Alternative Income in a Zero Interest Rate World with Clayton Degiacinto, Managing Partner & Chief Investment Officer, Axonic Capital. TJ Durkin, Co-Head, Structured Credit & Head of Residential & Consumer Debt, Angelo Gordon. Aaron Peck, Partner, Portfolio Manager & Co-Head of Opportunistic Private Credit, Monroe Capital.
Moderated by Daniel Barile, Partner & Senior Portfolio Manager, SkyBridge.
PRESENTED BY
SPEAKERS
Clayton Degiacinto
Founder & Managing Partner
Axonic Capital
T.J. Durkin
Co-Head, Structured Credit & Head of Residential and Consumer Debt
Angelo Gordon
Aaron Peck
Partner, Portfolio Manager & Co-Head of Opportunistic Private Credit
Monroe Capital
MODERATOR
Daniel Barile
Partner & Senior Portfolio Manager
SkyBridge
TIMESTAMPS
EPISODE TRANSCRIPT
Daniel Barile: (00:07)
Hi everybody. Thanks so much for joining us and on behalf of SkyBridge, thanks so much for being here at this very special SALT in New York. I have a great panel today. We're talking about... The title is Alternative Income in a Zero Interest Rate World, but it's going to be a little bit broader than that. We're going to talk about some interesting segments of the credit market generally and yields, but also just opportunity sets. I would like to introduce my fellow panelists Clay from Axonic, TJ from Angelo Gordon and Aaron from Monroe Capital. I'm going to pass it on to them, to just give a bit of background on their firms and themselves and what they invest in. And then from there, we'll talk a bit about markets. Clay.
Clayton Degiacinto: (01:02)
Great, Clay DeGiacinto, Axonic Capital. We've been around since 2009 and manage about $4.5 billion solely in structured credit. We do this through a couple of LP products. Some funds of one and single asset funds and also two registered products, a mutual fund, and an interval fund.
T. J. Durkin: (01:24)
T. J. Durkin, Angelo Gordon's a $45 billion global alternative asset manager, been around since 1988. I've been with the firm 13 years. We focus exclusively on credit and real estate. And I oversee our structured credit business, which is about a six and a half billion [inaudible 00:01:41].
Aaron Peck: (01:43)
Great. Hi, my name is Aaron Peck. I'm a partner at Monroe Capital. Monroe manages just a shade under $11 billion. We're headquartered in Chicago, we're best known as a lower middle market lender. So we're a direct lender, lending money to small companies typically generating between three and $30 million of EBITDA. We offer products everywhere from large institutional products down to funds that can be invested by accredited investors.
Daniel Barile: (02:07)
Great. All right, thanks. Thank you guys. So to kick it off... So obviously we're in an incredibly low yield environment you're basically at all time low yields for on the run. You get a high yield credit and you're close to all time tight spreads, not at all time tight spreads. And there's just very little places for folks to, to generate yield without some trade, right?
Daniel Barile: (02:38)
Complexity or less liquidity. But I think there are exceptions to that kind of generic statement that we're in a low rate world. There are definitely pockets of the market that are really, really interesting, offer higher yields without utilizing leverage to get there, but they require specialization. And when I think about your respective firms, you do a really, really good job at that. And you're involved in segments of the market where there are opportunities, right? So maybe we'll start with you, Aaron. Just talk about... Develop a bit. So when you say middle market direct lending, what that means for the audience here, but then talk a bit about what the unlevered yield and total return profile of a typical portfolio you could put together today, what that looks like.
Aaron Peck: (03:29)
Sure. So direct lending is just what it sounds like. It's a pretty simple business. At the end of the day, we loan money to small companies. We're typically senior secured first lien lenders. So we're doing what banks used to do. It used to be that you go down, you run a small business in your town, you meet with the local banker, then you play around a golf. You tell them you need to build a factory or you want to buy your competitor and they'll lend you some money against your cashflow. That market completely went away after the great financial crisis and the Dodd-Frank rules. All the direct lenders sort of grew up in that market and expanded their offerings and banks really aren't in that market. Banks are mostly asset-based lenders today. And so for us, we're providing cashflow lending. We're lending against business' enterprise value.
