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Aviation Security Innovations Since 9/11 · Bloomberg Intelligence

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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
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Speaker 1: my co host Matt Miller. Every business day we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast
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Speaker 1: called Apple Podcasts or wherever you listen to podcasts, and
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Speaker 1: at Bloomberg dot com slash podcast. Steve Crowley is Executive
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Speaker 1: VP of K two Security Screening Group, also a former
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Speaker 1: Assistant administrator at the Transportation Security Agency at the t
0:30
Speaker 1: s A. And UM, we want to talk about the
0:34
Speaker 1: changes that we've seen in aviation security since nine eleven,
0:38
Speaker 1: the UH, the improvements really and in in safety and security,
0:43
Speaker 1: and then the vulnerabilities that may still exist. So Steve,
0:47
Speaker 1: thanks very much for joining us. I guess the changes
0:50
Speaker 1: are pretty clear um to anyone over the age of
0:53
Speaker 1: like thirty, right, because we we've all lived through it. Um,
0:56
Speaker 1: and remember the days before you had to take off
0:59
Speaker 1: your shoe is now it's a lot more invasive, but
1:03
Speaker 1: it's not really that bad. Um. How how how much
1:06
Speaker 1: have we seen in terms of improvements in in UH,
1:09
Speaker 1: in safety and security. Well, first, Paul, Matt, thank you
1:13
Speaker 1: for having me on your show. Um, the Aviation Security
1:16
Speaker 1: Enterprise has come a long way since non eleven. Um.
1:19
Speaker 1: Not only do we have better technology to look for
1:22
Speaker 1: and identify the explosives and weapons, but we also have
1:25
Speaker 1: better security tactics, techniques and procedures. I mean, both of
1:30
Speaker 1: these things enhance our security posture. Let me give you
1:32
Speaker 1: some specific examples. UM. You know, as you mentioned back then,
1:36
Speaker 1: we walked through simple melo detector. UM. Now we have
1:40
Speaker 1: UM checkpoint X rays. UH, we have checkpoint on person
1:45
Speaker 1: body scanners. We have increased well, we went from actually
1:49
Speaker 1: a contracted security team twenty years ago to a professional
1:52
Speaker 1: t S A officer cadre of fifty thou strong people. UM.
1:58
Speaker 1: And now we have more law enforcement presence in UH.
2:00
Speaker 1: In the airports were hard in flight that doors, we
2:03
Speaker 1: have air marshals. Kind of what I'm getting at bottom
2:05
Speaker 1: line is the Avia Security Enterprise has implemented a multi tiered,
2:09
Speaker 1: multi layered approach to security. We didn't have this twenty
2:12
Speaker 1: years ago. Steve, with twenty years of hindsight, you guys
2:17
Speaker 1: in a security screening business, was it almost I mean,
2:23
Speaker 1: how did it happen? I guess? I mean, is it
2:25
Speaker 1: just that it was a different time and place, and
2:27
Speaker 1: we didn't think about strengthening the doors and all that
2:29
Speaker 1: kind of stuff. Well back then, if you remember, you know,
2:33
Speaker 1: anything that happened pretty much, anything that happened with an
2:36
Speaker 1: airline UM had to do with taking over the airline
2:40
Speaker 1: to get to you know, hijacking one like to get
2:42
Speaker 1: to another place. It was never really used never not really,
2:45
Speaker 1: it was never used as a weapon. So it's twenty
2:47
Speaker 1: years ago it's used that it was used as a weapon.
2:50
Speaker 1: And so if you think about it, just hardening the
2:52
Speaker 1: cockpit door, you know, they were able to get into
2:55
Speaker 1: the cockpit because they thought it was just a typical hijacking. Hey,
2:58
Speaker 1: I have a knife, I'm not gonna hurt anybody. Just
3:00
Speaker 1: let me, you know, talk to the pilot and and
3:03
Speaker 1: and that. You know, that changed obviously now we don't
3:06
Speaker 1: view it as hijacking anymore. It's terrorism, and it's uh,
3:10
Speaker 1: you know, we will always think of it as airplane
3:13
Speaker 1: as a weapon and never allow this to happen. You
3:16
Speaker 1: know again, well, we haven't seen anything even remotely like
3:23
Speaker 1: that since um September eleven, have we? I mean, I
3:26
Speaker 1: I don't recall any reports of plane being hijacked and
3:30
Speaker 1: then used as a weapon in the last twenty years.
