The HPScast - Season 10 Finale

Colbert Cannon: Welcome to the HPScast. I’m your host, Colbert Cannon. We’ve reached the end of our tenth season. So today, we’re listening back to our best moments.

This season, I had the great pleasure of speaking with individuals I admire across health care, law and media, as well as my own colleagues at HPS, and my peers in finance.

I am grateful to all of our guests for taking the time to share their knowledge and stories with us. And thanks to you, dear listener, for tuning in.

We’re taking a quick break, but Season 11 is coming soon. Now, without further ado: here’s a recap of moments that made this season.

We launched this season with none other than Kristin Kallergis Rowland, Global Head of Alternatives at JPMorgan Wealth Management.

Colbert Cannon: What’s your perspective on private credit as an asset class at this point in the market cycle?

Kristin Kallergis Rowland: Credit is super interesting to me. I can understand all the reasons why small and medium-sized businesses use private lenders. We’ve skewed towards larger managers, like I said. I think that will serve us well on a go-forward basis. In special situations and distressed, we’ve skewed actually towards smaller managers who are going after more niche, sector-specific opportunities that we think are specialists in that space. But I just think the biggest question I ask my clients when they say, “Is private credit interesting?” I say, “What’s your funding source?” Because if your funding source is public fixed income, there are many managers out there who can give you that illiquidity premium that you deserve if you’re going to take the illiquidity of private markets.

 Colbert Cannon: David Lehman, a Managing Director of HPS’s real estate finance practice, shared his take on the sector.

Colbert Cannon: You mentioned this in terms of the timing and the rates move. You know, real estate is a cyclical business, which people forget because we’ve spent the better part of two decades with the most accommodative central bank policies in history. When you look at that landscape now, what gets you most excited about real estate finance?

David Lehman: The 15 years of the zero interest rate environment that you referenced before – that caused a lot of investing and a lot of growth in portfolios. For example, banks doubled their portfolios in real estate lending from 2012 to last year. And you just saw decision-making as a result of that environment that I think is being unwound right now. And I think that is the opportunity. When you had real interest rates go from close to negative 100 basis points at the end of 2021 to close to positive 200 basis points now – that type of move coupled with the growth in portfolios and where assets have been aggregated – I think you’re going to see new lending, new owners of those assets for the next cycle, whether that be 15 or 20 years.

 Colbert Cannon: We touched on artificial intelligence with one knowledgeable gent: Salim Ismail, the Co-Founder and Executive Director of OpenExO, a global community that connects professionals with organizations to navigate disruptive technologies.

 Colbert Cannon: If you are even a smart and discerning type of reader, you could read a lot of articles about AI and come up with two binary outcomes. Either it’s the “Terminator” movies – robots are taking over, and humanity is doomed, or, AI ushers in a utopian future, saves humanity and the world, and everything’s fine. Why do you think the truth’s somewhere in the middle?

Salim Ismail: I don’t think the truth is in the middle. I think the truth is very much on the AI saves humanity side. The reason that we go down the other side is that when you see technology portrayed by Hollywood, you always see a negative dystopian outcome. The robot overlords take over the world. But the reality of how we’re exploring the world with technology is very, very different. If you think about page rank – Google’s AI that’s crawling webpages around the world – it’s designing and developing a completely different type of intelligence that’s complementary to human intelligence, not replicative. Human beings have evolved for four billion years to do two things: to survive and procreate. AI is not limited with those issues. So why would we think that’s where we’ll end up?

Colbert Cannon: Dr. Brendan Carr, CEO of the Mount Sinai Health System, offered sage advice for stepping into new and challenging roles — something he knows a thing or two about after joining Mount Sinai to run their Emergency Department just one month before the global pandemic hit New York.

 Colbert Cannon: I’m always interested in how people come up the curve on new experiences. How else do you figure out how to do what you didn’t have to do in the old gig?

Dr. Brendan Carr: I mean, the good news is that there’s an enormously deep bench of expertise here. And I remember what I did. For those who don’t know what emergency medicine is, it means that we stand at the front door, whatever comes, comes, and we figure it out. And figuring that out when you are alone in a rural hospital in the middle of nowhere is very different than figuring that out when you’re at a giant academic medical center, where at 3:00 in the morning, if I would like the power of Mount Sinai to emerge, I just have to light it up, and it will. It means that you get very, very comfortable knowing when to know what you know and knowing when you need some guidance and some help, knowing when to call the consult and when not to call the consult. And so, I am very happy to reach out to the brilliant finance folks that we have here, or the brilliant business development folks that we have here. I very, very much believe that the best leaders are mostly invisible and that when people look back, they just pat themselves on the back for having gotten there.

Colbert Cannon: We caught up with Jay Goffman, a bankruptcy lawyer with true business acumen, and the Co-Founder and Co-CEO of Smith Goffman Partners.

 Colbert Cannon: For listeners less in tune to bankruptcy law, what is a prepackaged bankruptcy, and is it factually correct that you invented the prepack, Jay?

Jay Goffman: Yes, I did come up with the idea. For all I know, somebody else may have been thinking about it, but to my knowledge, I invented the idea one night. I can tell you how and when, but essentially, it’s a restructuring where you do all the negotiations on an out-of-court basis, which avoids all the costs and the degradation to the business. And then, when you have your votes in hand, then you go into Chapter 11 for a short period of time – anywhere from 30 days down to a day – in order to confirm the case, make it binding on holdouts and anyone else you couldn’t find, and to take advantage of the other tools of Chapter 11. It’s a way to shorten restructurings from five years down to a matter of days by looking at it as a business transaction. And I always thought that made sense.

