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On this episode of On The Tape Guy and Dan discuss Mike Wilson of Morgan Stanley seemingly turning less bearish (1:00), recap of tech earnings last week (3:30), this week’s Fed Meeting, and Chinese equities (9:20). The co-hosts go “Off The Tape” with Drew Schardt, Head of Global Investment Strategy at Hamilton Lane, and talk about the credit market (14:10), who a Hamilton Lane client is (21:00), private market valuations (25:30), the retail investor (32:00), opportunities in the market (38:50), his view on the macro environment (41:00).
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Show Transcript:
Dan Nathan: [00:00:00] iConnections Ad. [00:00:00][0.2]
Guy Adami: [00:00:50] You’re listening to a bonus episode of the On the Tape podcast. Guy Adami always joined by Dan Nathan. Huge week earnings fed jobs report. Mike Wilson seemingly getting less bearish. A lot to talk about. Later, we’re going to go off the tape with Drew Schardt, head of global investment strategy at Hamilton Lane. That’s important more now than ever Dan. [00:01:13][23.1]
Dan Nathan: [00:01:14] Yeah, no. We had a great conversation with Drew and it’s interesting, guy, you and I spent a lot of time talking about equity markets and the things that affect it. I know you in particular have been highlighting all year long what’s been going on in the credit markets. And if we really are to see a major downdraft, I think in the economy, which would be reflected in the stock market, we’re likely to see some kind of issues in the credit markets. We haven’t seen it just yet. I think Drew’s take on the public credit markets with what’s going on in the private credit markets where they’re primarily focused on really interesting stuff there. So definitely check out that interview with Drew. Guy, the one takeaway for me, Mike Wilson, he was on our podcast on the tape a few weeks ago. He was still pretty bearish. This was before that market, the stock market had turned on that Thursday afternoon. Remember, we had that new 52 week lows. Things felt really ugly. And then we had that intraday reversal. That Monday, Mike comes out and basically says, I think we could have a tactical rally. What did he say? 10 to 20% possibly. You had been saying we think you thought you could have at least a ten, 15, 20% rally, maybe back towards 4100. So that lined up a little with you. But he’s changing his tune now. He thinks inflation has peaked a little bit. Right. Maybe the rate hikes have basically they’re going to be done when we’re done with 2022 thoughts on that? [00:02:34][80.6]
Guy Adami: [00:02:35] Well, we talked about it was October 12th was a Wednesday. We talked about it that week, how the set up those couple days looked eerily similar to what we saw back in the middle of June. And we thought we could see a 15% rally. Actually, we set up to 4000. Maybe we overshoot and effectively here we are. So, Mike Wilson, is he changing course? I don’t want to go that far, but I agree with him. I think we probably have seen peak inflation. I said that back when we saw the 9.1% CPI print and that proved to be true. But I’ve also said, you know, that is inflation will be the other two PEs, which is pesky and persistence and I think we’re seeing that as well. I think a lot of people will say, okay, the Fed’s going to stop. That’s got to be bullish. All systems go and the market will rally on any indication that that’s the case. But the reality is earnings are still slowing down and there’s still significant headwinds. And by the way, the Fed rate hike cycle still has a lag effect. You’re going to be feeling that for quite some time. So yeah, the market will breathe a collective sigh of relief. I happen to think it’ll be somewhat short lived. [00:03:36][60.8]
Dan Nathan: [00:03:37] Yeah. Let’s take a quick wrap, though, of the earnings last week. I think when we went into that week, we knew that Amazon, Apple, Microsoft, Alphabet, Meta all reporting. And you know what, to be very clear, four of the five were a disaster. Apple’s commentary, the only stock that traded up after its earnings, which was on Friday. Okay. They traded up, I think 7% at its highs. It wasn’t even that good and the guidance wasn’t that good. Stock’s down 2% today on a story that continued China. You know, COVID lockdowns is going to hurt iPhone production here. So the stock’s down 2% or so, I think. Keep an eye on these names. Meta is down 3% today. It’s trading below its lows from last week. Microsoft, you know, has bounced a little bit off those lows, but today down percent and a half or so. If those stocks were to make new lows from last week’s, you know, post earnings lows, watch out below. And, you know, you talk about where your target is to the upside in the S&P Guy I got it right here at 3867. Okay. So if we were to have the same sort of move that we had off of the June lows to the August highs, you know, that was about 18 9% off of the lows that we just had a couple of weeks ago. On October 13th, you get 18%. That puts you just below, I think about 4100. So we’re still a ways away from there. That’s why I’m still focused on those big tech names that disappointed and gave that guidance, because if they are to make new lows, what is that saying that you said, Katy and you don’t know she who. [00:05:06][89.1]
Guy Adami: [00:05:07] I don’t know who she is and I don’t know what door she’s watching, but she better bar that SOB, you know what I will said you know, I said it on fast money last week when they reported that the Apple quarter, I think people were looking at it as a flight to safety on the back of a miserable Amazon quarter. I said one of the reasons why Apple’s probably not lower and actually now going higher is because it’s exactly that it’s been this flight to safety, this perceived flight to quality and the Apple quarter to me again to use the word reminiscent reminded me of the Microsoft quarter a couple of quarters ago when Microsoft initially reported the knee jerk reaction was lower. They made some constructive comments. The stock was off to the races. And Apple, to me, is a. Exactly the same thing. You know, you saw a quarter that was okay. At best, the guidance was not great. But then you saw again this perceived flight to quality. I think it’s going to be short lived. You know, I’m not some apple bear. I don’t really care one way or another. It just feels somewhat contrived to me. That move from the lows of about 138 or so in the post-market to levels we’re seeing now. [00:06:09][62.4]
