How Oaktree's Head of Sourcing Finds the Next Great Deal
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Direct lending has been one of the most dynamic areas of the private alternative space these last few years, having grown massively as a source of capital for both corporate borrows but also a financial sponsors that have kept going from strength to strength and have that private capital to Foster the growth that they have been experiencing .

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Hello, and welcome to another episode of the all bots podcast. I'm Tracy alway .

and i'm sure went.

So do you member deal toys? Did ever see those?

I never got a deal. I never. I do know what.

You wouldn't get a deal to her unless you were working.

I aware that they existed, but I don't never had. I never saw one.

I used to be slightly .

obsessed with them. Were the toys like? Or were like, like, are they those sort of look?

So yes, that's pretty much IT. So if you are working in capital markets or in mergers and acquisitions and you completed a deal, you would mark the end of that transaction by getting some sort of swag, I guess. And I could be really boring IT could just be a lose de block or something like that.

But some of them were really interesting and fun. And one of the ones I remember seeing was someone IT must have been working in like markets. IT was a little a tog l like an actual talk.

Like think of like a rail talk. And IT was to celebrate the first ever pick togo transaction. So I say that.

you know, we talk to first of all, it's amazing. Second of all, you know, we talk to a lot of investors on the podcast. We talk to a lot of people whose job and somewhere resembles our job, which is looking at screens all day, or maybe looking at data.

I think if I ever had gone into finance, I would have some job that would looked involved. A lot of looking at screens and a lot of maybe looking at the data, but modestly, just looking at screens. We don't often talk, talk to a lot of people who are in the world of actually talking to other people about making things happen. I never think i'd be good at that. No one was saying out with me, you know, if I did so, I want to learn and talk to more people about how actually things in finance, whether we're not about a deal, whether we're talking about a new issuance IT set, how that actually happens, how an instrument or security actually comes into the world.

I am very pleased to say you that we do, in fact, have the perfect guest for this topic. We're going to be speaking to someone whose day to day business is talking to people .

sourcing and finding .

a deal and someone who also a knows exactly about that pictou deal toy that I mentioned earlier. So i'm very excited we're going to be talking we're going na try to thread the needle between sourcing deals and also something else we've been interested in lately, which is private, are IT. So without further or due, we're speaking with melwood d hobs.

He leads owne trees sourcing and originations group. So really again, the perfect person. milward. Thank you so much for coming on.

All thought.

thank you. So i'm right right about the picture GLE toy.

You've seen this toy. Yes, i've seen IT. My favorite deal toys are too that stick out when ford fun out hurts. In two thousand and five, I was part of that transaction.

And so I have a set of car keys and there's a thing from hurts and they are called two sides yeah. And then the other one, which was pretty cool, I did the mars s regular deal by train. And so I have to emini m amazing guys that sort.

they lay out to try, do you have a room in your house that .

sort of like, i'm imagining high school athletes all their job, a house. And i'll have, like, overall library. And then that library are two things from investment banking that I have. I have bank books from deals we used. We used to go to our printer and we used to draft.

oh like the .

pitch that kind well. It's like it's like a actual a glossy picture book of the of the deal. The transaction IT goes to transaction or view goes to company, goes to business.

And that was what folks used to actually underwrite deals back in two thousand. yeah. And then I have two sides, so I have a lot of lots.

Des, so the unit that you're leading at oak tree, yes, that was created, I think, relatively recently like twenty. What was the thinking behind that?

So the market private credit in origination and financing deals has evolved quite a big if you just go back to kind of most private equity firms didn't have what we call capital markets professionals and post out Frank and the migration and creation of of a robust private create market, most of the private equity firms have capital markets professionals who really spend time drafting, creating, structuring financing for the private equity bial.

And what we figured out of tree, we were found in one thousand nine hundred and ninety five, we manage a couple hundred billion dollars. What we were figuring out when I first started in two thousand and thirteen, every strategy with an autre kind did his own thing. So if the deal came in, the one strategy IT didn't work, he just kind of died in that in that strategy.

So we what we decided as the market evolved and move towards capital solution provider versus this fun does this, and this fun does that. We created my group with the real purpose of a couple things. No one is making sure we were focused on, on providing capital solutions versus trying to figure out what fit a particular strategy.

And in the second reason we really did IT is that know capital is the commodity in our business. Everyone has a lot of money, but how do you get the first call in the last call and ask the relationship. So my team is meant to really spend time in developing relationships with the counterparties because, look, the reality of IT is we shouted we're not agreeing on we have different investors.

