The current environment provides an opportunity for different managers to differentiate themselves, says Stefanescu. Not only will there be more dispersion, but some shops will either fold or face consolidation.

“Ultimately, some people will be priced out of the market,” she predicts.

While Stefanescu expects defaults in sub-investment grade debt to increase, she also notes there have been structural changes that have served to reduce the default rate, most notably more pockets of liquidity.

Middle-market direct lending finances growing businesses, says Gauthier Reymondier, head of European credit at Bain Capital, a private equity and credit powerhouse with more than $225 billion in assets under management.

Reymondier speaks about the fundamental difference between US and European economic growth, the impact of artificial intelligence and capex spending, and consumer habits. While European growth expectations have been very mediocre, more political stability would prompt consumers to spend more, he says, as has been the case in Spain, Portugal or Poland.

“Trust would be the biggest growth driver,” Reymondier says. “I think stability is important because we see in our market that without stability, people don’t spend.”

Bain Capital’s private equity arm this week announced a major deal to acquire Everllence, a marine power and turbomachinery manufacturer, in a carve-out from Volkswagen Group, and Reymondier also weighs in on the future prospects for M&A and LBOs.

Issues in the software space and a looming maturity wall will result in a return to more traditional distressed opportunities, says Jeff Kivitz, chief investment officer at Canyon Partners, on the latest episode of Credit Exchange with Lisa Lee.

There’s a wall of software debt maturities looming and while in the past these have “magically gone away, I think this wall is a little bit different,” Kivitz says. Eventually, the rubber will meet the road and there will be distressed and restructuring opportunities.

Canyon, a global alternative investment manager with $30 billion in AUM, is a firm to watch. While others are pulling back from lending to software, Canyon earlier this year led the arranging of a landmark $4.8 billion private credit loan in the space. Kivitz explains how they got comfortable with backing private equity shop Thoma Bravo as its portfolio software company Auctane merged with logistics provider WWEX Group.

In addition, Kivitz discusses how Canyon set up its new ABF unit, Canyon ABF Partners, with anchor investments from management, Daiichi Life Insurance and Korea Investment Holdings. He also talks about how Canyon nabbed credit market star Jay Kim, former CEO of Apollo’s ATLAS SP Partners.

“We’re starting to see some impact on cost. Very manageable, but it’s hard to ignore,” says Alex Chi, deputy CIO of global credit at Carlyle, one of the world’s largest investment managers with nearly $500bn in assets under management.

Speaking on the latest episode of Credit Exchange with Lisa Lee, Chi says that they are being very careful about how they underwrite new credits going forward. But new originations and investments stand to benefit from higher interest rates, he adds, as most of Carlyle’s credit holdings are floating-rate.

While Chi says consumer spending is holding up, particularly from higher-end consumers, Carlyle is staying away from credits that have significant exposure to discretionary consumer, “because we just don’t know what the impact’s going to be.”

Expect to see more defaults within the software landscape, says Chi, who is also head of direct lending at Carlyle. The vintages of late 2020 through early 2022 are especially problematic. If you look at the rates of default within those vintages, they have the highest percentage of non-accruals and defaults, he says.

“I think that we’re going to have to face the music at some point, because the maturity wall is coming,” Chi says. “And as a deputy CIO, I also think that could be very interesting for the opportunistic credit asset class.”

On AI, the software firms experiencing problems aren’t a result of AI disruption, Chi contends. “I actually think that you’re going to see more of an impact of AI from white-collar business services companies,” he says.