Aaron Peck: (04:11)
If a business is worth $100 million dollars, we're usually going to lend about $50 million. So we're typically attaching at around a 50% loan to value. It's senior secured. So unlike most high yield bonds, which tend to be subordinated and unsecured, we're top of the capital structure secured by all the assets of the business. And we're typically four, four and a half times leverage and most important is in the lower middle market where we spend most of our time, that market still has a lot of protections. It has a lot of covenants. And so what that means is when a borrower has its risk position change, they'll trip a covenant and we have a repricing opportunity and the opportunity to change what we get paid for the risk, which is very different from the high yield bond market. It's really the reason I got into direct lending in the first place is I grew up in the high-yield bond market.
Aaron Peck: (04:58)
What I hated about it is you buy a 5% bond. That's the most you're going to make on that bond if the risk of that bond changes and suddenly the company's a lot more risky, you may not get your money back, but you're never going to be able to increase your rate. Your 5% coupon is your coupon. In the direct money business, when there's a change in the risk in the underlying credit, there's a covenant violation, particularly in the lower part of the market where we trade and you'll have the opportunity to adjust your risk. So that's something we really like.
Aaron Peck: (05:25)
And so to the question, Dan, about yields, our loans typically are anywhere from LIBOR 575, 600. So we usually have about a 1% LIBOR floor. So we're generally earning six or 7% on the low end, up to low double digits on the high end. And our portfolios typically on an unlevered basis are going to generate kind of a mid to high single digit return. Everything we do is a current pay vehicle. We usually put some leverage because we're such senior secured. It's pretty low risk assets, pretty secure.
Aaron Peck: (05:57)
So our typical fund, we have an accredited investor fund, for example, that is paying around an 8% dividend yield current and uses about one-to-one leverage.
Daniel Barile: (06:06)
That's great. Thank you, Aaron. Clay? You want to talk a bit about what you can construct given your mandate at Axonic from a yield and total return perspective and what are some of the different exposures there?
Clayton Degiacinto: (06:24)
Yeah, sure. If it were a zero rate world, which you point out, I would want to invest in a market that has a systematic tailwind, something like a shortage of housing in this country that we've had for the past 30 years. I'd want the market to be over the counter, not exchange traded, and ability to execute in a bilateral fashion. I'd want it to be liquid. I'd want it to be dislocated. I'd want there to be numerous players that all have different regulatory constraints via banks or insurance companies, or even the GSEs that sort of dominate the mortgage market in this country. I would want the players to have different and asymmetry of information, asymmetry of systems and asymmetry of the way that they differentiate themselves from a fundamental perspective. I'd want the market to organically delever, meaning every month that cash flows out and turns risk into cash.
Clayton Degiacinto: (07:29)
I'd love for the markets traded at discount. And that's what I'd want to invest in. That effectively is structured credit. And that's what we do. And we do it through RMBS, CMBS, commercial real estate loans, asset backed securities, et cetera. Did I mention dislocated? At times the market has dislocated. We look for those pockets. People say when will the market be dislocated? I say it's always dislocated. You just have to find the sector that's dislocated. And so that's what we invest in, and bonds, loans, et cetera, through our vehicles. And I think our sort of expectation is a cashflow in the mid to high single digits and the total return sort of centered around 10, given the opportunity today.
Daniel Barile: (08:18)
Great.Great. TJ?
T. J. Durkin: (08:20)
Yeah, I'd say Clay and I probably swim in the same pool but maybe different lanes. And so I think his background for what we look at is applicable to us. And I think just getting into probably what we're looking at today is I'll point out three things. And there's two themes that are consistent with the three. One is we believe there are large tangible, addressable markets, typically trillion plus. And two, we think that the credit quality is still tight, especially when you compare it to some kind of more public corporate lending.
T. J. Durkin: (08:51)
So first within residential mortgage finance, everything that doesn't qualify for Fannie or Freddie, we think it's probably commonly referred to as non QM. We think that's very interesting. We're active in purchasing the raw receivables and effectuating securitization. Secondly, student loans in particular private student loans.
T. J. Durkin: (09:12)
And so when you think about that, that notional, that's a trillion and a half, and the headline numbers that you'll see in the Wall Street Journal, et cetera, about the delinquencies and the forbearances, that's generally what is sitting on the government's balance sheet. And when you dive into what the private market is, probably the most popular companies are so fire selling that we think there's really good risk adjusted returns there, and the performance is much, much better. And then I would say, third is credit card lending from the non-bank institutions. So if you think about B of A or Chase or Wells, that's a super private customer, easy access for those people that qualify. There's a whole ecosystem of people in that demographic that wants a flexible way to pay for gas, pay for groceries. And there's a lot of specialty finance companies out there that are serving them. And so we're very active in providing those companies capital, whether it be in debt or buying the receivables, et cetera.