So the private equity firm has a different investor base than we have. yeah. And so the goal in my group is to, one, make sure the entire firm sees a transaction and two, we're involved in the art of the deal, right? And so the goal is no one really should win.

Both parties should be just mildly annoyed. And how do you do that? How do you do that in the way you do relationship?

That's funny because we say journalism sometimes like the goal is for everyone to be like slightly to satisfy the story, right? Because if everyone's happy that you basically wrong.

if one side is really happy, the other size is probably wrong.

I know Tracy ari more less asked this question, but I just put IT in a different way. What do you just give us to sort of brief overview if somebody just what do you do and how do you get here? Yes, what do you do and how you get here?

Yeah so you want full background. So I actually do because .

you've been in the market for a really long time.

yeah. K, O, K. So child.

od OK OK.

i'll start. So my I was .

in public accounting, and originally I got a full academy, larger to rocks, to go to law school. I SAT in political science, and I, I would fall asleep and wake up, and they were talking about the same thing. So I said, I don't think I can do four years of political science.

So I switch to accounting because my generation, you did what the adults said to do. And so I swish to public, into accounting. And my dad said, don't do public counting, do banking.

So I started out in a firm called nation's bank, which, which is now is a predecessor of bank of america. And the most interesting job, I had a nation's bank. I was a controller for leverage finance.

I was the controller in the Youngest controller in the firm. And I set home to be a lever's finances banker. You know, in the reason why IT sounds silly when you're at age, but they were they wear a nice time, were a nice shoes.

They were in big and finance. And at that time, nations bank was a pretty big a term by Linda. And so the headed a group basically said, look, right now, you're just an account.

He said, go get a sales job and then go to business school. So again, I went to g capital, and I financed commercial quipsome or rolling stock asset cars, trucks for clifts did that for one year to today, and then went to colony business school. I submit at first boston and I summer an acid bags and leverage finance and and enjoy your bank in two thousand four. And during that time period, I structured a lot of l BIOS sigar new markets.

footMarks being the first ever pictus. And so you have that deal toy I have.

you know, i'll be honest with, I think I gave IT to someone more sense.

shouted.

given IT to me, I would appreciate. And in two thousand seven, I left dota bank. And really, you sort of say, why would you do that, man, if you go back to two, two thousand and seven, the market was very concentrated.

So versus today, there were eight underwriters who owned all the leverage finance, right? So you could see the market you when I got to call to say, hey, what leverage would you provide an ideal and ask prior equity firm will would eating the business worth and i'd say what based on leverage. And so you could see that coming to a head. So in two thousand seven, and I went to go on sacs, I did ABS at golden sacks and also did sales enjoy no try in two thousand thirteen .

is always interesting, someone to background. But I like how this dove tails with the actual development of the industry itself in this idea that at one point they were just a handful of very small or a handful of banks that ran leverage finances. And then of course, we know about the proliferation of all that. Yeah, you're useful. Yeah, that background.

Well, why don't we dive into that a little bit more? So I talked to us about how the credit market, the capital market has evolved over the course of your career.

yeah. So look, when I first started, convenience were pretty standard. Amendments to deals were actually fairly standard. And if you moved forward by two thousand and seven, the majority market was cover light.

The one interesting thing about pre dod, Frank was in the credit agreement, which is a document that sort of govern the loan, if you will, you had to head fifty percent of floating rate risk. And so going into the cycle, two things that may make sense then is, one, folks were hedged fifty percent. And then the other thing is lie bar.

If you remember, back in two thousand, seven was at five percent. So the spread to deal with two hundred to fifty to get to that seven and height percent average. L, B, O, well, what happened at when? Dd, Frank, when the markets cried the world, the global financial crisis rates went to zero, right? So companies actually generate a cash flow in that cycle.

The chAllenge of difference we have today is we've been a no rate environment. So no one really hedged one and then two there there because they were zero pe to send base rates. The spread on deals was much higher instead of two hundred and fifty had four, fifty, five hundred, six hundred. So when twenty two, when rates started to move up, you actually had a situation where a lot of companies couldn't support the cash flows because no one predicted the race and moved and most folks were not hinged like they were into that.

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Not everybody likes talking about money. Some people find IT awkward, sometimes even find a little embarrassment. I do not. I like talking about money.

Mother is the order, the use of the trading, writing about money and talking about IT, and writing about a little bit more americanisms at web. And every week seen you're a boto jup. And I answer your questions about personal finance, and we discuss the best strategies for making the most of your money. This is end for the guy of insights, of explanations everyone can use to help them make Better saving and investment choices for themselves and their families.

My question is whether you think maxed out my complete pension match is enough for when IT comes to saving form? My pension, should I attempt to pay my child's university fees and living costs?

