The Bridge Ep. 17: Is Private Credit’s Golden Age Over?

The Bridge EP 17, David Manlowe/BSP – Transcript

COLD OPEN
Sonali Basak (00:00:01 -> 00:00:02)
Hi, David.

David Manlowe (00:00:02 -> 00:00:05)
Hey, nice to meet you. Hi, how are you?

Sonali Basak (00:00:05 -> 00:00:05)
I can’t believe we never met before.

David Manlowe (00:00:05 -> 00:00:07)
No, I’m surprised.

Sonali Basak (00:00:07 -> 00:00:14)
So we’re about to speak to David Manlowe, he’s the CEO of Benefit Street Partners

David Manlowe (00:00:14 -> 00:00:18)
Franklin Templeton democratized the ownership of stocks.

Sonali Basak (00:00:18 -> 00:01:33)
I’m team Jenny, so it sold to Franklin Templeton in 2019, and it has almost quadrupled assets since then. So, we’re going to talk a little bit about what he’s seeing in private credit today, given that we have seen all those 2026 hiccups in the market in the first half of the year, and where it goes from here. And now that we’ve seen continued institutional interest.

Welcome to the latest episode of the Bridge by iCapital. I’m Sonali Basak, the Chief Investment strategist at iCapital, and today I am joined by David Manlowe. He is the CEO of Benefit Street Partners, which is a unit of Franklin Templeton. It currently has $93 billion in assets under management as of the end of March and started back in 2008. And so really interesting story, David, you’ve really seen the growth of private credits since the global financial crisis. Let’s talk about now, fast forward to today because we’re seeing tremendous amount of growth run into something of a speed trap.

David Manlowe (00:01:34 -> 00:01:58)
Yeah. So, well, first of all, thank you very much for having me. Really appreciate it. Uh, and, and yeah, I, I, it’s, it’s to me, uh, 18 years, 17 of those 18 years, we were, uh, uh, the favored asset class and, and, uh, topic de jour. And for the last 10 months, it’s been, uh, it’s been an amazing news cycle with, with different, you know, different themes and different threads.

Sonali Basak (00:01:58 -> 00:02:00)
Every favorite child gets put into the doghouse

David Manlowe (00:02:00 -> 00:02:03)
That’s right. We’re, we’re in the doghouse here, I think temporarily,

Sonali Basak (00:02:04 -> 00:02:17)
But as an industry. However, you’ve made some really interesting comments recently that tracks with what we’re hearing in the market that what might form out of this moment is dispersion, that the winners and losers might really start to emerge. Explain your thinking there.

David Manlowe (00:02:17 -> 00:03:01)
It was the, the golden age and era for private credit up until recently, and now I really believe we’re in the age of dispersion or era of dispersion. And what I mean by that is, uh, what you’re seeing is for the prior 18 years, the performance of the asset class, which has been excellent over that, that timeframe, it’s outperformed, you know, liquid loan indices literally around the world, over 1, 3, 5, 10, 15-year periods. So, the asset classes perform very well, and us as managers within that asset class, if you, if you looked at sort of the dispersion around the average, we were all pretty tightly clustered. So, so it was extremely difficult for people who were allocating to the asset class to discern differences between,

Sonali Basak (00:03:01 -> 00:03:04)
It almost didn’t matter who you invested with for a while.

David Manlowe (00:03:04 -> 00:04:42)
Yeah. As, as a, as a GP in the asset class. I kind of hate to say that, but, but it’s true. It was very hard to, to, to distinguish between the different managers. If you look at today, today, the single biggest difference between managers and is how much software exposure the manager has. And so, we know from the data that we get for through BDCs, which provide a high degree of transparency around private credit tra you know, uh, platforms around their exposure to asset classes and even pricing of assets, which we can talk about is that the average private credit platform has about 25% exposure to software. Now, I’m not a SaaS-apocalypse guy, I don’t think that, you know, all of software is going away, but it’s difficult for me to believe that loans that were originated for the most part in 20 21, 20 22 in that sort of timeframe with the underwriting case that went into those, those particular investments, that with the evolution of AI and all the things that we’ve seen since the November Claude, you know, moment, uh, that, that, that it’s all going to work out exactly as was underwritten. So, I think you’re going to see some winners and losers within software that’s going to create winners and losers within software portfolios. And since there’s so much, um, exposure to software within most managers, uh, I think that’s going to create dispersion in returns. We’re lucky in that we have less than 10% exposure to, uh, to software for a variety of reasons. Uh, and so I think it puts us in an advantage position as it relates to that dispersion.