3:32
Speaker 1: That is correct, and that is it is because of
3:35
Speaker 1: the aviation security enhancements that we have made. I said
3:38
Speaker 1: that the multi layered and multi tiered approach UM because
3:42
Speaker 1: there were there there's not even attempts. There's there's there
3:45
Speaker 1: were several attempts, uh probably any less than five UM
3:49
Speaker 1: to bring on an explosive UM, but that was all
3:53
Speaker 1: failed and since then we have not had not even
3:56
Speaker 1: an attempt And again that's because of whipped in place today.
4:00
Speaker 1: How can technology steve make you know, this even safer? Again,
4:06
Speaker 1: it seems a little low tech to have to send
4:09
Speaker 1: you know, get in line, take shoes off if you're
4:11
Speaker 1: not t s a pre approved It seems like there
4:14
Speaker 1: should just be some technology solution that would maybe speed
4:18
Speaker 1: up the process, make it less invasive. Yes, so there
4:22
Speaker 1: are some changes that are happening again behind the scenes.
4:25
Speaker 1: You don't you don't necessarily some of them. But UM,
4:28
Speaker 1: for one, even you know about what ten years ago
4:31
Speaker 1: when they came out with pre check UM being able
4:34
Speaker 1: to look at at folks and put put folks that
4:37
Speaker 1: you're comfortable with a side so that you can actually
4:39
Speaker 1: focus on those folks that you don't know about the unknowns.
4:43
Speaker 1: That actually helps the process and go a little the
4:46
Speaker 1: process to go a little faster efficient. But there are
4:48
Speaker 1: technologies that are that they're putting in place today, actually
4:51
Speaker 1: computed tomography system called CT at the checkpoint. It's kind
4:56
Speaker 1: of similar to the medical technology UM. It's a red
5:00
Speaker 1: image technology that will allow you to kind of manipulate
5:03
Speaker 1: the bag as your bag, your carry on bagg is
5:05
Speaker 1: going through victory or CT system that you don't actually
5:08
Speaker 1: have to have someone to take out things and move
5:11
Speaker 1: things around. You can actually digitally do that, so that
5:13
Speaker 1: becomes a more efficient process as well as these uh
5:17
Speaker 1: what they're deploying is automated automated screening lanes which are
5:22
Speaker 1: uh uh state of the art UM conveyance systems will
5:26
Speaker 1: call it, and that allows basically the bags to automatically
5:30
Speaker 1: be put into the X ray system or the CT system,
5:33
Speaker 1: the bins automatically come back. You can more than one
5:36
Speaker 1: person can divest their stuff at at the same time,
5:39
Speaker 1: so thus you don't have to wait for that person
5:41
Speaker 1: in front of you to finish. So it's things like
5:43
Speaker 1: that that do help the process along and they aren't
5:46
Speaker 1: looking at other things to even become more and more efficient.
5:49
Speaker 1: You know the old Total Recall of someone going through
5:52
Speaker 1: a Total Recall movie where you sup fall sports that
5:54
Speaker 1: you're going through. Well, we're not gonna get down to
5:57
Speaker 1: the point of looking at you know, bones and stuff
5:59
Speaker 1: like that. The ideas that have the passenger continuously walk
6:02
Speaker 1: down this this UH pathway where sensors are they are
6:06
Speaker 1: looking at the individual, so we are moving in that
6:08
Speaker 1: direction and that will happen in the in the future.
6:11
Speaker 1: So at first, I want to say, there's a remake
6:13
Speaker 1: of Total Recall with Colin Ferrell that got really bad reviews,
6:17
Speaker 1: but I thought it was amazing, So I highly recommend
6:20
Speaker 1: checking out the remake. And then I want to ask,
6:22
Speaker 1: are these technologies going to lead to um an easier
6:27
Speaker 1: airport security? I mean, are we gonna eventually leave our
6:30
Speaker 1: shoes on and maybe even carry liquids through? Yes, So
6:35
Speaker 1: the carrying liquid through, let me get that one first.