My partner and I have access savings, so should we overpay on our mortgage or should we put the money into .

stocks from limped podcasts june and marine tooks money follow marine tooks money on apple fodor sts, or the way or wherever you listen.

Can you talk a little bit you know, it's a theme that obviously comes up in every private credit, but also other episode is as well took to us a little bit more about like the the post, the meat, the the passage of dod Frank.

And how is set in to that? This is going to restructure the financial industry, various activities, whether or tell about trading where they are, about lending and set, right, these are not going to be part of the banks anymore, right? Talk us a little bit about those sort of early post, you know and they were talking two thousand nine, two thousand and ten, those initial conversations that people were having about h something new, new opportunities are going .

to emerge from that. If you go back to two thousand and seven, when a portfolio manager on a public side with seller risk in the market, the banks were the shock ability to that risk, right? So, you know, when I was sent at common sax, IT wasn't unusual for us to buy two hundred million dollars of an issue, right, post what dad Frank did effectively said, okay, if you go back to the leverage, I hope i'm not be in two technical.

But banks were levered roughly times pretty global financial crisis post there fifteen times left t right. So once he shrunk that liquidity or capital out of the banks, they can no longer absorb the deals. And so what happens is and this is why liquidity is really an important phenomenon.

So when A P. M calls the desk and says, hey, I have to move five, ten, fifteen million, you're not really sure what they are real size is because they know the markets not liquid. When I was in sells in trading pm co.

Or somebody would call and say, hey, i've got several million and move and I say, well, this is your first call or last call they laugh and they say why? I said, because I give you two different Prices. And so what happens in a market that's less liquid is as they're trying to sell, they call really different banks.

And every time they make a call, a bank then assumes that there's more behind that to go. And so they react the pricing. And so in a public security, which is different in private, a public security can actually move pricing wise without anything really trading, but only anticipation that there's their supply out there. And so that created, you know, and if you go back to two thousand, nine private credit market will speak three hundred billion dollars, right? Most of that was more maze or off the run, not what we call our regular way direct lending private credit, which we were active in. But we are doing IT more on the distress our opportunities credit side and over time, because of the liquidity and capital requirements of banks, more of that has just migrated to the private credit market, supplemented by the fact that debt these private equity professionals who are very efficient at, at looking at both markets and figure out where they should play or where they should place they are, credit or ideals.

I'm getting a lot of flashbacks to writing about corporate bond inventories at the dealers like around two thousand twelve. So just on this note is the pitch from private credit is IT basically execution like you don't need to worry about us actually being able to do or complete the deal. Where is that a bank? You know they're taking into account leverage considerations, regulatory .

requirements and all right. So what a proper deal should be if you if you're sitting in private equity, your job is to refine the most sufficient best Price capital for your deal, right? The public market, what they're very good at doing is saying, here is the indicated rate for deal.

And let's just say the indicative on a term loan is so a plus four hundred, right? Then the private equity firm comes to us and says, where will you actually own net risk, right? So they get a level where we're owit, which won't be the addict tive because remember that banks are marketing, hey, we can get you the best rate and best execution.

We're in the storage business. The banks are in the moving business. So they're trying to move the risk and we own the risk. And so we Price the risk.

Where will hold IT? And if those two are not a line, you, you, you then and then what you add to that four hundred, you add what we call flex. So if you take the indicative plus flex, that gives you an idea of what the banks are willing to say that this debt Price. So let's say the flex is one hundred and fifty basis points. So they know on the private equity side, they know worse case, the banks were owner at over five fifty, which the banks have gotten that sort of flex tumor based on their discussions with us to know where we would actually own their risk.

I see.

Yeah so so the process is how do you create an efficient auction to have the dead in the right market at the right pricing with the right structure?

okay. So here's my other question. When you are about to do a deal or when you find a deal, who are you actually talking to? Is that the banks or is IT like the companies that are borrowing in the market, 收收 generally .

meeting you？

So talking .

about everyone's my end .

up in the the more conversations I have, the more in foreign I am of where the market is, right? know. The interesting thing about public markets is that market reprises risk faster, red and private credit because there's a secondary market.

Private credit doesn't really have a secondary market. So we're always trying to make sure where understanding is relative value between public, private. And so my conversation, let's say X, Y, Z sponsor wants to buy a business, right? And let's say, is a public company.

The first call logis from the barnton say, hey, mewed, we'd like you guys to look at a financing opportunity for a public company we are looking to buy. I'm like, great. I say, look, i'll put my compliance on the email and we will do a conflict checks on that business because we don't know if we only stock or there is existing dead outstanding.