 Colbert Cannon: Purnima Puri, who leads HPS’s public credit strategies, shared her view on the future of credit protections in a panel discussion for the pod.

Colbert Cannon: Private credit historically benefited from tighter documents, but with so much capital raised, some private lenders were willing to forego strong credit protections. With the markets on the liquid side open, at least for high quality issuers, and so much dry powder in private credit, will the pendulum swing back towards looser documentation?

Purnima Puri: I think probably, yes. So, there’s a couple of things. The first is that this year the new issues have been predominantly refinancings, I think the number is 67%. So, it hasn’t been, sort of, core new issuance. The second is a lot of it has been much higher quality issuers. So, the minute you get into the higher quality issuers, you’re going to actually see looser documents in the same way if you take the extreme investment grade documents out of the loosest documents in the bond markets.

 Colbert Cannon: We took a sweeping tour of Asia through the lens of foreign policy with Jonathan Stromseth, Professor of the Practice at Duke University’s Sanford School of Public Policy.

Colbert Cannon: You spent time across a range of countries in your time there: Thailand, Vietnam, China. How important to your work was that exposure that you got throughout the region?

Jonathan Stromseth: Yeah, I think that’s a great question. I was very happy after five or six years in Vietnam to get the chance to basically be the country representative of the Asia Foundation in China. And I was the first not to be based in Hong Kong but to actually be based in Beijing and then spent another eight or nine years there. But I did Southeast Asian studies in grad school, and it was just so great to see, kind of, the macro sense of how China relates to the rest of the region.

Colbert Cannon: We were joined by Gareth Mee, Chief Financial Officer at Legal & General Capital, the investing arm of one of the UK’s largest insurance and asset management businesses. Gareth shared how private credit fits into L&G’s portfolio.

Colbert Cannon: So, insurance companies obviously have long-dated liabilities and need long duration assets to satisfy them. L&G has been investing in private credit for some time. Why does private credit make sense for L&G?

Gareth Mee: There is a limited universe of corporate bonds, particularly here in the UK market, once you start getting out to 10, 15 years or even actually beyond seven years. And we’ve got them all, and all of our competitors have got them all. So, you run out of diversification on those long-dated corporate bonds, and we have an insatiable appetite for assets that back our long-dated liabilities. So, first of all, we need a bigger pool to be able to fish in. Secondly, the returns on these corporate bonds vary, and the returns on the liabilities that we’re out there pricing also vary, in some cases not as significantly. But one of the features throughout my career that has made a difference in the insurance products that we work in here at Legal & General is the ability to find the best assets. And so, it has been really, really important, and at various points in the cycle, we’ve had to use different mechanisms. But over the last 10 years, an ability to originate the best private credit in the market in the most capital efficient way has become something that has been a differentiator for Legal  & General and some of our peers.

Colbert Cannon: Chris Stainton, a Managing Director in HPS’s London office, who is focused on direct lending and special situations investing, shared his thoughts on the European credit market.

Colbert Cannon: We have colleagues on the ground in the continent in Europe, but our biggest office in Europe is obviously in London. How do you think philosophically about lending into various countries across Europe?

Chris Stainton: One of the priorities when we’re looking at deals is, how do you plan for a scenario where something doesn’t go well? What does that downside case look like? And unlike many others, our deals generally have covenants, so there will be an early trigger if something goes awry. And what does that actually mean? So where is your asset security? Where is your share pledge? You know, there are certain jurisdictions in Europe, particularly in the south of the continent, where it is going to be very hard to do, I guess, a non-consensual re-capitalization of the cap stack.

In the northern part of the continent, actually, it’s more straightforward to do a non-consensual re-capitalization. I think that’s one of the fundamentals of doing any credit investment is being able to catch on the downside and also control your destiny. So, at HPS, we generally think it’s important to, ideally, speak for all the tranche or a majority of the tranche, write the document yourself in the first principles, and have the covenant and security package to be able to act if the deal goes awry.

Colbert Cannon: We wrapped this season with a showstopper: a conversation with Emmy award-winning comedy & television writer Robert Carlock. Rob is perhaps best known for his work as the showrunner of Tina Fey’s “30 Rock.” He shared his best advice for fostering long-lasting relationships in business and life.

Colbert Cannon: I want to talk about your partnership with Tina because you’ve continued working together. “Unbreakable Kimmy Schmidt,” which is great, and also the movie “Whiskey Tango Foxtrot.” Partnerships and how people maintain those always interests me. How have you sustained your execution at a high level over time? How do you make that work for as long as you guys have?

Robert: I don’t know how conscious we are of it in terms of best practices. We have a good social relationship, which helps. Seeing each other with spouses – Tina’s husband, Jeff Richman, is an incredibly talented composer and does all our music – and our kids are friends. So, I think that actually really helps to see and be reminded of each other’s humanity when you step out of what can be the stress of meeting these deadlines and ratings numbers and notes and whatever else and dealing with actors. In terms of the work, again, I think it’s a question of communication and expectations.

Colbert VO: Thanks again to all of our guests for joining me this season. We’ll be back soon with all new episodes. Until then, I encourage you to check out any episodes you might have missed. Or, you can visit our show notes to find links to all of our Best Ideas.

This podcast was brought to you by AT WILL MEDIA with HPS Investment Partners. Please be sure to rate, review and subscribe on Apple Podcasts, or wherever you like to listen.

See you in the next season.