Dan Nathan: [00:06:10] Yeah. So real quickly on the Fed, right. So that’s going to be Wednesday. I think the CME Fed fund futures are pricing a very, very strong likelihood of a 75 basis point hike and then a 50 basis point hike in December. I know that again, going back to my Mike Wilson for Morgan Stanley, he thinks that the rate hikes cycle might be ended after December. Goldman’s strategist hiatus. Hiatus is that I pronounce it he Hatzius. Hatzius He’s suggesting that we might see a quarter point hikes in Q one maybe a couple of those. But again, I mean, I think, you know, it’s getting towards the end of the cycle. Do you think when Fed chair, the honorable Fed Chair, Powell Guy steps up to the mic on Wednesday afternoon, do you think he already knows what that October jobs report is? [00:06:56][46.4]
Guy Adami: [00:06:58] Yeah, there’s obviously you’re leading me down a primrose path and I’m not exactly sure that has something to do with Shakespeare, because if you don’t know, it typically does. But, you know, maybe he has some inkling of what it’s going to be. Quite frankly, I’m not sure it’s going to matter one way or another. It’s all going to be about the tone and some of the words he uses or more importantly, chooses not to use. And again, you know, if the Fed was to go on, if they’re going to slow things down, if they’re going to pause, whatever it is that will again be perceived as bullish. Oh, yeah, the Fed’s back on our side. But don’t get ahead of yourself here, folks. I mean, we’re still in an earnings slowdown. We’re still in a margin compression. It seems to me prices are still elevated. There’s a lot of work to be done here. And you have to ask yourself, what are we getting bullish on the back of of it’s just on the fact that the Fed may slow things down. I don’t think that’s good enough. [00:07:46][48.2]
Dan Nathan: [00:07:47] All right. So let’s talk about interest rates here, because the ten year which had dipped below, you know, 4% is back above it. And it’s just interesting to me, we still have a 2/10 spread that’s inverted by 45 basis points here. And, you know, on a day like today, guy, where, you know, yields are not even up that much, the ten years up on all three basis points or so, look at what’s going on with homebuilders. You know, Toll Brothers is down 4%. Lynas down two and a half percent. Related names are down a couple percent. You know, you know, WorldCom, NASCO has gotten killed up late. Talk to me a little bit about yields and kind of how you see this playing out. If we are towards the end of this rate hiking cycle here, don’t you think that we would see the ten year now better reflective of maybe slower growth, which would see it coming in a bit, maybe down towards three and a half percent? [00:08:36][49.7]
Guy Adami: [00:08:37] I’ve thought that for a while. It’s been wrong now for a while. I mean, think about it. I know, you know, this ten year yields went, I think almost a 4.3% or thereabouts. Obviously, you saw a pretty steep reversal. And I’m shocked that they saw beforehand, you know, in this environment, especially if what we just talked about for the last 7 minutes is true, if this Fed is somehow going to slow down, you should see it back up in yields. And what does that mean? I think the ten year moves lower because we’re still in a slowing growth environment, not only here but around the world, by the way. So that should theoretically drive yields down and there should be some sort of flight to quality in the form of ten year yields here in the United States. So I’m really surprised they’re a stick is they’ve been but I’ll say this, you mentioned about 45 basis points inverted in the two tens. I still think that’s going to get significantly worse, meaning get more inverted to the tune of anywhere between 75 basis points, potentially to 1%. And it probably comes in the form of to your earlier point, three and a half to 3.75, four and a half ish in the two year. And that to me, again, you can be as bullish as you want, but that does not paint a pretty picture in my opinion Dan. [00:09:42][65.3]
Dan Nathan: [00:09:43] Yeah. And we also obviously got to keep a track of the dollar, the US dollar index, the Dixie which almost got to 115 again a year ago. Guy this was 94 a year ago, the US dollar index was 94. It got as high as 115 ish or about 114 and a half or so at its highs in September. It checked back a little bit, back below 110, but it seems like it kind of bounced off of that kind of long term uptrend. So that’ll be interesting. The other one, you know, last week we started after the Communist Party in China. You know, President Xi is you know, again, he won an election guy. He’s going to be premier again here, a president, you know, and Chinese equities got killed and then it had a nice little bounce. But they’re back now, man, if I’m looking at the side, that’s the iShares large cap China ETF. I bought calls in. I talked about it a little bit on market call. Look at that thing. It’s making new lows right now. And again, is that on the heels of kind of COVID lockdowns, continued COVID lockdowns? [00:10:40][57.2]
Guy Adami: [00:10:41] I think that’s exactly what it is. And they can be more draconian now because, again, his power base seems to be solidified and. I think there was some that concern. That’s the wrong word. But I think there was some thought that perhaps with the zero-covid he was somehow compromised. Well, that proved not to be the case, and I’m not surprised by it. And my concern all along has been, again, with in terms of the Chinese, when you’re when your opponent and I’m using the word opponent is playing a 50 year game and you’re playing a five minute game, which we typically do here in the United States, almost by definition, you can’t win when your opponent is willing to lose battles to win wars you’ll all be defeated before you even start. And I’m surprised, in my opinion, that really hasn’t manifested itself here in the United States. [00:11:28][47.2]