So IT goes through a process where that companies actually veit from a conflict perspective. Once it's veit in that clears the process, then we get initial information on an albo and an information could be uh uh a selling memoranda IT could be an initial model. And so then we start the process.

And what the sponsor wants to be able to do is from the preliminary information is IT get a sense for do you want do you like the asset or not? Do you want to finance IT? Where do you want to finance IT that and what's your leverage and what's your pricing? So there are some high level indication that they get from us to determine if they if we should move forward with a more robust diligence process.

So that's that's how IT starts. And then at that point, we do a do diligence process on the asset, right? So we may have we may call third party consultants. We may do some backroom on IT. Um we have a call with the sponsor. We understand their investment thesis like why are they why are they making the investment? And then we talk internally and we have an investment committee and we discussed and then we'll iterate with the sponsor diligence questions.

And then at that point, IT becomes, are you in? Are you out? And so then once the sponsor kind of has a sense for who's in and who's out now, there are goal is to get the right terms until there's a process around sending us their thoughts on the terms, right? And our job is to figure out which of those we want to negotiating in, which are we find with.

first of all, this fantastic stuff I wanted talk more about know what get to what that is, what IT takes to be the first call because you said that that's important. And I like curious, like know Tracy competitors is one of us get the first call. But even before we get into that question and IT occurs to me that you know because you work for occurred and their multiple strategies within IT, you work goes like different people in different committees, in different funds is set up.

Is there ever attention that arises between your recognition of the need to make the get that first call verses what people on investment committees see? Is the fair Price right? Because if the investor is always trying to get every pending rise, then at some point i'm going to stop calling all a hundred and talk to us about reacted selling that. And I also have to imagine just to sort of ad on a part of this question, you know be one thing if like there was a small shop in one strategy, but you're looking at this holistically, where's the investor who's running a special there, cares about their returns and doesn't care so much about the return of the other fund or just the general. So talk to us about record ceiling.

some of these tension, right? So so the biggest tension is, like I said earlier, we don't necessarily agree on Price structure leverage, right? But what what we're doing is i'm talking to that sponsor, that client or the company all the time.

Hey, has a family. I know where they get go to school. I may do zones with their kids. Hey, no, yes, I want .

to go to ocean prime and you .

know to ager so yeah .

so we we are .

full service here. And again, like I said, the relationship is getting the first court last and bite away out of twenty deals. I only care about the last two.

So how do I pass eighteen times? Yeah, I see the last two. So IT IT really is A A form of art, if you will. And what we're trying to do is demystify the negotiation and we're institutionalize ing relationship. So if X, Y, Z bosses in L, A, the company said, he know, who should I talk to?

I let me give you a list of folks because the more that, that private equity firm or that sponsor or whatever clients is feels like they understand our firm, the Better the relationship. So we spend time making sure that they know who our CEO armin is, are bobble lary, that they know the pms at the different strategies. So it's not a scary monster.

When I when I joined in original, remember, we were more opportunistic. And as the market has evolved and as we have evolved as a firm, we're sort of private credit and opportunities. And by the way, the client will say, no IT, I don't really care about one side of the house was so and and so I have to go to the market as one as one firm.

We talked us a little bit more about what negotiations are actually like because I will say we just had sujet in nap on wrote a great book about the scissors palace. L, B, O, yeah you're in that.

Not not use specifically.

but oak tree certainly is and they're certainly like. There are some very dramatic negotiations that take place in.

oh, I mean, look, sometimes you you get up, you throw your pencil, you walk in a room sometimes know. So you know at the art of negotiation is what I say. What I said to my team is it's not the negotiating point you're discussing at the moment.

It's the points that are coming two points later, right? You're always thinking ahead on the negotiation. You know, we did a deal for a business that wasn't really loved in the leverage finance market, and I knew that the type of business, because I had done an lbo in the market, really didn't understand IT. But IT was a great management.

Sometimes, sometimes deals do well because the manager, he is very good and very articulate, and I knew this deal would struggle at a bank and so when I was hung, which meanings the bank had, the funding got stuck they got stuck with IT I called and I said, hey um sorry um but i'll buy fifty million and ninety well oh got know IT ninety well that's that's A D discount. I say, well, you know, I think as you now realized that business is not is a little tRicky business. And IT was a public tool, private.

So a private equity farm was taking a public company and making a private. And even though is the declining march in business, there is a view that the public company expenses were high. So you can sort of map you can map scenario wear over twelve month, they were going to cut some of the public company calls and create a more efficient, which would create more ebata.