6:37
Speaker 1: So the compute demography system that's being deployed today and
6:40
Speaker 1: that UH started we'll say a year and a half
6:42
Speaker 1: ago for deployments, you can actually leave the liquids in
6:45
Speaker 1: because those those systems can see that. So yes, that
6:49
Speaker 1: will help with that leading laptops in the bag. The
6:52
Speaker 1: CT system will help with that leaving shoes on. They
6:55
Speaker 1: are integrating uh, some sensors within those walk walk through
6:59
Speaker 1: metal detectors as well as the omboy scanners to actually
7:02
Speaker 1: be able to leave shoes on. UM. Will they always
7:05
Speaker 1: be that way? Where? Yeah? Yeah, like for the entire
7:08
Speaker 1: um you know, traveling public. No, my guess is you
7:11
Speaker 1: will still have to do some of those for those
7:13
Speaker 1: unknown high UM, the folks that need to be looked
7:18
Speaker 1: at more more carefully than others. UM, you always have
7:22
Speaker 1: that kind of capability of those technologies. UM, we'll be
7:25
Speaker 1: able to support that. UM one way that they can
7:27
Speaker 1: will be able to do it with shoes on wor
7:29
Speaker 1: shoes off as an example. Uh, but it won't have
7:31
Speaker 1: to be two separate technologies. Steve, where do you think
7:34
Speaker 1: they're still risk in the system vulnerabilities in the system? Well, UM,
7:40
Speaker 1: Airports continuously conduct res assessments and security vulnerability assessments to
7:45
Speaker 1: identify prioritizes and actually mitigate what they find. We know
7:49
Speaker 1: that the US aviation system is a high value, high
7:53
Speaker 1: priority target for bad actors. UM, and I like to
7:57
Speaker 1: say the bad actor only has to get it right once,
8:01
Speaker 1: while t s A and the Aviation Security Enterprise that
8:03
Speaker 1: you know has to be able to get it right
8:05
Speaker 1: every time. So everybody still needs to remain vigilant. But today,
8:10
Speaker 1: not only do we have uh we have to be
8:12
Speaker 1: bilion against that that conventional bad actor you know who
8:15
Speaker 1: carries the explosive or a weapon on board, but we
8:18
Speaker 1: have to also look at those asymmetric bad actors that
8:21
Speaker 1: are going after um the threat factors such as cyber
8:24
Speaker 1: threats or even the use of drones as weapons. So
8:27
Speaker 1: those things exist, and so the bottom line is we
8:30
Speaker 1: need to be five steps ahead of those bad actors
8:33
Speaker 1: if we want to security that aviation enterprise. All right, Steve,
8:37
Speaker 1: thanks very much for joining us. Steve Curly there is
8:40
Speaker 1: executive VP the k TO Security Screening Group. Of course,
8:44
Speaker 1: as we mentioned, he's a former assistant administrator at the
8:47
Speaker 1: t s A as well, and m really has done
8:51
Speaker 1: so much in security and in leadership, so really appreciate
8:56
Speaker 1: the time with you. Steve, Thanks very much for your
8:58
Speaker 1: insights on this UM. Well tomorrow, I guess the twenty
9:02
Speaker 1: year anniversary of nine eleven. Travel as we knew it
9:06
Speaker 1: changed almost overnight and has become safer and more secure,
9:12
Speaker 1: so we appreciate it. This is Bloomberg. Let's talk a
9:18
Speaker 1: little bit about the crypto space, Michael Cameron, CEO of Skilling,
9:24
Speaker 1: and let's let's start with El Salvador and and what
9:28
Speaker 1: happened the other day. You know, we saw UM the
9:31
Speaker 1: country adopt bitcoin as I guess legal tender. And on
9:35
Speaker 1: the same day we had a big drop in the price.
9:38
Speaker 1: So the two things related. Michael, Hi, Matt, thanks for
9:42
Speaker 1: having me. I do think they are related. I think
9:44
Speaker 1: it's a good old fashioned by the rumor, sell the news.