T. J. Durkin: (10:09)
And probably on a return perspective, probably similar to cashflow is being generated in the mid high single digits. And then there's kind of upside on the exit, whether it's a securitization or sale on that will probably get us into the low double digits.
Daniel Barile: (10:24)
Great. Okay. So we'll start with Aaron, but same kind of question to the panel, the other panelists as well. So for the audience here, help reconcile... So you can buy HYG right now and get a high yield, popular high yield ETF, and get a 4% yield. And I think you don't have to be a specialist, you just look at the financial press. And I think the press does a good job of kind of conveying just about any corporate... You put your hand up and say, "Hey I need to raise money," and you can raise money pretty easily in the environment that we're in. So very wide open kind of capital markets. And so reconcile that to why would a good company that's been around for a long time be willing to, or be forced to, I guess, as the market kind of forces them to pay that higher yield.
Daniel Barile: (11:16)
So along with Merome and a handful of other really good middle market direct lenders that have been doing an excellent job generating exceptional risk adjusted returns in the current environment. But it doesn't always tie, I think, unless you're deep in the credit markets, you don't necessarily appreciate why that exists. Why does that inefficiency exist where you can pick up three or four points in yield?
Daniel Barile: (11:38)
So maybe talk through that for the group and also what the trade is there. So in some cases it's going to be liquidity. So you have to have a different kind of duration of capital.
Aaron Peck: (11:48)
Yeah. That's a good question. And I think what's important to understand is that it depends on where you are in the market. So it's specifically to middle market finance, which is the business that we're active in. When you get into the high side of middle market finance, the larger middle market companies, which are typically going to be 75 million of EBITDA and up. There are more alternatives for companies of that size. They can look to selective high yield issuance and in some cases, even [inaudible 00:12:15]. When you get down into the space where Monroe traffics, the three to 30 million of EBITDA kind of borrower, there is no bond market for those borrowers. There is no alternative source of capital other than maybe going to the bank for a first lien sort of asset-based finance and maybe a hedge fund or a mezzanine lender for that mez piece.
Aaron Peck: (12:35)
What we provide them as a one-stop shop. Most of what we're doing today is working with a middle market, private equity firm who's buying the company. And it's really the only way that they can create their levered investment in a borrower is through a firm like ours. And so what does an investor taking on when they take on an investment in a Monroe fund versus a high yield index or even an investment grade index?
Aaron Peck: (12:59)
Well, obviously we're paying a higher yield and there is nothing that's free. So we must be taking on some risk that you aren't taking on if you are in a high grade bond. And so I think what you're taking on is a couple things. One is there's clearly less liquidity in what we do than there is in the both high grade market and even the high yield market.
Aaron Peck: (13:19)
Right? So when we originate a loan, it's a hundred and $150 million loan, it's going into all the Monroe funds. I can't sell that loan easily for the price that I originated that. When things are good, I can certainly syndicate a piece of it at the time, but if I close that loan and we get a year out and I want to sell that loan, there's probably no one who's going to show up and bid me par. Maybe there is, but it's not going to be so easy. It's going to be negotiated. There's no market. And so there's definitely a liquidity premium in what we do.
Aaron Peck: (13:47)
And so...
Daniel Barile: (13:48)
They can still see us.
Aaron Peck: (13:49)
I don't think they like the answer. There's a liquidity premium there, for sure. And then at the end of the day, there's also a bit of a timing issue, right? So a lot of times we're called upon to do a loan where we need to move quickly because there's a transaction that needs to close. And the bond market may take longer to underwrite. There's a registration process. Everything's privately negotiated. And so a lot of our borrowers are willing to pay a little bit more for certainty of execution, timing of execution, particularly in our opportunistic credit business, which is a subset of what we do. More asset focused lending. It overlaps a little bit more with what these guys do. We do some specialty finance lending. Those tend to be things that need to move quickly, close quickly. And the price that we're charging is not usually the determinant of why we're selective. It's more about the flexibility and the capital we provide.