Dan Nathan: [00:11:29] You know, it’s really interesting when you talk about your opponent and you talk about playing a game, a long game here. You know, yesterday we’re recording this on Monday. Yesterday, the Seattle Seahawks playing the New York football giants. They only had to play they only had to play a 50 yard game a bunch because you’re giants in the special teams were an absolute disaster. They’re just coughing up the ball, giving them the short field. And it was kind of over. So again, they had to play a very short game. [00:11:57][28.1]
Guy Adami: [00:11:58] I like what you did there. I love the fact that you went to sports before I did. I mean, my point is to go there immediately. I’ll say this, Seattle beat the Giants yesterday. I mean, those two turnovers did not help. And that kick returner slash punt returner probably will not see the field of play again, at least not in a Giant uniform. That said, the offense didn’t do that on much when they had the ball, and the only time they really scored a meaningful touchdown is when they recovered a fumble on the two yard line and went in. Thank you Saquon Berkeley Daniel Jones was mediocre at best yesterday. They still don’t have anybody to throw to. As a matter of fact, I just got a call a few minutes ago from the giant organization asking if I’d be to try out for their wideout spot. And I might do that later this afternoon after MRKT Call 1 p.m. Eastern time, by the way. But we’re still six and two going into a bye week, a record that nobody thought was possible. Dynasty, by the way, the Rangers did win yesterday in Arizona. Back to you. [00:12:52][54.6]
Dan Nathan: [00:12:53] Yeah, a matter of fact. And then by the time it was. [00:12:55][1.9]
Guy Adami: [00:12:55] Oh the Jets by the way, since you went down this road, all you jet fans, oh, we’re going to throttle the Patriots. It’s our time. You got embarrassed. Embarrassed. [00:13:03][7.9]
Dan Nathan: [00:13:04] At home at Giants Stadium, at Giants Stadium. So. All right. Well, we did that. So I just wonder. [00:13:11][6.6]
Guy Adami: [00:13:12] How quickly you went down that road and you’re like, this is probably. [00:13:17][4.8]
Dan Nathan: [00:13:17] I like these bonus episodes that we do, the iconnections, the off the tape segment. They’ve provided us with some fantastic gas drew chart, which we learned after the fact was a Cornell lacrosse player. How about that? [00:13:30][12.3]
Guy Adami: [00:13:30] Yeah, the I think they call themselves the Big Red or something, I’m sure Rehfuss will know what the hell that name is because Rehfuss probably got throttled by Cornell during his time at the Cuse. Back to you. [00:13:42][11.7]
Dan Nathan: [00:13:43] Probably a couple of times. All right. So big week. By the time you’re listening to this, you know, we will kind of be in the mix of some more earnings, some of your biotech health care name guys. Then we’re going to have that Fed meeting on Wednesday. The jobs report on Friday could look like a very different market by Friday afternoon Guy. [00:14:01][18.4]
Guy Adami: [00:14:02] You know, it’s interesting and we’ll ended on this. Typically good news is good news. You get good news in the form of jobs on Friday. In other words, unemployment stays low. And you added, that’s not good. I don’t think the market’s going to like that all that much. And we’ll see. So this week, it’s going to be a fascinate given the fact, again, that we’ve rallied, I think, close to 10% in the S&P from the lows ish. So much to look at this week. And it’s to me, it’s so interesting to see how the market reacts to this stuff. So right now, a little squishy. Today is a long day, but I’ve enjoyed the conversation. I’m really going to enjoy the conversation with Drew Schardt in just a few minutes Dan. [00:14:37][35.6]
Dan Nathan: [00:14:37] Yeah, so stick around. [00:14:39][1.6]
Guy Adami: [00:14:40] When we come back, our interview with Drew Schardt, head of global investment strategy at Hamilton Lane. [00:14:45][5.5]
Dan Nathan: [00:14:46] iConnections Ad. [00:14:46][0.3]
Guy Adami: [00:15:35] Drew Schardt is the head of Global Investment Strategy, co-head of investments and co-head of direct credit at Hamilton Lane. In his roles, he is responsible for shaping strategic portfolio decisions across Hamilton Lane’s various investment strategies and product areas and overseeing credit related investment activities. Prior to joining Hamilton Lane in 2008, Drew focused on principal investing and advisory activities, while at TCG Advisors, an aerospace and defense focused merchant bank. Drew, welcome to on the tape. Drew welcome aboard. So what we like to do is obviously just give us a little bit of a primmer as to Hamilton Lane, your journey and what you guys and gals are doing there. [00:16:21][46.6]
Drew Schardt: [00:16:23] Yeah, absolutely. So thanks for having me. Really appreciate being on. Hamilton Lane, we like to say, is the biggest company you’ve never heard of. We are a publicly listed company, but all we have focused on for 30 plus years now is investing in navigating and help our clients understand this realm of private market investing. So private equity, private credit, private real assets. I’ve been at the firm for just about 14 years now. I do what you call a sort of traditional financial services track, started in investment banking, worked in private equity and private credit, and then came to Philadelphia, where we’re headquartered. And when I started, we had under $10 billion of AUM in three offices. And today we have something like $850 billion of assets under management and supervision, all focused again in that private realm in 21 offices globally. It’s a global asset class and so are we. And personally, I am the firm’s co-head of the investment platform. So really oversee the management of the teams, the strategies and all that we do to help our clients find their way through this area of private market investing. [00:17:39][76.0]