9:48
Speaker 1: I think some of the people looking for UM, there's
9:52
Speaker 1: a lot of people that like the link. You know,
9:53
Speaker 1: this drop must equate to something that happened. I think
9:56
Speaker 1: if you're looking for that, it's by the room, sell
9:58
Speaker 1: the news. But also it was a bit of a
10:00
Speaker 1: stumbled rollout, and so I think some people thought it
10:02
Speaker 1: made cloud the it make cloud the future for other
10:06
Speaker 1: countries to follow suit. What does it mean, Michael, for
10:09
Speaker 1: a company to adopt it and for a country, I'm sorry,
10:13
Speaker 1: to adopt bitcoin as legal tenor, what does that really
10:15
Speaker 1: mean to you? I think it means that, I mean
10:21
Speaker 1: the obvious cases that it means that they have to
10:23
Speaker 1: that vendors and providers have to accept bitcoin as a
10:28
Speaker 1: as a an asset that they'll accept. And so that's
10:32
Speaker 1: that comes with a lot of operational hurdles that they
10:34
Speaker 1: have to get over, and uh that that you know,
10:37
Speaker 1: it's citizens have to adopt this and understand how to
10:39
Speaker 1: how to use it now to convert from dollars over
10:42
Speaker 1: to BTC and and so on and so forth. So
10:44
Speaker 1: at a very basic level, it just means that every
10:46
Speaker 1: vendor from a little kiosk selling phone top ups to uh,
10:50
Speaker 1: you know, a large purchase of a furniture or a
10:53
Speaker 1: car has to accept bitcoin. What about um skilling, You're
10:59
Speaker 1: a trading form um that tries to make trading I
11:04
Speaker 1: guess transparent and secure and you deal in over eight
11:08
Speaker 1: d f x um Uh well pair currency pairs? Does
11:12
Speaker 1: that include crypto? Yeah? So Skilling is a is a
11:18
Speaker 1: ex and CFD broker. We deal, We do deal in crypto.
11:21
Speaker 1: In fact, we're a leading provider of crypto. We have
11:24
Speaker 1: twenties seven crypto assets right now, which includes the big
11:27
Speaker 1: boys like Bitcoin and ether, but also the more nascent
11:30
Speaker 1: cryptos like dog coin, shiba Inu and more. Well, how's
11:34
Speaker 1: it going? How's that going right now? I mean, is
11:37
Speaker 1: it still um an incredibly hot sector? Bitcoin is trading
11:42
Speaker 1: for over forty dollars right now. It's still incredibly hot.
11:46
Speaker 1: It is. It is the product that that that customers
11:49
Speaker 1: want to trade, you know, where we we find that
11:52
Speaker 1: UM more and more customers are just exclusively trading cryptocurrencies
11:56
Speaker 1: now Skilling it does attract. Skilling is a really relatively
12:00
Speaker 1: new fintech on the scene. Were only a few years old,
12:03
Speaker 1: and uh, we primarily attract a younger audience, but they
12:06
Speaker 1: and they almost exclusively dip their toe into crypto. Some
12:09
Speaker 1: of the older brokers still rely on a lot of
12:12
Speaker 1: customers that trade the kind of the traditional assets, you know,
12:15
Speaker 1: the TAO and the SMP and gold and the Fiat currencies. UM.
12:19
Speaker 1: But we are trying to push the envelope and just
12:21
Speaker 1: offer all the cryptocurrencies that that are making the news,
12:25
Speaker 1: making the headlines, and and it's still on fire. It's
12:28
Speaker 1: still all that people want to trade right now, you know, Uh, Michael,
12:32
Speaker 1: there's still a lot of skepticism out there about bitcoin
12:35
Speaker 1: and crypto in general. In fact, the Sweetish central banker
12:38
Speaker 1: warned that bitcoin could eventually collapse. How do you kind
12:42
Speaker 1: of frame that type of thinking as this market continues
12:46
Speaker 1: to develop. I think that that skepticism is is a
12:51
Speaker 1: little unfair. I think a better I think that these
12:56
Speaker 1: the way comments like that I think are are are
12:58
Speaker 1: going to be judged to be on the wrong side
13:00
Speaker 1: of history. So this cryptocurrencies have with every passing year,
13:05
Speaker 1: there's more and more use cases for both blockchain but
13:08
Speaker 1: also cryptocurrencies, and so I feel like when there's comments
13:13
Speaker 1: like that denigratee cryptocurrencies and the use of blockchain, it's
13:17
Speaker 1: very shortsighted. Fiat currencies like the Prono, like the Swiss
13:22
Speaker 1: frank are not um. They're not without volatility. I mean,
13:26
Speaker 1: just a few, just a few januaries back, m a
13:30
Speaker 1: currency here in Europe, dropped well appreciated. UM. So for
13:35
Speaker 1: all the naysayers that say crypto is a scam or
13:38
Speaker 1: it's too volatile, UM, fiat currencies are not above that.
