Traci Alloway

We've heard some numbers from some of the sales side.

Wall Street analysts that suggest that we could see 15% defaults in private credit.

Seems a little high, but it's not so far out of the realm of possibility because we've just seen the practice of extending more leverage to companies that probably shouldn't have that much leverage on them.

Many, many years ago, a good friend of mine who was doing this for a long, long time told me,

Company gets to six times levered.

It's very, very difficult to get out from under that.

And this is back in the early 2000s.

We were in a normal rate environment.

That went by the wayside when we went through this period of extraordinarily low rates for many, many years, post-financial crisis.

But now that we're back where we are today, we're back into that environment where six, seven times leverage all of a sudden at the current borrowing rates becomes a real strain on most companies' balance sheets.

So

Again, if you think about the legacy businesses, some of these software companies that were in these portfolios, they might be 2020 or 2021 vintage LBOs that haven't monetized yet.

They were borrowing versus an historically low treasury rate.

Once we raised rates in 2022, all of a sudden the resets on these loans, because they are floating rate, have gone up.

So it's chewing into the equity value of these businesses and it's putting an increasing amount of strain

on the companies to have to cover their interest expenses.

So I think that all these things filter into more and more pressure on these companies, which could lead us to a spot where we do get to 15% defaults.

I'm not saying that the probability is very, very high, but if it happened, I wouldn't be shocked.

And can I just ask, you said earlier that you don't have any private credit exposure in your fund at the moment.

Is that right?