Sonali Basak (00:04:43 -> 00:05:01)
What’s actually going to cause that dispersion? Is it the idea that some of these software companies might go bust? Or is it simply the idea here that, you know, some of these loans were underwritten to things like annual recurring revenue, were the practices just not going to yield the returns that people will expect in the future?

David Manlowe (00:05:02 -> 00:05:25)
So, I think it’s, it’s a couple of things. First, I do think there’s going to be performance, company performance implications of the application of ai. In some cases, it’s going to be a tailwind and you’re going to see, you know, lower costs and so on and so forth. And others, it’s going to be a headwind where the capabilities of a particular mid-size software company will just be replaced by, you know, by AI and us, you know, all coding ourselves.

Sonali Basak (00:05:25 -> 00:05:36)
But structurally speaking, if you’re lending to a software company, a lot of people are now talking about, well, the private equity backer actually might feel that pain first. There’s kind of a lot that has to still go wrong until you get to the credit.

David Manlowe (00:05:37 -> 00:07:09)
That’s that’s very true. If you think about, um, at underwriting, the majority of software loans we’re written at a loan devalue that’s, you know, 25%, 30%, meaning you had, you know, effectively 70 cents of cushion beneath your loan, if you will. So there does need to be a lot of value destruction. But, uh, I, I think that given what’s going on in, uh, in software and AI that you could see that, so there will be winners and losers, and there will be some cases for sure where there’ll be some complete bus, but I do think maybe the bigger problem for, for private credit exposure is, is that the terminal value of the company has been impacted, right? So, you’ve gone from underwriting loans that, you know, we can all debate what the, what the, uh, EBITDA multiples and so on were, but let’s just say 15 times. And now all of a sudden, it looks like these companies, the public companies, uh, software companies are being valued. Really good ones are being valued at seven or eight times. So, then you’ve got to roll forward when these loans start to mature, which based on the maturity wealth for software is really, they don’t mature until 2028, but you’re going to have to be dealing with those maturities in 2027 is what what is going to be the enterprise multiple that, that, that refinancers are going to be able to underwrite to. And that’s where the rubber in my mind meets the road. So, the first half of 2027, so we’re still a ways off the rubber meets the road as we start to see some of these loans people attempt to refinance,

Sonali Basak (00:07:09 -> 00:07:21)
People forget that, that the reason we’re talking about this now in early to mid 2026 is that that 2027 wall begins to emerge and we’re going to see what these companies are actually worth.

David Manlowe (00:07:21 -> 00:07:58)
Yeah. And again, it’s, it’s the, the real wall, the maturities are 28 and 29. And I think what happens is people say, okay, well it’s 2029, I don’t need to worry about it. Well, you, you know, the, the rule of thumb is you like to refinance at least 18 months before our maturity, or if not before that. So, it’s really the, it is the first half of 2027 and 2027 where we’re going to start to really reveal kind of what is the, the new multiple that people are going to be willing to sort of underwrite to. And what does that mean for the current private equity exposure and what does it mean for the current private credit exposure.

Sonali Basak (00:07:58 -> 00:08:22)
You know, not even to go on too long about this, but one kind of exciting thing I think about the market right now is you have the equity market paying attention to how the credit guys are thinking, uh, and talking more in terms of terminal value when it comes to these software companies. That’s right. So, in your mind, how do you kind of draw that game plan out? I mean, how much has terminal value perhaps shrunk in this industry?

David Manlowe (00:08:22 -> 00:08:52)
Well, I, I, again, I think it’s hard at this point, uh, for anyone to predict exactly how AI is going to impact software industry with any kind of precision. And anyone that sits here and says, yeah, they know exactly where things are going to be in two years, I think, I think they’re kidding themselves. The one thing I feel confident in saying is that the multiples that were applied to these companies two, three years ago are going to be lower than that standard in a year from now.