13:42
Speaker 1: European fiot currencies are not above that. And so I
13:44
Speaker 1: think I think it's here to stay. I think UM,
13:47
Speaker 1: and I think comments like that aren't aren't gonna help
13:49
Speaker 1: and are going to be judged to be on the
13:51
Speaker 1: wrong side of history. But We're gonna clearly need more regulation,
13:54
Speaker 1: aren't we. I mean, you look at all the rip
13:56
Speaker 1: offs going on and defy and um, the fact that
14:00
Speaker 1: it's almost expected by investors. Not that you trade those
14:03
Speaker 1: defy tokens also, but you see them. Yeah. Yeah, there's
14:08
Speaker 1: more regulation coming, and I think that's that's a good
14:11
Speaker 1: thing for companies like Skilling. It's a very good thing.
14:12
Speaker 1: We don't we're highly regulated as it is. You know,
14:15
Speaker 1: we have a significant amount of you know, a m
14:18
Speaker 1: L and k y C checks we put customers through.
14:20
Speaker 1: We don't accept cryptocurrencies right now as uh for deposits,
14:24
Speaker 1: But um, it's something we're we're obviously we're eyeing, and
14:27
Speaker 1: we know that all of our competitors and most brokerages
14:30
Speaker 1: are looking into this. And there are leading companies out
14:33
Speaker 1: there that do what they call KYT tracking, so that
14:37
Speaker 1: you can track the genesis of a cryptocurrency transaction. You
14:41
Speaker 1: can track it very far back and you can see
14:44
Speaker 1: you know where where it's been used. So, um, I
14:46
Speaker 1: think the regulation is building and I and companies like
14:49
Speaker 1: ours welcoming. Hey, Michael, thanks so much for joining us.
14:52
Speaker 1: Really appreciate it. Fascinating store here developing so just we
14:56
Speaker 1: will obviously keep you on the loopas as we need
14:59
Speaker 1: more discussion going forward. Michael Camerman, CEO of Skilling. I'm
15:06
Speaker 1: a credit investor. Where do I go for yield? A
15:10
Speaker 1: lot of folks are looking at the private credit market
15:13
Speaker 1: and we've got an expert in that market. John Klient,
15:16
Speaker 1: President and Chief operating Officer of New Mountain Finance Corporation. John,
15:19
Speaker 1: thanks so much for joining us here. Just give us,
15:22
Speaker 1: you know, for those folks that that aren't that you know, um,
15:26
Speaker 1: you know, knowledgeable about the private credit market, just framed
15:29
Speaker 1: for us. What is the private credit market that you
15:32
Speaker 1: guys playing well? Thanks for having me on the show.
15:35
Speaker 1: I really appreciate it. The private credit market, at least
15:39
Speaker 1: the way we think about it, is a market that
15:41
Speaker 1: finances leverage buyouts for um uh for for financial sponsors
15:47
Speaker 1: across a big continuum of size. So we're providing capital
15:51
Speaker 1: to effectuate leverage buyouts, and historically we've done so in
15:56
Speaker 1: the middle market, but more and more private credit is
15:59
Speaker 1: moving up market and and executing billion dollar tranches to
16:03
Speaker 1: effectuate these larger buyouts. So what kind of return are
16:07
Speaker 1: we talking about? So private credit the pitch across the
16:11
Speaker 1: industry to investors is essentially in private credit you can
16:15
Speaker 1: get consistent seven to ten percent returns essentially with floating
16:21
Speaker 1: rate tranches so you can protect against inflation and changes
16:25
Speaker 1: in the general macro environment. And across the industry, we've
16:30
Speaker 1: we've done a good job achieving returns that are better
16:33
Speaker 1: than the high yield market and the syndicated market, and
16:37
Speaker 1: that continues today. So it's interesting, John, I mean, you know,
16:40
Speaker 1: Matt and I we we talked a lot of folks
16:42
Speaker 1: who in the private equity space and we're just amazed
16:45
Speaker 1: by how much capital and is in the private equity
16:48
Speaker 1: space looking for deals. Give us a sense of kind
16:51
Speaker 1: of the deal flow that you guys are seeing right now.
16:56
Speaker 1: Right now, We've never seen deal flow as high as
16:59
Speaker 1: we see it see it today. Uh. Here at New Mountain,
17:02
Speaker 1: we have a private equity business and we also have
17:04
Speaker 1: the credit business which I'm in charge of. We manage
17:07
Speaker 1: about over twenty billion in private equity, seven billion in credit.