Guy Adami: [00:17:39] It’s interesting, you know, obviously, Dan and I, if you extent you watch fast money, we’re clearly focused 99% of the time on equities. Sometimes a little commodity credit comes up, but credit is sort of the backbone of everything. Can you speak to that? Because I don’t think people fully comprehend the importance of credit in terms of what it does for equities, commodities and global economies, for that matter. [00:18:03][23.1]
Drew Schardt: [00:18:03] Yeah, if you look at, you know, your standard sort of company or purchase, especially in the private realm, you know, the most significant part, anywhere from 50 to 60% of the purchase price or structure is the credit, it is debt. And you think about even just extrapolating that to buying a home. When you buy a home, you put in 10 to 20% of equity. What’s the rest? It’s a mortgage, it’s credit. And so if you look at that, if you look at the size, just take the public realm. The global world equity market cap is roughly, you know, over $100 trillion. If you look at the amount of global debt outstanding, it’s multiples of that. And so I think you’re absolutely right that it is the backbone of the financing and deal landscape in most areas. And it also is what helps generate outsized returns. If you can use debt to help generate better equity profile returns, if you do it in a prudent way, if you do it in a way that is considering all the macro factors and volatilities and risks that come with utilizing debt. [00:19:05][61.2]
Dan Nathan: [00:19:05] Well, let’s talk a little bit about those macro factors. You think about the last three years. You know, with the start of 2020, you know, it really felt like all systems were go as it relates to just how, you know, our economy was humming capital markets. And then we have this black swan event. And I’m just curious, as you know, Hamilton Lane, how you guys think about that, because a lot of people in the first half of 2020 were really concerned about some sort of credit crisis, right? When you have that sort of event and you don’t really understand or no one really knows how it’s going to play out, but things were okay and why were they okay again? Well, we just had this coordinated central bank intervention to avoid that. Talk to us, though, here we are kind of on the other side of that. And to Guys point. You know, if you’re an equity investor and you’re thinking about, you know, kind of the reorientation of rates after that period, you know, the worry is that there’s some sort of hiccup in the credit markets right now. And that could be the thing that maybe kind of turns this bear market that we have in equities into something maybe protracted and really kind of spreads on maybe, you know, a bear market that is longer than many people might think or might hope for. [00:20:20][74.5]
Drew Schardt: [00:20:21] Yeah, absolutely. I mean, I think if you look at the last pretty much 14, 15 years, everything has been up into the right right. It’s been low interest rates, lots of liquidity, whether you’re talking about the public or the private markets, pretty sort of steady sailing for most asset classes. And frankly, that’s one of the things that looking internally keeps me up at night. Half of our workforce has been hired in the last sort of 5 to 10 years, and so they’ve never really lived through a cycle the more senior people have. But bringing to life a little bit of the points you mentioned, you have a lot of those tailwinds suddenly in the course of eight months and pretty suddenly those tailwinds have become headwinds, not to mention geopolitical risks, uncertainty, volatility. And what I would say is, as private asset managers, this is what we get paid for. For to help manage and navigate times of increased volatility because it’s this back to the psyche of the investor. The absolute worst time to lean in is when everyone’s sort of greedy. In the best time to lean in is when everyone is fearful. And you’ve certainly gone through that more fearful, more risk on or sort of risk off metrics in terms of investing and navigating the investment sphere. And so I think that we have to all be cognizant that this isn’t likely to change any time soon in terms of there is going to be more market volatility, there is going to be continued uncertainty. And so as an investor, I think it puts the importance on back to instead of, you know, top down underwriting, really a bottom up focus by, you know, whether it’s public or private, whether it’s the geography, whether it’s the sector you’re investing in in our world on the private side, a huge differentiator is that it is not an efficient market. Information and access is not created equal. And so you have to find Blackstone likes to say and I love this the good neighborhoods in areas you’ve invested in before, assets you have familiarity with because it is going to be more of a thematic deal picker’s market today and going forward than it’s been at any time over the last 15 years. And I think investors are trying to take stock of all those different components. [00:22:34][132.9]
Guy Adami: [00:22:34] Well, it’s interesting you say that, Drew, because I would imagine prior to November of last year, when the market effectively just does nothing but go higher, albeit a couple situations notwithstanding, you guys, I’m sure, do very well, but it’s very hard to differentiate yourself in that environment. And people probably are not necessarily looking for what you do because everything’s great in the equity market. My sense is and please correct me if I’m wrong, though, over the last seven, eight months, this has been an opportunity to really show the non correlated asset component of what you’re doing and how you can sort of rise above some of the noise we’ve seen effectively for the last decade and a half. [00:23:13][38.4]