Yep, right? So they sold IT to us. So now i'm a top five lender, right, with the right response to other right relationship, right? Well, sponsor, which you know there, there need to be opportunistic too.

Cap structure, g grew. Cats structure look good. So I wanted do a division now again, in a negotiation if you you're going into divide and that means you're putting more than on my capital yeah right.

That money that could go to you.

that money that can go to anybody with right? right. And so you know, the job of a sponsor at that moment is to call the top five landers and say, hey, i'm doing a dividin deal and they take me from violence upset to my annoy.

That's the job. yeah. So this sponsor did not call us on that divided deal. And so now I have them in a unique situation. They went to other lenders and got the fifty one percent to do to deal. And I felt some kind of way about that, some kind of and and so I proceeded to try to figure out why folks would agree with this divide deal.

And so I call the market and a sponsor sort of said, you know, he calls me and he says, no, I hear you're working against me on my diving ideal I said, well, that's not actually true because you didn't call me when you lost this. So you said, I thought we had a good religion. I said we do.

I also, but you didn't call me, you're right. And so long, long to be short, the dividend didn't go through, right? And so then we changed the structure of dividend to allow we struck the sizes of the divine.

We change the original issue discount. And I told the sponsor, I said, look, unfortunately, i'm going to sell the position. When is closest and the point that story is, sometimes it's lives too short. And not all, not all relationships are meant to go on forever. We still talk. I am still a good friend, is still a good friend, but we haven't done a lot together since then because is sometimes you know in in our in an negotiation, if you don't see I the eye and that deal worked out, what happens if IT doesn't work out yeah so sometimes sometimes you're managing relationships to to keep and sometimes you're managing relationships to not do on a business side. But you always want to be friendly in this market because you usually one person away from somebody .

that that matters yeah business if he says we're on this point, that makes me is very savy and very wise. And like probably a lesson many of us should learn in many roles that sometimes I O take the l or let a proposal fall apart, because life is long and other things happened at some point. We have listeners who are in college or Young and they think about, you know, career trajectory and set them.

I'm curious, just from your perspective, this is probably a sort of attitude that you would hope the people who work for you cultivate eternal ze, so to speak. How do you recognize who has that? And like when you think about like people that you want on your team and are you able to sort like building tuitions about yeah the people who can uh who can think that .

way yeah so good, good question. So I would say on my team, everyone is uniquely different and everyone's exceptional as something and very good at everything else. And I think where you make a mistake in building teams, especially in in our business, is you try to find someone who can be exceptional and more than one thing.

So i'll tell you a good story. So when I was first starting out, I would, I would flooded out as taxes, and I would meet with folks and taxes. And I thought I was a pretty charming, knowledgeable person on the markets and and everyone. Texas was friendly. But what I figured out was, by the time the deals made IT to me in new york, everyone in texas pass almost like wrong way risk.

And so explain, yeah.

what was that happening?

Well, because you're in taxes, right? It's a different culture, different market in new york. And in in, in some markets, folks want to do business with folks they may see on the weekend or in the gym or you know and so it's it's more of that person sits in new york.

They don't really know me, right? Yeah so but if people in taxes didn't really like the deal, then you call when people in new york, oh, so, so I decided that I needed to put someone in texas. So how do you hire people? right? So this is for the year, Young audience.

So went to a conference, and he was kind of managing a room really nicely. So I gave my business card, say, hey, would love to spend some time with you. So I called them and we set up two days of meetings.

But he didn't realize us actually interviewing him for two days because everyone says they have great relationships and everyone says all, yeah, i've got the best relationship. How do you actually test that? So I spent two days with this person.

And look, you know, high school football matters and taxes. I didn't play high school, fool. I play high school baseball. This person plays high school football. And so you put someone in that territory that understands the local culture.

And what we're trying to do is have a hub and spoke origination model where we where we where we have a global firm. But we try to talk on a more regional, local level, and that's what I think makes our source origination a little bit different. And again, people matter in this business. And again, the goals to get the first call, the last call, that person may spend a lot of time going events, spending time with the families yeah and ultimately be what you want folks to do is to show you deals because they trust me and is still a trust me business.

Direct lending has been one of the most dynamic areas of the private alternative space these last few years, having grown massively as a source of capital for both corporate borrows but also a financial sponsors that have kept going from strength to strength. And i've needed that private capital to Foster the growth that they ve been experiencing for leading alternative investing insights.

Listen to speaking of alternatives from P. G. M.

