Exciting trends in private credit, private equity, and VC

Transcript

Jake Miller There's really three pieces that we are particularly excited about right now. One is in the private credit space. When banks step back, more specialty lenders can step in, and they can step in at more attractive rates and better risk standards than they could before. Now there's a little bit too much hype in the space right now at an aggregate level. And a lot of these registered liquid products are being marketed to rise in their clients. And we think there's more risk in those, and people assume because once you're in a liquid product holding illiquid underlying, you have a lot of counterparty risk. That said, in more specialty areas of private credit, asset-backed finance, certain parts of the real estate debt market, you've had the big buyer of banks step out, and the folks who are stepping in are able to get really attractive rates.

Joe Lonsdale This is another big trend in our economy is the banks are regulated in a whole new way. That makes it really hard for them to do things. And so alternative credit can go on and do those things and get much better yields for safe stuff.

Jake Miller Yeah, as an example, there's a firm we know of that it wasn't Australia... it was part of an Australian mega-cap commodity producer. They spun out and moved to the U.S. same business, profitable, great company with a long track record. They don't have three years of U.S. audited financials spun out last year. No bank will give them a loan. So if you have the capital to step in and the right partners who can assess the quality, that team opportunity really abounds right now in a way that would be harder when capital is kind of flowing everywhere.

Joe Lonsdale Yeah, there's a venture company I know that helped build a bunch of different companies, and they had shares in a bunch of different things, and the shares are worth somewhere between 200 and 500 million, and they wanted $25 million, and they ended up having to pay over 20% interest rate on the 25 million, even though like it seems like it first came to worse, on the downside, their portfolio is going to really easily cover that 25 million. So private credit is one of the areas.

Jake Miller So private credit is one the other another big one is specialist private equity. And what I mean by that is, you know, how did you win to deal in the upmarket? You wrote the biggest check at the highest valuation. That didn't always mean you were the best operational investor. And so seasoned private equity, with the experience of helping teams get through these higher gross capital periods and portfolios that can be additive to one another to help reduce costs and get people through the next few years, they're winning deals now, even if they're writing the lowest valuation. So that's a really interesting area for us. And then early stage venture opportunities, it feels like they haven't been this many in years, but a little bit more common sense has returned to the market. You have enough time to do a full diligence process to customer references, really get to know the founding team in a way where, you know, when you had a week to turn around in 2021, that was a lot harder.

Joe Lonsdale Some are more disciplined, strong, richer investors earlier still going to be alpha over the next decade. There is the idea, but make sure you're in the ones. There’s a lot of autocorrelation in that space, so make sure the ones know what they're doing, I guess.

Jake Miller Exactly and the autocorrelation point in venture is key because the best founders know who the best VCs are and that word gets around and so you're going to just see that deal flow.

Joe Lonsdale You're overall optimistic, you think, I mean, we obviously have a lot of challenges and problems in this country. You’re optimistic in market innovation. You know, I agree. I think the alternatives world you deal in is basically getting money towards really smart, solutions-oriented people. And the more we can get money towards these people, the more we can just basically confront all the problems that we care about.

Jake Miller And I think that's why I'm so optimistic. I see the smartest people trying to innovate on how capital is deployed. And so a venture capitalist is finding innovators of companies. We're working with a lot of managers who I see as capital innovators and are finding new ways to deploy capital more intelligently, get good ideas off the ground quicker, and are largely succeeding.