Sonali Basak (00:08:52 -> 00:08:54)
So, what does that mean for the cost of borrowing that

David Manlowe (00:08:54 -> 00:09:16)
I, I, I think ultimately the cost of borrowing is going to go up and has gone up as we’ve all seen for software companies because the, the, um, the impact of the technology on the business model is unclear to, to, to everybody. That lack of clarity on a business model translates into a higher cost of capital.

Sonali Basak (00:09:16 -> 00:09:37)
Do you ever look at how much money is being raised in public markets, debt, debt and equity, um, in private markets across data centers and just regular way for hyperscalers and other, and other fashions in private credit markets? Do you ever feel like maybe there’s not enough being asked for by the lenders in terms of what they’re getting back in terms of return?

David Manlowe (00:09:38 -> 00:11:08)
So, we are not lenders into these gigantic, you know, hyperscaler data center. So, so I can’t, I can’t really comment on that. But sort of the, the impact of AI and the implications on the cost of capital for those type of companies is sort of a very different discussion than the capital that’s being deployed to support the growth of AI. I, I, I happen to be one of the believers that the investments that are, you know, and we all know the numbers, it’s, it’s truly epic amounts of, of capital, uh, being deployed, uh, and needed for building data centers and all the things you mentioned and the, the energy infrastructure to support that. Uh, I think what we’ve seen and been proven, if you recall nine months ago, we were debating is there going to be an ROI on that? Now we know every, uh, you know, every model, every the OpenAI and Anthropic and so on are completely sold out. So, I think that the question about monetization for now has been answered in that the return on those type of investments correspond….

Sonali:
For the frontier labs

David:
for the frontier labs, uh, is going to be supportable. We can all debate whether the, the, the debt investments that are going into that, which incidentally are going to have to be significant, and it’s going to have to be public, it’s going to have to be private, it’s, uh, going to be across the board whether the, the returns that are being demanded by all of us are sufficient into those investments. I think we can debate that. But the actual return for those types of investments, I, I think are, are going to be outstanding.

Sonali Basak (00:11:08 -> 00:11:25)
It’s there, it’s just kind of what you’re getting back for.

David:
That’s right. Right.

Sonali:
Okay. So let, let’s move down the food chain a little bit here. When it comes to AI more broadly, software was kind of the first flashpoint in the private credit market. Do you look around and say, well, AI is actually impacting many, many industries. We have to underwrite differently to account for that?

David Manlowe (00:11:25 -> 00:12:13)
We do. So, I mean, the, the the, uh, the pointy end of the spear was software, but it’s going to impact virtually every industry. I think we’re all sensing that and, and, and seeing that. And so, uh, I, I wouldn’t say we are underwriting differently. I’m saying we have put, and and many of of our peers have put a, a very significant AI framework in place into our existing, uh, underwriting process so that every opportunity is viewed through, okay, what is going to be the impact of AI? And again, we’re making, you know, 5, 6, 7-year loans. So, you have to have an idea what is going to happen over the next three or four years and have deep research that gives you insight and alpha around what that might look like. And you have to make some bets around that in your underwriting for sure.

Sonali Basak (00:12:14 -> 00:12:23)
So then, what do you think is the most immune to AI? Are there areas of your portfolio that you feel that can weather the, the disruption a little better than others?

David Manlowe (00:12:23 -> 00:12:41)
Yeah, we’ve really focused on what I would call industrial services and, and it, it not only isn’t being impacted negatively by AI, if you think of when there’s a trillion dollars of CapEx, I’m rounding up a bit, but a trillion dollars of annual CapEx going into the infrastructure for AI.

Sonali Basak (00:12:41 -> 00:12:42)
We might get there soon anyway.

David Manlowe (00:12:43 -> 00:12:44)
Oh, we might, it might, you know, by the time

Sonali Basak (00:12:44 -> 00:12:46)
2027, here we go,

David Manlowe (00:12:46 -> 00:12:53)
For, I, I think, I think you probably will. I think that’s actually 2027 might be the year where you see that, uh, the,

Sonali Basak (00:12:53 -> 00:12:54)
The big bet that we make on this podcast, .

David Manlowe (00:12:55 -> 00:13:28)
Yeah. I don’t, yeah, that doesn’t seem like a huge one either.

Sonali:
The trillion dollar build out.