Drew Schardt: [00:23:14] Absolutely. I think you’ve seen the correction happen first in terms of asset prices within the equity markets. And you’ve also seen even recently some volatility on the public credit side, which was a phenomenon you hadn’t really seen in quite a while. They’re usually just correlated those two areas. But to your point, what investors are thinking about is in the new normal environment, yes, equity valuations have come down and at some point transactions will start to occur back at that new normal valuation. What it brings to later highlights the benefit of inflation resilience strategies. So things like private credit, things like real assets in terms of infrastructure in real estate, we’ve seen investors in our world on the private side really pivot and put more dollars to work in those areas. And frankly, it’s been happening over the last ten years in the world of credit, because you had since the global financial crisis, banks and traditional lenders pulling back and it’s given rise to all sorts of new lenders. That said, this is when you find out who the sort of real leaders or bellwethers are versus sort of the also rans who are just trying to raise capital around an industry or market trend. And so back to it’s going to come there’s going to be more delineation of outcomes, whether you’re talking about deals, strategies or managers over the next three years. Then we think that there’s been pretty much over the past ten. [00:24:41][87.8]
Dan Nathan: [00:24:42] To give us a sense of who a Hamilton Lane client is, you know, so, so from the investor base and then also the size of private credit versus, let’s say, you know, listed credit like, you know, public credit markets. [00:24:58][15.8]
Drew Schardt: [00:24:59] Yeah. And so so first, who is Hamilton Lane investors that we hope and that’s our whole point as a firm is to expand access to this sort of black box historically of private market investing. And so our firm started out with some of the largest pensions, endowments, institutions, sovereign wealth funds. Those are the more traditional institutional investors in the private market, i.e. they’ve been around for decades. They’re relatively familiar with this. I think where the puck is going, so to speak, is in this newer area of high net worth, individual, more retail oriented investors who see the great returns that have come from different areas of private markets. Now, more flavors and strategies in private market investing. You talked about private credit. And so that is sort of the newer channel this this excuse me, retail client, high net worth individual investor where product strategies and structures are now accommodating more seamless access for those investors who historically have had limited or no exposure to the private markets. And I think your question about the size of private credit, you can extrapolate that to the private markets as a whole. So to give you a sense and put some numbers around it, the entire NAV, the net asset value of everything in private markets. So equity, credit, real assets, it’s about $7 trillion. That amount has sort of quadrupled over the last sort of ten or so years. And if you compare that to the global world market cap, equity market cap, you’re talking about about 100 trillion plus. And so while it has grown significantly at $7 trillion, it’s still relatively small compared to the world that everyone’s used to. Public equities, public credit realm within private credit. You’re talking about probably, you know, 10 to 15% of that NAV being in private credit. And that’s been one of the more rapid growing areas that we’ve seen across strategies. [00:27:04][124.6]
Guy Adami: [00:27:05] It’s interesting, we talk about valuations a lot in in public markets. You know, valuations I don’t want to say they’re easy to determine, but obviously the market determines it for you to a large extent, private world is entirely different. And, you know, everybody seems to think that despite the fact that valuations are going lower, my company or my entity or my whatever, you know, I am impervious to that. It’s a difficult thing. How do you have those conversations and determine valuations in an environment where a lot of people don’t want to accept the reality that’s going on? [00:27:41][35.9]
Drew Schardt: [00:27:41] I mean, that’s the $64,000 question, sort of what is it worth you private market guys are and girls are full of baloney. The public markets are down 20%. And here you are telling me that June 30th and probably September 30th, you’re going to be flat to down 5%. There’s got to be funny math. There’s something else going on. That’s the way that this sort of skepticism goes. And let me say one thing. So the private markets are correlated to the public markets, period, full stop. So the two, if you look at how they move, they move in tandem. But there’s more muted volatility in the private markets. And if you look at why that is, it really comes down to two fundamental components. The first is purchase price multiple. If you look at the data historically in the buyout landscape, so the equivalent of a public equity investing landscape, more mature private companies, the investors in that buyout world and the private side have bought their companies at about a 20% discount to the multiple that the same company that was publicly listed was trading at at the time they entered. So in other words, there’s more of a cushion because you started at a lower entry multiple then then where the public comps are. So when those public comps come down 20%, in theory, they’re at the same multiple you bought in at. That’s part one. Part two is just this. Private markets have a better governance structure. And what I mean by that is when we buy these assets in the buyout realm, again, talking, using that as an example, you control the company, you control the asset. You are buying the company today knowing you’re going to have to live with it in our world, which is less liquid, you’re going to live with it for five or six years. There’s going to be uncertainty, there’s going to be