Aaron Peck: (14:33)
And the last piece I'll just mention is it's not untrue that we're going to push out on the leverage side a lot more than a bank would do. So our typical loan is four and a half times EBITDA. You're not going to see a lot of banks hold on their balance sheet for four and a half times EBITDA kind of leverage. That's a little bit more leveraged. So it comes down to a really fundamental, good credit underwriting. And our track record is that we go out and try to make sure we don't lose a lot of money. The lending business is easy. The way you make money is you don't lose money. It sounds dumb, but that's the bottom line. You don't get paid enough to take a lot of risks. So you've got to really underwrite well, and I think that's really what we're trying to do every day.
Daniel Barile: (15:06)
No, that great Aaron. Yeah, I think that the key point is that it's not that you appear in the current market to be getting paid well for those risks. Right? So if you're generating double or close to double the yield of vanilla, unsecured, high yield and you're secured, I think that trade-off from a liquidity perspective makes sense all day long, assuming it matches the duration of your capital. But it seems like one segment of the market where there's still a lot of income and a lot of value in a tough environment. And so maybe TJ talk a bit about the difference. Obviously structured credit is... We can cover a lot of kind of sub sections of the market.
Daniel Barile: (15:58)
But maybe pick one or two to kind of highlight. Drive home this point that there's a lot of inefficiencies in these markets. And you could be a lazy, fixed income investor. You could be mandate constrained as well. So it's not just lazy investors are only investing in on the run IGE and high yield. They may know that there's not a lot of value there, but they may be mandate constrained.
Daniel Barile: (16:23)
But imagine an investor who's not mandate constrained who still overweighed those kind of very vanilla segments in the market right now what's the simple pitch for a couple of segments of your book, just from a relative value perspective.
T. J. Durkin: (16:39)
Yeah. I think just, just even from 10,000 feet, if you think about what corporations and CFOs are doing. They're doing what they're supposed to do right now. Credit's easy. Rates are low. They're extending durations. And so I think if you fast forward to five, whatever amount of years and rates do eventually go up and there are some fundamental concerns, that's a lot of volatility in the price of the corporate security that's got a 10, 15 year maturity.
T. J. Durkin: (17:07)
When you think about a lot of the products, just big picture that we're investing in. If you think about residential real estate, it's a great inflation hedge, right? And so if you're worried about sort of the inevitable rising rates, who knows when it's going to happen, that's a good place effectively to be secure and be hiding. If you look at a lot of the other consumer asset classes that we're investing in, like I mentioned, credit cards as an example, generally shorter duration floating rate. And so I think what this space in particular can do right now, more so than other parts of the market, whether it be corporates or immunities, is offer you yields without a lot of duration risk. And I think that really should have a home in a lot of people's portfolio, given sort of the uncertainty of what's in the Fed's going to do, and sort of where we are just big picture mid 2021.
Daniel Barile: (18:00)
That's great. Clay, maybe a couple of segments of your book you want to highlight? I know that the Freddie SPL portion of the book is fascinating. I think might be worth taking five minutes to kind of unpack for the group here as a segment of the market that I'm sure a lot of folks won't be familiar with. Axonic has really has developed a relationship with Freddie and a real specialization here. So maybe worth highlighting from an opportunity perspective, something that's really unique.
Clayton Degiacinto: (18:29)
Sure. Thank you. And I agree with TJ, I think you said yield without duration, and effectively that's just cash flows. And everybody at my shop, when we look at certain assets or respective investments, we first look at the pool of assets, be it residential mortgage loans, or commercial mortgage loans, or aviation loans, et cetera, and really have a good feeling or a forecast of the pre-payment variability, the default variability, the recovery variability. And then we look at the structure and it's really that function of structure that allows us to insulate and mitigate a lot of risk. I think inflation's here. I don't think it's a debate.
Clayton Degiacinto: (19:17)
I remain surprised when the Fed tries to convince us that it's transitory, but hard assets are a great position to be in. And specifically our firm, we're not always at the top part of the capital structure. So we're at sort of the part of the capital structure I dib to be that fulcrum part where losses and prepayments matter, and inflation is only going to support these assets on a go forward basis. So if we can run a lower severity than we had originally sort of forecasted the bang for your buck or the additional yield enhancements is quite substantial, especially when it's a discount asset or a discount bond.