David:
Where we are, but, but that, that build out brings with it. So yeah, everyone’s focused on, okay, you have a data center and Nvidia and so on. But the reality is all the other things, the, the water infrastructure, the power infrastructure drags so many other companies and service providers into to supporting that CapEx. I mean, and they’re generally not super exciting or sexy, but you’ve got specialized wiring companies that are, that are involved in, in data center building, all it’s pretty

Sonali Basak (00:13:29 -> 00:13:30)
Geographically dispersed too.

David Manlowe (00:13:31 -> 00:13:44)
It’s very geographic and it’s going to have to be geographically dispersed. So, so I think that that industrial services are, are a big winner from AI and less disruptive impact from, from what we’re seeing. So that’s a, that’s been

Sonali Basak (00:13:44 -> 00:13:49)
are those kinds of companies more so in private markets or public markets, do you find, uh, so

David Manlowe (00:13:49 -> 00:14:03)
So it’s a good, it’s a good balance. But I would say, uh, uh, if I looked as a sort of percentage of the overall market, these are more mid-size companies that are more being financed by private ca you know, by private credit than public.

Sonali Basak (00:14:03 -> 00:14:14)
So, from your perspective, you’re looking at the AI infrastructure play in, in its many forms. Um, what are the qualities of successful companies and what are the risks behind the underwriting to them? Yeah,

David Manlowe (00:14:15 -> 00:14:27)
So, so I think the qualities like, uh, both good companies are, do you have the right management team in place that can manage the growth? Because these companies are all now growing very rapidly, just again, through the pull through that

Sonali Basak (00:14:27 -> 00:14:32)
We keep prescribed. And I keep saying people talk about AI taking CEOs jobs, but I’ve got to say management matters.

David Manlowe (00:14:32 -> 00:15:20)
Oh my gosh. It really, really does. At, at the end of the day, and again, we, we have a, we have a lot of experience with companies that, for example, grew through COVID and didn’t recognize some of the signs of that growth was going to slow and ended up running into, you know, brick walls. So, um, you know, I think management is sort of the most important thing that you need to, you know, underwrite. You also have to underwrite the understanding of AI to, of that management team and how they’re adopting it themselves and benefiting it from, in terms of the tailwinds that we’re we’re talking about. So, I would say the management component of the underwrite has become way more important. It’s always been, you know, near the top of the list, if not the top of the list, but it’s become even more magnified as we’re, as we’re going through this, uh, this period.

Sonali Basak (00:15:20 -> 00:15:33)
Right. Because you have to kind of understand not just the AI food chain, but the issues that you can run into with utilities or energy or Exactly. Um, other forms of, it’s complicated. It’s complicated supply chains

David Manlowe (00:15:33 -> 00:15:53)
Where the bottlenecks are and how do you manage through ’em? How do you get the materials that you need? So yeah, it, it’s a, it’s a, it’s a very complicated world that we have right now, and we’re, you know, we’re obviously seeing it in who would’ve thought memory chips would be the, the new hottest commodity on planet earth, right, a year ago.

Sonali Basak (00:15:53 -> 00:16:28)
Go figure. And so, when you think about the underwriting opportunity here, how do you talk to people about private credit? I keep on calling it private credit 2.0 because it feels like the industry is hitting this growth phase, this maturity phase where a lot of new structures have come to market and a lot of new different types of private credit have been becoming more popular. I’m thinking asset based, I’m thinking, um, opportunistic is something in 2026 we get asked a lot about, given the disruptions that we’ve seen. So how, how now do we kind of clear the slate and talk about private credit? How do your clients ask about it now?

David Manlowe (00:16:28 -> 00:17:45)
So, so I think the, the evolution of private credit has been, you know, it’s been fascinating, right? It started, we started and the industry started 18 years ago with the only flavor of private credit being basically direct lending, right? You know, providing loans to midsize corporate companies here in the US then migrated a bit over in, in, into Europe. And, and to your point, what’s happened over the last five, or six years is the flavors of private credit have started to multiply. You’ve seen the, you know, horizontal expansion of the asset class into asset, but, you know, backed, uh, capabilities into, you know, a a lot of, uh, of fanfare now around investment grade because the direct lending was almost exclusively up until a few years ago, fo focused on sub investment grade companies and infrastructure, uh, you know, so on and so forth. I guess we could throw opportunistic in there as well. And, uh, if I tie it back a bit, so we did a survey at the beginning of this year that that’s proving, you know, pretty accurate around what investors are sort of looking for. And in this case, it was institutional investors, you know, globally, they’re looking for, uh, diversification by product category, this horizontal expansion. They’re looking to diversify since most had stepped into direct lending and had their exposure in direct lending.