volatility. And so when you control the company, you control the board, you control the alignment of incentives with employees. You control the strategic direction you control when you buy, when you sell, how much leverage you utilize. All of those factors are dramatically different than the efficient public markets where you control none of those things. As a sort of passive investor, you don’t know whether the stock price is going to go up or down. And so what I’d say is most private market investors are thinking of the world where they know the price multiple is probably going to decline from what it’s been given, how toppy things have been. And so what are the other levers of value creation? You have to have a plan. You have to have a thesis and strategy about creating value, value in a way that’s not just buying low and selling for a higher price like you would count on in the public markets. [00:30:20][158.3]
Dan Nathan: [00:30:20] So so help us out a little bit where the dumb fast money guys here, Drew, and you’re dropping your drop in knowledge here on on you know obviously on private debt. There were two big deals this year that were things that made it into kind of our universe because we were talking about it, obviously, the Citrix deal. Okay. And now Elon Musk buying Twitter and the headlines. You know, yes, there were kind of around valuation a little bit and how valuations changed with the interest rate environment, you know, with a whole host of things changing since these deals were announced in the spring. But the focus as we got to the close of these deals was the credit was that was the debt right to do these sorts of deals. Give us a sense for how these two deals are going to shape, you know, just basically the way buyouts are going to happen in this environment big. Because it looks like the banks that agreed right to kind of provide the debt are wearing, you know, this to the tune of what, maybe billions of dollars lost here. So talk to us a little bit about what’s gone on this year and how unique that is in your professional experience over the last, let’s say, ten years. [00:31:27][66.8]
Drew Schardt: [00:31:28] I mean, that’s a great point. And I think no question back to the earlier comment, everything was sort of going up and to the right. And so underwriting lending standards, the banks being willing to lend the capital a lot of liquidity. You’ve seen now how fickle public markets can be when things go in the other direction. Some of those deals that you mentioned are good sort of case studies for that. I won’t pretend to get into the mind of Elon Musk. And boy, that would be interesting. But I think a big part of the impetus and potentially why he wanted to move forward is he had debt financing arranged. And if he sort of push things down the line in that public debt offering that he was agreed to went away, that becomes more expensive in terms of financing. And so this is where the private landscape, I think, frankly, takes advantage of opportunity and volatility. We estimate there’s somewhere between 40 and $50 billion of hung paper, what you described sitting on these banks balance sheets. This is the time private lenders, private debt, direct lending, love to lean in. Because when your biggest competitor, the public lending markets shut down or shut off or inflows stop, that is when you can get better spreads, better interest rates, returns in addition to better loan documentation in terms to protect you as a lender. And you’re seeing that play out. And even in transactions, I think a part of the financing solution for some of that home paper will ultimately be the private capital, the private credit providers that can help solve some of those challenges that sit on the banks balance sheets today. [00:33:07][99.2]
Guy Adami: [00:33:08] On a side note, I watched somebody hang paper in my dining room. That is a pain in the ass. Like I don’t know how people do that. They’d line up the patterns and stuff. I mean, that’s well beyond my pay grade. I digress. Drew, here’s a question for you. Historically, credits the deep end of the pool, private credit. I mean, that’s sort of like, you know, you’re you’re a few hundred yards out to the ocean and you can’t really see land. But at a certain point, you know, the retail investor has gotten themselves up the learning curve. Now, I’m not suggesting that that’s a group you’re looking to go after, but it’s just a matter of time before I would imagine the retail investor finds their way into your into your vertical. Can you speak to that? [00:33:52][43.7]
Drew Schardt: [00:33:53] Yeah, we hope so. And I think this has been and it’s a broader challenge, frankly, with the retail market in general, and it’s a challenge created by us, the private market industry. We have been a black box. People don’t understand. So what I would say to you is what you want to give the retail individual investors what those institutions have gotten. First and foremost, great and consistent returns and better returns than you could have gotten in the public market strategy. But the other part of it, and it’s almost equally important, is just education, understanding the landscape and understanding the space. And so what I think most investors generally don’t understand is if you look at the numbers of private companies versus public companies, for example, companies in the U.S. have $100 million of revenue. There’s ten times the amount of private companies compared to public companies. And the companies are all shapes and sizes. And so the other myth is this private market stuff. It’s much riskier. The companies are all small. They don’t have profits. That’s not the case. If you look at where the majority of private lending is happening, it’s happening to companies that have greater than 50, 75, $100 million of earnings. So these are real sizable businesses that have just chosen to stay private companies for longer. That’s a trend that has occurred since the early 2000, where the number of public companies is shrinking, the number of private companies is increasing, and they’re staying private for longer. That’s partially because this ecosystem of financing, particularly around credit financing, has evolved. And so a lot of the landscape is lending to those private companies. They do have size and scale. And so I think you’re absolutely right. It’s only a matter of time before investors and the more retail oriented end of the spectrum do what the institutions are already doing, which is focus their traditional public fixed income dollars, take slices of that and put it into this less liquid but generally attractive risk return proposition in private credit. [00:35:55][122.6]