Clayton Degiacinto: (20:00)
Our relationship with Freddie is really interesting. We've had a relationship for almost 10 years now. I mentioned in the beginning that we love a market and we enjoy our market where there's regulatory constraint for other people. Banks have to think about their tier one capital. Insurance companies have to think about their NAIC rating. Oh, unless you're in Europe. And then you have to think about Solvency or Basel, and those don't always link up.
Clayton Degiacinto: (20:26)
So they're looking at different bonds through different lenses. The GFC also have the regulatory constraint and President Obama put them into a conservatorship. I believe it was Christmas Eve, 2010. And what that effectively meant is that they're supposed to protect taxpayer dollar at all costs. And so you saw the advent of their risk share programs on the residential side, which is generally a reference pool, and it's a synthetic asset, and you may have heard of [ Kazer Stacker 00:20:57] a liquid. It's a tradable market. Almost every dealer will make two way markets on it. The way that I think about it, it's much more about spread than it is about cashflow or yield.
Clayton Degiacinto: (21:10)
So it's certainly not a core component of our portfolio, but on the multifamily side, Freddie approached us in 2013 and 14, because they wanted a risk share partner from day one when the loan originally gets made. That's evolved through several iterations, but now we're maybe a third to 40% of their flows in the small balance lending program. This is for Freddie and $8 billion a year program. I mentioned small balance because Freddie has a, from my perspective, sort of a dual report to both Congress and the Treasury, and they're there to support. I mean, it's not purely financially driven. There's a bit of a social component.
Clayton Degiacinto: (21:58)
And the small balance program, in general, is workforce housing. It's Class B multi-family garden style, low-rise two to $10 million apartment buildings. And we're their risk share partner on that. So with that-
Daniel Barile: (22:13)
To be clear, this is where the country is short enough supply of this housing. You need more middle income housing.
Clayton Degiacinto: (22:19)
We had this view that it was a defensive sector going all the way back to 2015 to 2020. COVID tested that. We saw rental demand and rent prices decrease in the Class A. It actually went up in class B, which is sort of what we would expect. If you're in trouble, if you're a Class a renter, and that's the stainless steel refrigerator, granite countertops that it comes with a yoga mat and cost $2,200 a month. You can always downsize to something that's $1,100 a month. It doesn't come with a yoga mat, but it's housing and it's a two bed, one bathroom or three bed, two bath.
Clayton Degiacinto: (23:00)
And that's the asset that we like. Call it workforce housing. It works for us. If you were to invest in these, and I know there's a lot of managers of money out here, and there's probably room for a multifamily equity, that cap rate, I mean, I guess it depends on where you are, but in New York City probably starts with a three. If you're in a tier three or tertiary market, maybe you're lucky to get something that starts with a five. We're getting 9%. How are we doing that? Well, I'll tell you.
Clayton Degiacinto: (23:31)
The loan is, I don't know, call it a three to 4% to the consumer. And that's for approximately a 70 LTV mortgage. So there's 30% sponsor equity below you. In our partnership, we come in at a layered slice. So we're sort of with a zero to 10 on the loan. So when I think about it in terms of the capital structure and an apartment building, we're effectively that 30 to 37% part of the capital structure in the apartment building. If the loan is three to 4%, the reason why we get 9% is because our partner is Freddie Mac. Freddie has the lowest cost of capital in the world.
Clayton Degiacinto: (24:13)
They're guaranteeing the top 90% of this loan and that trades with a one handle. So when you look at a loan that's zero to 70 and 63% of that trades with a one handle that allows us to... We can make something like 9%. So let's say it's a cherished relationship. If you're in the structured credit world or the RMBS or CMBS world, you go down to Washington, DC, at least once a quarter. I've been doing that since I was on the south side at Goldman starting in 2002. And that's just the way it is. But it's a great partnership. The loan de-risks. It doesn't extend.
Clayton Degiacinto: (24:54)
You mentioned sort of high yield and IG. To me, that's terrifying because you're only subject to spread and the loan doesn't organically de-risk. So when it comes time to try to sell the loan, you're subject to somebody else telling you what price they want to pay for it and something that's prorata in the capital structure, it amortizes down every month. And I'd much rather take reinvestment risk than the longer duration non cash flow risk.