Sonali Basak (00:17:45 -> 00:17:47)
They don’t want one scoop of ice cream. They want a few,

David Manlowe (00:17:47 -> 00:18:14)
Yeah, they want different flavors, right? And they, they, because the first flavor they got, I digress a moment, but the first flavor they got, they really liked, why do they like it? because back to what I said earlier, because it’s outperformed the underlying liquid asset class 1-, 3-, 5-, 10-, 15-, and 20-year period. So, it’s been, it’s been a great performing asset. So, what do they want? They want more flavors of that great taste to continue the metaphor, a little tortured of the, of, of the ice cream.

Sonali Basak (00:18:14 -> 00:18:51)
But, you know, just to go back to that, how, how does that describe what’s going on in, in this moment? Because it’s not that performance fell off a total cliff. Yes. Have you seen maybe returns be slightly less than when we were in a higher interest rate environment? Maybe, but we haven’t seen this widespread default environment, but we have seen elevated redemptions, we have seen inflows across the top BDCs start to shrink, um, dividends, uh, being more of the inflows than let’s say, new investors coming in. So, if, if we’ve had great performance, why has there been such negative sentiment?

David Manlowe (00:18:51 -> 00:19:53)
Yeah, I do think we really need to distinguish between sort of the more wealth platform type product and institutional and, and investors, uh, the largest allocators in the world, because again, tying back to this survey we did, again, it was the beginning of the year where it said the institutional investors were going to continue to, if not increase their allocation to private credit and all these different flavors. And it turns out that’s exactly what they’re doing. So, so we’re not seeing any diminution in demand for the product from that channel, we’ll call it institutional, uh, allocators. It’s the entire, you know, focus has been on, a lot of the press has been on what’s happened to these new, you know, wealth platform products, the perpetually private products where to, you know, you’ve, you’ve, uh, correctly identified where there’s, you know, redemption pressure. And uh, so that, that to me is what’s been impacted by the news cycle. So, if we really kind of, if we go back, it was September that we had the Tricolor First Brands moment and then in October and it’d

Sonali Basak (00:19:53 -> 00:19:56)
Be a broadly syndicated market, mostly, which were bank loans, which

David Manlowe (00:19:56 -> 00:20:04)
were bank loans, ironically. And then in October is when you had the, the cockroach comment and that that started the

Sonali Basak (00:20:04 -> 00:20:05)
Jamie Diamond cockroach comment.

David Manlowe (00:20:05 -> 00:21:09)
Exactly. Which, which, you know, he’s walked back and clarified and and so on. But but you know, that, that, that was, that was now, and, and those, those events occurred in the media back in October, so that, that started this negative news cycle. And I’m going to tell you what I’ve learned, uh, through all this is I thought that we as an industry did a really good job of, uh, educating all of our investors about what private credit was, what direct lending was, so on and so forth. And what’s very clear to me, I do think from the institutional investment, the largest allocators, they’re wickedly sophisticated and understand the asset class. But as we got to wealth platforms, we probably needed to do more education about what the asset class was and liquidity and things like that. So, I, I’m, I’m really focused on using this as an opportunity to, uh, increase our education about the asset class, again, how it’s performed, how we think it’s going to perform going forward. It’s it’s liquidity or illiquidity. And I think that’s, that’s what I’m really focused on.

Sonali Basak (00:21:09 -> 00:21:28)
Yeah, I think about this a lot because the liquidity parameters are one of the most important parts of the asset class. And if all is said and done here now, I think one of the benefits is that 5% limit is far more understood. I by wealth advisors, I think you’re right than it was before. Um, this idea that it’s not semi-liquid , that it’s actually not very liquid.

David Manlowe (00:21:29 -> 00:22:14)
Yeah. I think we screwed up in naming the product. Honestly. I mean, it, it is, it’s technically semi-liquid. I think we would’ve just been better off saying it’s illiquid and you can get, you know, sometimes you can get more than 5% depending on what’s going on with, with your, your fellow investors. But here’s the reasons why we put the 5%, you know, uh, cap or if you will, on these funds because it protects everyone. It protects existing investors. It protects you as a departing investor in that the product itself, I would argue was perfectly engineered. It really was. I wouldn’t change anything about the product itself for the asset class of private credit. It’s, it, it was, it was engineered perfectly. We just didn’t collectively as an industry do as good a job, uh, of educating advisors and their clients about that.