Not everybody likes talking about money. Some people find IT awkward. Sometimes they even find a little embarrassment. I do not. I like talking about money, but is talking about money, writing about money, and talking about IT, and writing about IT a little bit more americanized, that web, and every week seen you're a able to jump up. And I answer your questions about personal finance, and we discuss the best strategies. S are making the most of your money, listening for the guy of insights, of explanations everyone can use to help them make Better saving and investment choices for themselves and their families.

My question is whether you think maxing out my complete pension match is enough for when IT comes to saving form, my pension? Should I attempt to pay my child's university fees and living costs?

My partner and I have access savings. So should we overpay on our mortgage or should we put the money into stocks.

from libert podcasts to marine talks, money falling marine talks, money on apple podcast, or to five or wherever you listen?

One thing I want to ask you just going back to something you said about the management of a particular company being good in in credit. We've spoken about this on the podcast before, but we tend to think about IT as avoiding losers, right? Where is equity or more about finding the winners.

how we would love you said that.

So I guess my question is like when you're looking at a particular deal, do you feel that you're making a bet on that business? Or is that just about looking at the numbers and making sure that you know you're not going to lose that?

Yes.

so interesting and enough. What we're trying to do in a iligant process is figure out where there may be holes in that investment. We did one deal with a counter party that we we require them to switch to CFO just because the questions IT took too long.

The answer, like if I ask you how many days as IT take you to close your books? What percent of that is many overs s automated? What do your management letters say in auditor?

You know those types of questions if if you have to think about and more you say i'll come back to you as a CFO, that would be concerning. So you know our job is to protect our investors. Yeah, that's our job.

And and what we're trying to do is make sure we understand the investment. And no one bata thousand, right? If you look at the top ten, hers and majorly y baseball, they strike out as much as they hit. So you know, our job is to avoid losers like you said, and we have to manage that through a process.

Can you say actually little more? I thought that was really interesting about some of the questions that you asked in the idea. Like I can't see if I just quickly .

answer how long IT takes to .

you think that would be. I'm always surprised also just generally a bit of attention twenty twenty four with like all the computer and accounting systems that like fraud is still happens that are still way or you know companies like we have a material weakness and work after. I'm always a little surprised that that can events still happens, how this world of things is being wronger ambiguous. And companies yeah live .

to here you talk more about that. You buy a business as a platform and then you then buy sucessful businesses. More than likely, they didn't have all the same for oh yeah yeah and the integration process, depending on how quickly you want to grow IT drives how long you actually integrate.

So what what happened? Sometimes you don't fully integrate these businesses and systems. If you go back to failures of businesses in our market, S A P integration is a big sort of point of contention. And so businesses, you focus on risk that you see time in time, so fraught fought.

You know there was a water business that that was fraught, fraudulent, that you some banks, also a lot of money know if you go back to like Collins and egan, which was an lbo long time ago, there was some fraud. And you could see what you what you're doing in a dolgin process. You are looking for sort of what I call inherent witnesses. And the information you get back management letters, which the auditor is produce, is a good document that sort of highlights the risk of accounting systems, financial systems and at a pretty systems tends to be a big driver of sort of integration issues.

So this isn't necessarily fraud, but you just reminded me of ad backs and deals and no adjust ted earnings and things that can be inflated to make a transaction lot Better than IT actually is yeah the last time I remember writing about this was, I guess, caught five or six years ago. And the feeling back then was the there was more sketchy stuff happening on the valuation side of credit deals. Is that still the case? Or has that been your observation over the years?

Well, so so the airbags an assumption and and asked to get credit for something that may happen in the future, right? Or it's saying something happened previously that hasn't fully been uh, flown through the financial statements and we want to get credit or we don't want IT to affect our earnings. Every deal has adjustments.

okay. So just start with the premise that a justice baa will exist. And in part of our job is to trust our partners that they're trusting the right things.

What happens is if you launched the financial statements over time, sometimes adjustments never go away, right? And then he started, okay, this is recording, right? We did a deal for sponsor and we were in IT, was near year end and sponsors going through each line item of what they wanted to add back.

And you know, IT, I say, oh, we could we could go through this for three days, right? Explaining one I but you know, IT, you can get back five million call whenever you want, right? yeah.

So at the end of the day, what we're trying to do is understand the rationale for the attack in a market like today. The problem is the rational isn't fully explained all the time, and the amount t of time you want to add IT back this kind of almost infinite. So you start to say, okay, and the sponsors perspective would be on paying for that, right, because i'm paying off that at justice, but so you should leverage against that.

The the the counter would be i'm kept outside, right? I'm kept at par. And if you go back to, oh, seven, a lot of the ad backs in in some of the large ob s never truly came to further.