Aaron Peck: (25:23)
No, that great Clay. Really, really interesting stuff. And I think drives home, as everybody in this room knows, or as most know, SkyBridge is an alternative asset manager. And we believe deep down that markets are an efficiency and alternatives that are persistently inefficient and alternative strategies make sense and hedge funds add a lot of value. And I think that an example like that from Clay, I think if you're, if you're a professional hedge fund investor, what Clay just sketched out there with Freddie in that relationship and the ability to source that paper, the terminology you would use is that's a key part of their alpha proposition. Something very, very unique that they're able to do to deliver a unique return stream to investors in a world, or again, going back to the name of the panel, that it seems like there's not that much to do. There's a ton to do. But it's hard. It's hard work. That's why specialist managers like this exist. They have the resources and the ability to focus and extract value.
Aaron Peck: (26:34)
Why don't we go to you, Aaron? And then we'll come back to you TJ and talk a bit in your market. Again, it goes back to the same idea of you need to source those loans. And so for a direct lender, that's no easy feat. A lot of the audience probably doesn't appreciate that you're doing this from A to Z. And so talk a bit about what Monroe's team looks like from a loan origination perspective, what the process looks like. The two minute version.
Aaron Peck: (27:06)
Yeah, for sure. So if you talk to any direct lender, every one of them will talk about proprietary origination. Big buzzword. Most of them don't really know what it means because their proprietary origination is just calling one of the Wall Street banks and asking for a big allocation on a deal. That's not very proprietary because I can find the same deal. Maybe I don't have the relationship, and maybe I can't get 75 million of it. Maybe I can only get 20, but-
Daniel Barile: (27:27)
Here's a big loan and they're going to take a little piece of it versus doing it from scratch.
Aaron Peck: (27:32)
Exactly. So what do we do that's different? We have close to 20 full time loan originators. All they do is go out and look for loan opportunities for Monroe to agent and own. So we'll typically be the only lender or the agent lender where we'll structure the loan. And then we'll bring in a partner who maybe will get a small piece of it. And so that's a very expensive proposition for a firm like ours to hire 20 full-time people. And at the end of the day, as investors when you're looking at, what am I paying for when I'm investing in funds like ours, you ought to be paying for some sort of alpha, right? And so much of the direct lending business has become beta because it's what I first described, buying things off the street. That's that's beta business. I mean, maybe you can generate an alpha by being better than the next guy in underwriting, but at the end of the day, you better be providing something that's unique.
Aaron Peck: (28:18)
And so when you're into a Monroe product, for example, you're going to have a bunch of loans that you're not going to be able to get anywhere else because we've gone out and sourced them. We've invested in the people over our 17 year history to go out and find these opportunities and source them. And it's through relationships. It's through lawyers and bankers and accountants and boutique investment bankers and private equity firms. And it's not to say that we don't compete on rate and that there isn't competition. There certainly is, but relationship matters. And the reason relationship matters is because we don't just give them the money and then they never talk to us again. We've got covenants. And so they want to have a relationship so that if something happens, they know who they're talking to and they can try to work out something. And we don't just take the keys and run with their businesses.
Aaron Peck: (29:00)
And so relationship matters and you can source based on our relationship. And that's what Monroe does. That's what differentiates us from most people in the lower middle market, particularly, is the size and breadth of our origination.
Daniel Barile: (29:11)
TJ, maybe. And I guess, TJ, you can answer the question from a couple of perspectives. So you have the larger Angelo Gordon, which I think is maybe important to touch on very briefly, but then also your world structured credit as well. So a lot of value from kind of sourcing.
T. J. Durkin: (29:26)
Sure. I mean listen, we have a huge corporate business where we can JV on things within the special finance world. And we've done that over time from shorting Hertz into COVID, into looking at some of the mortgage originators coming out of COVID and their high yield bonds. But I mean, I think Clay walked you through how you can partner with the government. And then I think there's the other way of looking at it in that a lot of consumer finance is subsidized by the government. So if you think about Fannie Mae and Freddie Mac, and if you think about most of the student loan origination going on today for undergrads is the direct program, which goes right onto Treasury's balance sheet. And so you can either work with them like Clay walked you through an example where you go to where they're not.
T. J. Durkin: (30:07)
And so I talked about non QM. And so that's where you have to have infrastructure, you talked about a team. We have 35 investment professionals to sort of build that mousetrap to go basically capture that excess return to where the government isn't making it easy and cheap. Same concepts with student loan. And so I think that's how we really think about things in the sense of, there's obviously a lot of money out there. And so we're trying to focus on areas that have just large tangible adjustable markets. And that there's enough to go around.