Sonali Basak (00:22:14 -> 00:22:19)
How important is that 5% line in the sand in terms of redemption limit?

David Manlowe (00:22:20 -> 00:22:21)
So, what do you mean?

Sonali Basak (00:22:21 -> 00:22:37)
The fact that a lot of these new evergreen vehicles are sticking to 5% rather than going above a lot of interval funds, you can go up to 25%. Yeah. Um, if the board can approve it. Now, on one hand, if you have more liquidity, then you would have to have a bigger liquidity sleeve, yeah.

David Manlowe (00:22:37 -> 00:22:52)
There’s no free lunch. Okay. So, so what we’ve been paid, what we’ve been paid as a private credit lender for a variety of reasons, one of which is our product is illiquid. So, you have to have an illiquidity premium I’d also…

Sonali Basak (00:22:52 -> 00:22:55)
Some people want that. Some people want their money in the ground compounding. Yeah.

David Manlowe (00:22:55 -> 00:23:59)
And, and what, what everybody wants is they want excess spread. Okay? So, one element of that excess spread is, is the illiquidity premium. I’d say there’s other reasons why our products has been so successful with the borrowers because we can be more flexible on, you know, terms and so on and so forth. Um, you know, we don’t have to sta we don’t have to go into a standard box. We can be in a non-standard box, borrowers like us, uh, but at the end of the day, we’re an illiquid product. When we do, we write a piece of paper, it’s, you know, it’s going to mature in five to seven years. And, and there there is no liquidity. And so back to your question, about 5% you anyone can, we can create, Franklin Templeton can create a product that’s got 10%. It’s got 20% sort of liquidity. That just means a much bigger proportion of the portfolio has to be in liquid in instruments, which means by definition you’re giving up that illiquidity premium. And so, the yield and the spread and, and so on of that particular product is going to go down versus the, the products that we’re all comfortable with. And we know now

Sonali Basak (00:23:59 -> 00:24:00)
It could mean a return drag.

David Manlowe (00:24:00 -> 00:24:06)
That’s exactly what it does. Just your returns will be not even could, it will be mathematically lower.

Sonali Basak (00:24:07 -> 00:24:31)
So, when you think about what’s happened here, to your point on what institutions are saying, a lot of institutions will say, well wait a minute, this is a harder market now, which means that money that goes in the ground, new investments could lead to higher returns. What do you make of that kind of thinking? And does it mean that the institutions are getting in at a time that could be a golden vintage one where there are a lot of individual investors who are left out because of fear.

David Manlowe (00:24:32 -> 00:25:36)
The beginning of the year, you know, we would be writing loans and at times would have a, a forehand on the spread. We’re we, we’re not seeing that anymore. So, it’s five and six handles on, on spread. So, spreads have gotten better. Uh, leverage levels have come down a little bit, but it’s all kind of, it’s on the margin. I, what I wouldn’t sit here and tell you is, oh my gosh, we are writing the widest spread loans at the lowest LTVs we’ve ever done in 18 years. That’s, that’s, that, that’s just not accurate. But has it gotten better? Yes. Do I think that’s going to continue? I do. Because you had a tremendous amount of capital formation that was occurring through wealth channels. And my best guess, love to hear yours, My best guess is that’s probably not going to turn around until 2027. So that we have a few more quarters when, you know, uh, it seems like every time there’s a, uh, uh, a redemption that’s above the 5%, it’s a, it’s a top news story. Even though I would, I don’t know why it would be a top news story, but it is. And so, I think that negative fear cycle we’ll continue through the balance of these.

Sonali Basak (00:25:36 -> 00:25:58)
No, the, the, how long it goes on for is an interesting question because the math will bring you there that the level of redemptions that we have been seeing would mean that of course. Why would it be new news that you see continued elevated redemptions? That’s how proration works, right? Yeah, and therefore, you would see it for at least four quarters. To me the question is, is this a four-quarter situation or an eighth quarter situation?