Dan Nathan: [00:35:56] So that’s going to it’s a great point you just made, Drew. And it’s funny because, you know, at least when you’re a pundit or you’re just obsessed with the sexy stories, right? Guys like Adam Newman and his ability to raise, you know, billions of. Whether it be here or overseas and in a very dilutive sort of manner. So when you talk about some of these companies, you know, there’s multiples of profitable private companies relative to these money burning VC machines, you know, that sort of thing. So so you really do have this, you know, investable group, right? That that are just would take it to the bank, you know, cash flows. I mean, what is this obsession that we have with these kind of sexy VC backed, you know, kind of, you know, like the cult of CEO personality, that sort of thing. And is it something that you guys just avoid altogether? [00:36:48][51.8]
Drew Schardt: [00:36:50] That’s such a great point, because I think you hit the word on the head that I was going to use it sexy. It’s fun to anecdotally talk about then deal I did and I was in this round early. The reality though is venture it’s an attractive space, it has a purpose and you’ve seen that over the last sort of 5 to 7 years where that by far has been the best performing strategy in the private markets. But collectively it’s less than 10% of the asset class. So even though it’s in the headlines, it’s popular to talk about as popular to write about or talk about the last deal you did. It is a relatively small part of the most investors private market exposure in portfolio. And I also think it’s a double edged sword, right, because you can have great success stories. But what is the riskiest of all the strategies? Right. It’s the venture world. It’s where, you know, generally speaking, you’re doing 20 to 30 deals. Two or three of them are going to be the home runs that you want to write about and talk about. The other are going to be, you know, the dregs of the portfolio that don’t quite work out. And there is a much broader equity oriented landscape that is, you know, the middle of that, it’s it’s sort of more stable, consistent, risk adjusted returns where, you know, it’s not as sexy or fun to talk or write about, but it’s where the lion’s share of the capital is going and where the lion’s share of the investment investable landscape is for most investors in this private realm. [00:38:16][85.9]
Dan Nathan: [00:38:16] So are you starting to see a bit more I’m seeing it written about a little bit, you know, companies that raised that big valuations over the last couple of years. We just talked about Marc’s right. So a lot of these companies don’t want to do down rounds. And you’re hearing more about private debt. Are we going to see this in a bunch of, you know, money losing VC backed, largely tech and consumer oriented companies? [00:38:38][21.9]
Drew Schardt: [00:38:39] Yeah, it’s a great question. And there’s a lot of there’s a couple of components to it. So I’d start with this. The fundraising environment for a lot of venture capital and growth oriented firms has been a good one for the last five years. So they have a substantial amount of what we call dry powder. So cash that is yet to be invested. So that would imply they can continue to support their existing positions and businesses. The other part of it, though, is this is an area where a lot of these companies that had gotten big deals up rounds, etc., that all happened in the last year or so. So the current sort of cash runway, if you will, is likely to extend through 2023. The interesting part is the question you asked, which is what happens when the rubber meets the road? And there’s still a lot of uncertainty on the macro side. But if things can continue to trend more negatively from a macro perspective, these companies are running out of cash. There’s this buyer seller disconnect of as someone who was in the last round, I want to raise and don’t want to have a down round, but I know my company needs capital to survive. So usually what happens is exactly what we see now. The transaction volume and amount of capital inflows slows or stops dramatically for a period of 6 to 12 months. And then as those businesses come to the end of that runway, I think you’re going to start to have to have some interesting or difficult conversations if the world hasn’t changed, if you aren’t a profitable growth company, that I think that’s going to be the delineating factor for venture and growth. Have you been pursuing growth at any cost or have you been pursuing growth with profitability and some level of cost discipline in mind? And that ultimately may win the day in that that world of venture and growth investing. [00:40:22][102.6]
Guy Adami: [00:40:23] So let’s bring it back to Hamilton Lane and where you’re seeing opportunities obvious. Well, and that’s nothing is obvious to me, but I would submit that the opportunities present themselves and things have been beaten up and where you can sort of swoop in and you know, and I guess in the public world that would fall under the sort of the auspices of technology, you know, big cap, high valuation names and maybe opportunities in the energy space. It’s not as abundant. Can you speak to that? What are you looking at and where do you guys and gals see opportunity? [00:40:52][29.4]