T. J. Durkin: (30:40)
We shouldn't be drastically seeing price changes quarter over quarter or even year over year. And so we can kind of really understand the product, understand the credit we're generally kind of in a similar place in the capital structure that Clay walked you through. And so getting a credit is crucial to your ultimate return. And that's really how we like to play things. And looking where either the government or the large banks are sort of not playing. And just based on the size of the economy, even just thinking about U.S., there's plenty of no [inaudible 00:31:12].
Daniel Barile: (31:13)
Very cool. So we only have a few minutes left, but the high level question, I think the answers may be different given the different market kind of focuses here. So with the COVID shock to markets last year, I think that Clay and TJ, you tell me. I think that there are less well-capitalized competitors in your space, right? So you've probably seen a little less competition than you were a couple of years ago and both of your firms emerge very strongly from the shock that was last year. Where Monroe, I don't think that's going to be the case. I think that direct lending held up very well throughout the COVID shock early last year. And so maybe just put a final point on that. Would you say that it's, from a competition perspective, even better than it was several years ago or about the same? What would you say, Clay?
Clayton Degiacinto: (32:14)
I mean, sure. COVID killed several of our competitors.
Aaron Peck: (32:18)
There you go. Well stated plainly, there you go.
Clayton Degiacinto: (32:22)
By the way, it also wasn't a function of asset selection. It was a function of liability structure. There was a massive run on liquidity and something that I saw play out faster and deeper and more severe than the financial crisis between 2007 and 2009. But it's when you don't over lever. And you think really carefully about asset selection.
Clayton Degiacinto: (32:49)
I love what Aaron said, because I think about it. It's true in our own business. Buying cheap bonds is really cool and fun, but not buying bad bonds is actually sort of the key to our business. And I think the key to success. We went into COVID with 14 repo counterparties, diversified the days of role, meaning different days of the month, the term and the amount. And now we have eight counterparties and it wasn't a function of them not wanting to work with us. We don't want to work with them.
Clayton Degiacinto: (33:29)
So we really saw who good partners were during COVID, and we're trying to do more with those key relationships on our side. But listen, I mean, this remains an inefficient market that we enjoy. And I sort of pinch myself every day being able to come into work and find good bonds or good positions that cashflow organically out. And having less competitors, I would say in our sort of specialized field, I mean even TJ talks about a total adjustable market. Yeah, you're right. It's giant. And it's also taken by global insurance companies and global banks that have regulatory constraints on their capital. So what's left over, tends to always be the cheapest. Maybe it's because it's part of the fulcrum and the securitization, but that's what we like. We want to be paid and we think that we earn our keep, earn our money by being right about those credits.
T. J. Durkin: (34:29)
Yeah, I think this is also like the second calling of our competitor. There was kind of a small wash out, I would say after like Q four, 15 Q1, 16 high yield, mini blow up. And then this was kind of the round two. And so I think there's less of us that I think are actually dedicated to the space to sort of pursue those opportunities in earnest on a full-time basis, not being tourists.
Clayton Degiacinto: (34:54)
Yep.
Daniel Barile: (34:55)
Aaron, last word?
Aaron Peck: (34:56)
Well Clay said it right. There's really three things that carries out funds. It's credit selection or investment selection problems. It's sources of leverage funding and its sources of equity funding. And a lot of hedge funds saw all three problems during COVID. They pick the wrong assets that blew out and spreads, their leverage went away, the repo counterparties polled, and in some cases, their equity investors, also their hedge fund investors pulled and redeemed. And so that's the perfect storm. It's terrible.
Aaron Peck: (35:23)
And so at the end of the day, I think it's important to think about that when you're investing in funds. What are the sources of risk to you that are beyond just the manager? The manager is [inaudible 00:35:31]. It's how do they manage their business? And so just for us, we're focused a lot on that. So most of our capital's long-term and locked up and most of our credit is long-term and locked up. So then we isolated really at the end of the day to credit selection. And that's something that we do great.
Daniel Barile: (35:43)
All right. Thank you. Thank you, gentlemen. Aaron, TJ, Clay, always a pleasure. Thanks so much. Thanks everybody for joining us.
Aaron Peck: (35:49)
Thank you.
Clayton Degiacinto: (35:49)
Thanks.