David Manlowe (00:25:59 -> 00:26:39)
Now that is a, a great question and my opinion is the one thing that cures the redemption pressure is performance. Okay. So, the managers that are on the positive side of that dispersion, again, I we’re in an era of dispersion in my opinion with, with uh, managers. The managers that are on the positive side where you’re above that average trend line. Again, I think the average trend line is still going to show outperformance versus the liquid credit indices. But if you’re above that line, I think the reduction, redemption pressure, abates, if you are below that line, I think the redemption pressure stays, uh, in place in 2027 and, and possibly beyond. So very interesting. It’s all about performance.

Sonali Basak (00:26:40 -> 00:27:28)
So, to your point, let’s nerd out here for a moment. Yeah, love it because you’re looking at this environment where the truths that you entered 2026 with are starting to turn around. So, for example, you’re looking at a yield curve that’s flatter as opposed to steeper. That means lending profits for banks are not as exciting as before. And therefore, you had this bank market that was so excited to get into lending. It was heavily subsidized by a lot of investors who are willing to get into syndicated loans as well. I’m just kind of wondering, if you look at the second half of the year, are capital markets going to flow as freely as they did for the first half of 2026, such that people like you have the same kind of competition?

David:
Yeah.

Sonali:
You tend to do better, right? Let’s, you know, just call a spade a spade. Private credit tends to do better when the bank market tends to retract.

David Manlowe (00:27:28 -> 00:29:14)
Yes. Yeah. So, so I think that there, the answer is going to be a, is going to be nuanced, right? And, and you, you have to be focused on what segment of the private credit market you’re, you’re, you’re focused on, right? I think the large cap private credit market, which is the one that’s most influenced by the trends that you’ve mentioned in particularly the, you know, the broadly syndicated loan market. I actually and don’t see that that that uh, changing much honestly because I think the broadly syndicated loan market is still going to remain wide open. If anything, demand for broadly syndicated loans is going to remain stronger than I would’ve predicted, you know, six or eight months because people are still hunting for risk also. Well, and, and, and base rates are higher

Sonali:
Yeah.

David:
Right. Than what people are predicting. So, the actual yields of those instruments are higher. So, I think the demand, uh, and the competition, if you will, between private and public credit within the large cap space is, is going to remain, uh, in place the core middle market, which is really our focus is where I think what the interesting dynamic there is is that the, uh, demand for capital, particularly supporting, you know, AI and hyperscalers and these gigantic product, these gigantic projects is significant. And a lot of private capital is going to go to those projects, which then means you have less competition in the core middle market at a time when yeah, there’s some uncertainty regarding the impact of ai, but where there’s actually tremendous tailwind, you have higher base rates and you’ve got moderately higher spreads and lower leverage level. So, it is a, again, I’m not going to call it golden moment, but it’s, it’s an interesting and a different dynamic in the core middle market than I would’ve been predicting if I was sitting here nine months ago.

Sonali Basak (00:29:14 -> 00:29:29)
And just given how volatile equity markets have been on a, on a single stock or theme basis, you see like momentum on wines every so often. Yeah. It just feels to me that a lot of investors are going to be starting to look at credit very seriously in the environment that we’re in, in, in public and

David Manlowe (00:29:29 -> 00:29:59)
Well, I, I, and I think, so one of the, you know, people are, and advisors are going to look at their portfolio and, you know, uh, with equity performance last quarter being what it was, they’re going to look at their portfolios and say, wow, do I really winna have this amount of exposure to, you know, a dozen stocks, you know, maybe even less than a dozen stocks, or am I going to want to diversify? I think you’re going to get, you know, people are going to be like, I’m going to want to diversify a bit. And I think private credit and credit in general is going to be a beneficiary of that.

Sonali Basak (00:29:59 -> 00:30:13)
You were talking about the different flavors of ice cream

David:
Yeah

Sonali:
a little bit earlier ahead. Uh, let’s just quickly talk about where you were talking about your investor survey, where you’re seeing investors get most excited about allocating to private credit Yeah. The 2.0 version. Sure.