17:11
Speaker 1: And uh, I'll tell you, the zoom environment that we
17:14
Speaker 1: have today has has really created tremendous deal velocity, tremendous
17:18
Speaker 1: efficiencies and uh, there are tremendous amount of players with
17:22
Speaker 1: a lot of capital to put to work, and essentially
17:25
Speaker 1: there's a major competition to to buy all the best assets,
17:29
Speaker 1: and so we've never seen anything like it, and I
17:32
Speaker 1: think that is driven by the large amount of fundraising
17:35
Speaker 1: that we've seen in private equity. And from my seat,
17:38
Speaker 1: we're just trying to keep up with our clients to
17:40
Speaker 1: raise money fast enough to to suit their needs and
17:43
Speaker 1: to be a little finance the bigger and bigger buyouts
17:46
Speaker 1: that that our clients are pursuing. So if I'm high
17:50
Speaker 1: networth individual or family office, how long do I have
17:53
Speaker 1: to commit funds and and what kind of risk am
17:56
Speaker 1: I taking? Well? Across UH, I have a credit There
18:00
Speaker 1: are a lot of different structures here at New Mountain.
18:02
Speaker 1: We do manage a public BDC, so you can buy
18:05
Speaker 1: our stock, buy and sell our stock on a daily
18:09
Speaker 1: basis very easily. So you've got that daily liquidity and
18:12
Speaker 1: you kind of access to a diversified group of of
18:15
Speaker 1: of of private loans that we make to our sponsored clients.
18:19
Speaker 1: There are some structures um that are out there where
18:22
Speaker 1: as a high net worth individual or an institutional investor,
18:25
Speaker 1: you have to commit to the fund of the asset
18:27
Speaker 1: class over many years. So UH big picture, I'd say
18:32
Speaker 1: there are different structures for different time horizons, and it's
18:35
Speaker 1: possible to get access to private credit in a lot
18:37
Speaker 1: of different ways with a lot of different time horizons. John,
18:40
Speaker 1: earlier in my career, I was at the Chase Manhattan
18:42
Speaker 1: Bank and the corporate finance team, and we were lending
18:44
Speaker 1: money to the media sector, which is a great cash
18:47
Speaker 1: flowing industry and supportive of, you know, a good level
18:52
Speaker 1: of debt. What are some of the sectors that you
18:54
Speaker 1: guys like from a private credit perspective. Here at New Mountain,
18:59
Speaker 1: we're really focused on what we refer to as defensive
19:01
Speaker 1: growth industries, So we're trying to lend to businesses that
19:04
Speaker 1: we think are going going to do well no matter
19:06
Speaker 1: what the economic environment looks like. Uh and I think
19:09
Speaker 1: our sponsor clients are are geared the same way. So
19:12
Speaker 1: we're looking at software, technology, enabled business services, subscription data companies,
19:18
Speaker 1: life sciences, especially materials, healthcare. I could go on and on,
19:23
Speaker 1: but it's a lot of niches that have really predictable,
19:26
Speaker 1: recurring revenue models that that we can take comfort in
19:30
Speaker 1: as a lender. What are some of the biggest deals
19:33
Speaker 1: you've been involved in. Can you tell us any of
19:35
Speaker 1: the deal details. Well, I can give you a bunch
19:39
Speaker 1: of deals. It's pretty amazing. Before before COVID, I'd say
19:42
Speaker 1: the biggest deals would barely touch a billion dollars in
19:45
Speaker 1: the private credit market. And today we're we're we're financing
19:49
Speaker 1: deals as small as a hundred million and as big
19:51
Speaker 1: as three billion, where where we'd be a member of
19:53
Speaker 1: a of a club of lenders that financed those bigger deals.
19:57
Speaker 1: But really post COVID, there's been an explosion of larger deals. Uh.
20:02
Speaker 1: You can think about stamps dot com, which is a
20:05
Speaker 1: software business, Affordable Care which is a dentistry business, Galway
20:09
Speaker 1: and insurance broker Um, a novel on Holdings which has
20:13
Speaker 1: been announced that to take private lead by Norrik and Insight.