So if you take cap structures that were leverage seven times, you're adding back one hundred million, seven hundred million more that that if the hundred million never comes through at some love, you could be overload red. So that's why you have to look at air bags. And in the one notion, folks say documents are lose.

why? I would argue it's about asset selection, right? A document is not going to help you if you just wrote the wrong asset. At same time, a document, if you're doing well and i'm not let you lend more, what do you think i'm going to do if you're doing well? I'm probably gonna figure out a way to fix the document to allow limor.

So I think part of our you know business, you write on a bed but you know cover the market is mostly cover light. And even when you think about structures with a covering, a lot of times if you actually hit that covering, it's unclear. The business alright, is a going concern at that .

if you need the document to save you, right? You've got a you've already .

got a problem since we actually .

tell about documents, we have done a recent episode about so called credit or violence and how that works. Out of one thing that came up with that and also curious about IT is like um legal expenses and your detail like you know every comma and all that in the doors. I'm just curious like over the course of your career, yes, how much have you seen the perhaps to the point that IT extend changes, you're expected return on investment, uh, legal costs and the sort of rising lawyer fees that set to check to those documents regardless of how many confidence they have. If you seen an evolution over time since you've just been in the business of how much of deal resources .

end up going to .

the little al ah.

how much do the lawyers build you everywhere? Counter o, while I said the document won't, to save you in a deal is very important. You have a document that sort of expressly documents what what IT is, the intentions of the transaction.

And it's very it's very good to have governance in the document, right? So if you just think about public versus private markets, in a public market situation, you're given two to three days to review a three hundred pay legal pocket. Now if the deal is going very, very well, arguably there isn't a lot of opportunity for you to push back on the document, right? So you can na take the document as is in the public market.

In the issue is that there's a lot of and you say credit current violence, but there are lot of opportunities for you to take assets out of a restricted group, create new s new co and lending instead and take value away from existing lenders. I think one thing that private create is very good at and is focused on that part of the document. We've been very firm on making sure that the abilities take assets out and create new assets or new financing, our new capital.

We've limit that quite a been in private credit. But I will tell you, lawyers, what are you inflation is real for them too. So you know a lot of that deal calls gets kind of you born at the beginning, but yeah lawyers, but you need lawyers, right? You need them.

You know there's two reasons why a deal usually get hung up is usually illegal or tax reason on the M A side, on the financing side. And so lawyers are important part of of our process, and we spend a lot of time making sure we have the right council who can understand and be able to move with us. If this goes sideways, we want to make sure your bankrupcy and attorneys are really good.

We want to make sure that you are put you know, if you're thinking about biotech or something where IP is important, how do we make sure that IP yeah you can over license IT. There's a lot of nuances in the document that we find. Lawyers are very valuable in our process.

So I just have one more question. But you know, you've had such a long history in this market and you've worked on so many interesting transactions, what you are .

you most proud of? So when I was doing lbs, it's almost like you're watching the company and the sponsor get married and you sit in the middle of that marriage and you can of playing consulting and all of my deals. I still talk to the CEO of those deals because you get to know these people your own planes with for ten days.

You know, I know some of the corks are some CEO know you just get to know people, you know, when I was doing the buyout, when he span out direct TV rocco and off and was a rockstar right female CEO running direct T V, A very profile business and really, really, really get to know interesting people. So I I would tell you there all the deals on pretty proud. There's probably one that was a bit of a disaster that, that know we should say, if you may, one bond payment tell .

us about the deal that you're at least problems.

yes. So that was ably actually the more the question, but nobody really wanted to ask. Yeah.

that was hard. That this was hard. IT made one upon payment and filed.

tells what of is no okay? I want to protect .

those involved. okay. yeah. But a good question OK. And I think you know, so i've done a lot of deals and most of them i'm pretty happy about.

I think you mentioned you take right, you want to be the first call and to some extinction, the first call is some combination of the ability to give decent pricing. Yeah and also just be a like little guy that people want to talk about their family, right? But I think you say you take twenty calls and you may be takes saying .

what i'm saying is out of twenty calls, I get the last two of the most interesting. So how do you actually engage eighteen times? And that .

goes nowhere. I like you to see. You can say no forever, otherwise that at some point you'll no longer be the first call, right? If I like, I might like talking to trace IT long, but if she's never like in the end, wanted to concentrate the deal eventually you .

should no longer to be how you say no.

Okay, talk to about so saying no, but still maintaining so first .

sometimes and we don't say no, we say here's how we can get to a yes OK, right? So sometimes you give a path to a yes sometimes in a market like we're in today. No, i'm not clear it's not clear that someone takes my no offensively.