David Manlowe (00:30:14 -> 00:31:31)
So, so we’re, we’re seeing a couple themes. One geographic and then one flavor, right? So, I’ll start geographic. We’re seeing a lot more attention on Europe, and again, that’s not because they think the underlying economy is better in Europe. I, I, I would think we would all probably argue that the underlying economy in Europe is, is in less good shape than the US, but it’s that they’re already significantly allocated into the US, particularly in US direct lending. And Europe has a ton of tailwinds with defense spending and infrastructure spending a lot of, of, of the things that we talked about here in the US with AI are occurring in Europe and, uh, banks are, have been more impacted in terms of stepping back from, from the credit market. So, I think we’re seeing investors talk a lot about diversifying their holdings and increasing their exposure to Europe. Number one Now, from a flavor standpoint, right now, the hot dot is infrastructure credit. Uh, virtually every investor that we’re talking to is talking about infrastructure credit and it, it ties back to, you know, the infrastructure that’s being built to support AI being built to support defense industries outside the us. And so, there’s going to be a very long 5, 10, 15-year super cycle for, you know, infrastructure type of, of investments in the credit that goes along with it

Sonali Basak (00:31:31 -> 00:31:43)
No, infrastructure is for a few reasons, especially in a moderate to high inflation environment, a very exciting prospect for investors. How many investors come to you and say, I want infrastructure that’s not exposed to AI?

David Manlowe (00:31:43 -> 00:32:06)
Yeah. Uh, no one,

Sonali:
really,

David:
No, as a matter of fact, they’re looking at, uh, the tailwinds that AI are providing for infrastructure investments. So, if you look at some of the, you know, gigantic, uh, energy, uh, uh, you know, the power grid type of investments that would be supported and be part of the infrastructure, uh, development I’m talking about, that’s exactly the type of exposure that people are looking for.

Sonali Basak (00:32:06 -> 00:32:17)
As we wrap up here, just kind of big predictions, if you had to think about where you’re going to see the most excitement over the next year or so in this space, what would you say and why?

David Manlowe (00:32:17 -> 00:32:49)
I think the biggest surprise for people we sit here a year from now is that the asset classes overall going to perform very well. So, I think right now you, you would read the paper and think, oh my gosh, there’s going to be performance difficulties, you’re going to see there was, there was a report out at the beginning of the year talking about 16 and 17% default rates, which I thought was literally crazy. Uh, I think people are going to be very positively surprised by that average line for private credit being very positive from a performance standpoint.

Sonali Basak (00:32:49 -> 00:32:52)
So, where’s your prediction on default rates then, industry-wide?

David Manlowe (00:32:52 -> 00:33:20)
Well, so again, I I, I think for private credit, and again, if the data is, is less transparent than it would be in the, in the liquid market, but I would think that you’re going to see where default rates today based on our analysis are in sort of the three-handle territory. I think they could be up in the four, maybe 5% range, but, but, but given the, you know, context of where we are from a, from a spread and a yield standpoint, it’s more than supportable at that levels to produce the outperformance.

Sonali Basak (00:33:21 -> 00:33:30)
Then what throws things off course, I mean, what would be the one thing that keeps you up at night? Like they say, never hire an optimistic credit manager, , right?

David:
That’s right.

Sonali:
Always looking for what could go wrong.

David Manlowe (00:33:30 -> 00:34:03)
Yeah, I still very much worry that we’ve got, you know, tremendous geo-political risk. The second for me would be, uh, it’s amazing to me that we’ve gone from nine months ago talking about rate cuts to now talking about, you know, rate rises. And I would, I worry about if, uh, if the Fed gets ahead of itself and we see multiple rate increases, what does that do for them, you know, three, four-year time horizon that, you know, that we’re looking at for the type of loans that, that we do in terms of overall economic development?

Sonali Basak (00:34:03 -> 00:34:06)
Right, can we really withstand another series of rate hikes?

David Manlowe (00:34:06 -> 00:34:31)
Exactly. Exactly. So, I, I, those are two sort of broad things that I worry about. And then I think we, none of us know exactly how this, you know, AI is going to the, the diffusion of AI in all the industries and, and the pace at which it occurs and so on. So, I think that’s just a, another element that, that makes things, you know, less certain today than, you know, when we were underwriting, you know, three or four years ago.

Sonali Basak (00:34:31 -> 00:34:42)
Uh, David, thank you so much for joining us here. That is David Manlowe, he is the CEO of Benefits Street Partners, a unit of Franklin Templeton steeped in the private credit space. And you’ve been watching The Bridge by iCapital.

END