Drew Schardt: [00:40:53] Yeah, a lot of where we’re seeing opportunity are in areas not only that we’ve invested in before, so we know or have a playbook with our partners in terms of the thesis, how we’re going to create value. We’ve done a lot in the sort of logistical services space. It helps to have incumbent position know the. Industry and the players, the health care space, the recurring software space has been just to name a couple of sectors. Some more thematic areas that that we’ve been playing where I think importantly, you’re right that there’s also opportunity in a down market in the private lenders and the private investors know that better than anyone, that you can get the same high quality asset that last year was trading at 15 or 17 times today for maybe 12 or 13 times. Once that buyer seller disconnect starts to abate or the downward pressure continues. This is where you see traditionally vintage years coming out of a downturn tend to be the ones where the private markets outperform. The opportunity costs or investing in the public markets. That gap is the widest in these types of vintage years. It doesn’t mean that returns aren’t going to come down on an absolute basis. I think they will. Whether you’re talking about public or private markets, but I am saying that the relative outperformance you get from the private side tends to be heightened in a more pedestrian public market return environment. And I think you’re starting to see that in terms of the pipeline of opportunities and the pricing as deals start to happen again post downturn. [00:42:27][93.7]
Dan Nathan: [00:42:28] Before we get out of here, just curious what’s kind of the House view at Hamilton Lane on just the macro in general? You know, it’s been almost every risk asset on the planet has been going haywire in some ways our world. You know, if you look at the S&P 500, that seems to be one of the more stable sort of risk assets out there. But just the move that we’ve seen in yields and what that’s meant for the credit markets and commodities and currencies, it’s been it’s been it’s felt like, you know, a decade versus of activity in just a couple of years. Thoughts on the macro here and whether things are about to settle down a little bit? [00:43:02][34.1]
Drew Schardt: [00:43:03] Great question. And so I’d say, you know, just like I started out with and so take everything I say with a grain of salt here. There is so much uncertainty ahead of us that none of us can say with any true certainty how things are going to play out in the next 6 to 12 months. But that’s not what we get paid to do. So with that, you know, I think our house view is that continue to expect volatility. But in terms of sort of monetary policy inflation, our view is that the worst is behind us in terms of inflation. And that was sort of one a in terms of biggest risks from runaway inflation. I think it’s starting to come down. That doesn’t mean that it’s not going to stay or remain elevated. Inflation, particularly here in the US, tends to be more sticky given how much services accounts for, you know, GDP growth. And so service inflation tends to be stickier than goods inflation, which are already starting to see come down. But that said, we believe that there will be a soft ish landing. That probably means a mild recession in the first half of 2023 here in the US. I think Europe’s got some other bigger challenges. They’re probably already in a recession. You’re going to see some some opportunities on the value spectrum there, I think in particular. But it’s going to be a question of how strong your stomach is because there is some more geopolitical chop, obviously, in that realm of the world. And then seeing how things play out again with tensions with China and other things, something to keep an eye on. But China, for example, a market that’s too big to ignore and will continue to be a big part of the global ecosystem. And so back to the macro, it’s a thematic and deal pickers market. You’re going to have to have a more bottom up strategy today than maybe you needed or was required five or six years ago. But ultimately, we think rates stay elevated above the long term rate through the medium term, but start to come down as we enter 2023. [00:45:02][119.2]
Guy Adami: [00:45:04] Drew, how can investors find you? [00:45:06][1.6]
Drew Schardt: [00:45:07] Investors can find us at HamiltonLane.com. There’s all sorts of links to to connect with us. And, you know, we do have some different products in different channels, including institutional including retail channels as well. And so your brokers this is back to the point of access. You know, the platforms, the wealth management platforms for those who are less familiar with us, there’s a pretty good chance that some of the platforms you’re already invested on through your public market investing activities have heard or have affiliations with us as well. [00:45:41][33.5]
Guy Adami: [00:45:42] Drew, thanks for joining. Both Dan Nathan and myself. Look forward to seeing you again soon. Thanks so much. [00:45:47][5.1]
Drew Schardt: [00:45:47] Thanks, guys. Appreciate it. [00:45:48][1.1]
Dan Nathan: [00:45:54] On the tape is a risk reversal. Media Production. This podcast is for informational purposes only. All opinions expressed by me Dan, Nathan, Guy, Danny, Danny, Moses, and any other participants are solely our opinions and should not be relied upon for specific investment decisions. [00:46:09][14.6]
Guy Adami: [00:46:11] Thanks once again to CME Group and AI Connections for sponsoring this episode of On the Tape. If you like what you heard, make sure you hit, follow and leave us a review. It helps people find our show and we love hearing from you can also email us at on the tape at risk reversal. Dot com any time. Follow and connect with us on Twitter at on the tape pod and we’ll see you next time. [00:46:34][23.5]
Dan Nathan: [00:46:35] On the tape is a risk reversal media production. This podcast is for informational purposes only. All opinions expressed by me and Nathan Guy, Danny, Danny Moses and any other participants are solely our opinions and should not be relied upon for specific investment decisions. [00:46:35][0.0]
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