There's a lot of capital. So it's easier to say no in this market going on a market where there is not a lot of ital. And generally, we may say no what IT, maybe a concentration issue or maybe we feel like we have too much of that type risk on our books.

IT could be an attachment issue like average or attachment, uh, could be a problem. IT could be that we had an issue with a similar business and maybe our L P or fatigue and that in that type of space. And we don't want to sort of bring IT up again, there are host reasons why we may say no.

We may not get there fast enough, right? That happens to this market. But generally, I think we are pretty quick study.

And what we are very good at is we do exactly what we say. We're gonna. So if we put something on paper, we're gonna stand by that. And I think that, that goes a long way.

And I think if people say, well, why do they call? Why do they call me? I think we Price risk, right? So in some markets that a real big competitive vantage. And I think we we don't be as people, we say what we can do, we do what we say and that's IT. And so sometimes our answer is, yeah we like IT, but we don't love IT.

But if if the sponsor or someone is able to say what old trees involved, right, that gives credibility to the deal, and we can help them to get IT done by saying we're involved, but we may not be the anchor, we may not lead IT, you know. And when you when you managing the size capital, we need to write three to five hundred million dollar checks on most situations. So we're always looking at the biggest deals with the large sponsors.

Generally, those are safer place in the lower, lower mental market. So we think there's less competition when there's only seven, seven of us, they can write large years verses in small ideals. Hundreds of folks can write small tax.

I have one more question actually I just remembered, but you mentioned earlier that you want to be friendly with everyone um including the banks that you know you're ostensibly in competition with. One thing that's been happening recently, IT seems, is that a lot of deals that we're originally done in the private credit market are getting refinanced in the public market. great.

yeah. So first of all, why is that happening? And then second ly, like is that a concern for someone like outre?

That is great. Like if we can be on two or three year in one capital in most situations, that's good. The reason why they're going back to the public market is there's a spread between public and private. So there's a cost reduction element and in for the sponsor is more flexibility. Private credit is not meant to be the most flexible, is the most sufficient, but is not necessarily more flexible.

And if I can create an institutionalize and and have a broader investor base, right, sometimes I can get more things done if a lot more people owe IT at very small sizes versus five or six owning chunky size. So so it's actually you want a healthy market, public game, private, right? And when most folks say all you're lose and deals to people and probably have gone to public market in anyway, right? It's rated.

It's, it's, it's an exterior issue where it's been in a public Marks. It's just staying in public market. You know if you think about the private credit market where one point seven, one point eight trillion going to probably three trillion, there's A B F as a base finance, which is a new phenomenon, isn't really new. I G capital was a large A, B, F ender, but there's three trillion dollars a drive powder of farms there, enough for us all to do and be had.

All right. Milward hobs. Thank you so much for .

coming on authors and tasted. Thank you so much. I'm so that made this.

So that was .

so much fun that was unusually fun and good episodes even all of our get the perfect um you know I really like and I think we should do more about talking with the people whose we could, but that's like an element and finit that so you know what guys said? We talk to a lot of screen people and I miss screen people. I'm glad that there are still parts of the industry where there is a big role for, like of all people who can maintain relationships and stuff like and play off. But that's part of being human.

right? Uh, don't you have a whole song with the title? Like all my friends are online or something?

My friends, are you more people who have friends.

who have friends? I R L, yeah. right. There is a lot to pull out that I do think like mill, what's early point about banks being in the business of like pricing and moving risk very quickly was a good one because I think like that kind of a fundamental difference with private credit.

That was really interesting. I am also IT was really interesting hearing him talk about the tensions that emerged because you want to be the first call and you want to have a reputation for at least in yes, ten percent of the time or something like that ah with the demands of the actual P M. Who doesn't care about all the time as you have to say no.

You know, I think this is probably a sort of asymmetry that comes up in a lot of sales based businesses, right, where you have some sales person and their job is to hit a commission and or something like that, then you have like a product manager who's like, no, you can't Price so that is or we can move the product of this fact. Yeah, this is just sort of like an interesting dynamic that emerges in all businesses. And I really enjoyed hearing him describe how he negotiates that yeah the negotiations .

because a lot of these deals involved, like so many different entities who are all coming out IT from a different angle with a different incentive yeah.

so much, so much, they will have to talk to me.

Yeah, we should. All right, shall we leave at there? Let's leave IT there. This has been another episode of the authors podcast.

I'm Tracy away. You can follow me at Tracy away, our producers, common rud rigas at common armon dash and a dash bot and kill Brooks at kill Brooks. Thank you to our producer, moses.

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