20:16
Speaker 1: And these are all multibillion dollar deals, uh that that
20:20
Speaker 1: that are that are really popping up every day. So
20:22
Speaker 1: I need all my hands and toes to talk about
20:25
Speaker 1: the billion dollar deals and the private credit markets that
20:27
Speaker 1: have occurred over the last over the last two months,
20:30
Speaker 1: even John just about thirty seconds talked to us about
20:33
Speaker 1: credit quality out there. So I think credit quality is
20:37
Speaker 1: really good as long as you stick to to the
20:39
Speaker 1: sectors that have done well through COVID, so um, and
20:43
Speaker 1: essentially I think it's a lot of the sectors that
20:45
Speaker 1: we focus on. Our book has been very strong through COVID,
20:48
Speaker 1: and we were we worry about credit quality is really uh,
20:52
Speaker 1: companies that are that are exposed to secular change, supply
20:56
Speaker 1: Chaine disruption, which I'm sure you're talking a lot about
20:58
Speaker 1: in your show, labor shore is. So we really we
21:01
Speaker 1: really stay away from, uh, you know, industries that that
21:04
Speaker 1: that could be exposed to those those negative trends. I
21:07
Speaker 1: think about automotive, retail, travel and leisure, heavy heavy industrials, uh,
21:12
Speaker 1: consumer discretionary of course, you know energy. So I really
21:16
Speaker 1: think those are the industries that good, good lenders avoid.
21:19
Speaker 1: John Klein, President, chief operating Officer at New Mountain Finance Corporation.
21:24
Speaker 1: Appreciate your time today. This is Bloomberg. Now let's get
21:32
Speaker 1: over to Don Steinbroger been Uh. We've been anxiously awaiting
21:37
Speaker 1: the CEO of Agecroft Partners and he joins us now
21:40
Speaker 1: at a Richmond, Virginia. Don great to have you on
21:42
Speaker 1: the program. Thanks so much for joining us. You say, um,
21:45
Speaker 1: this is the greatest asset raising environment in the history
21:49
Speaker 1: of hedge funds. At least you have a paper out
21:51
Speaker 1: UM with that title. What do you mean by that?
21:53
Speaker 1: In the history of hedge fund industry? This is the
21:55
Speaker 1: best well I've been in the institutional investment and business
22:00
Speaker 1: for thirty six years. And uh. There are three things
22:04
Speaker 1: that drive flows to hedge funds and all of those
22:07
Speaker 1: are are pointing to me to be UM very strong
22:12
Speaker 1: indicators that two thousand, uh twenty two will be the
22:15
Speaker 1: best environment to raise money in the hedge fund industry.
22:19
Speaker 1: The first is you're just starting with a large asset bates.
22:23
Speaker 1: You know, the hedge fund industry at the end of
22:24
Speaker 1: the second quarter was at four point three trillion, up
22:27
Speaker 1: from six hundred billion at the end of the turn
22:30
Speaker 1: of the century. It's grown every year but three this century.
22:36
Speaker 1: Before this year, flows the hedge fund industry had been static.
22:40
Speaker 1: Most of the growthy industry had come from performance, but
22:44
Speaker 1: a lot of that has changed. You seem very strong
22:46
Speaker 1: flows into the hedge fund industry this year, and three
22:51
Speaker 1: things are resulting in this strong flows. One is just
22:54
Speaker 1: the performance of the hedge fund industry has been very
22:56
Speaker 1: good over the past two years. Most investors are investing
22:59
Speaker 1: in head funds to protect on the down side and
23:02
Speaker 1: add diversification, and they were very happy with performance first
23:06
Speaker 1: quarter of last year when the markets sold off, they
23:09
Speaker 1: were happy with the full year up ten percent. In
23:11
Speaker 1: the first six months of this year, hedge funds are
23:14
Speaker 1: up ten percent, which was the best start of a
23:16
Speaker 1: year since. In addition to that, when you look at
23:21
Speaker 1: flows from hedge fund industries, it tend to be dominated
23:24
Speaker 1: by large institutional investors, and a lot of large institutional
23:27
Speaker 1: investors have allocations to fixed income that are you know,
23:32
Speaker 1: expected to return in the mid two percent range, and
23:34
Speaker 1: a number of these large institutional investors are beginning to
23:38
Speaker 1: shift money away from fixed income into uncorrelated hedge fund strategies,
23:44
Speaker 1: and some of them are also including hedge fund strategies
23:47
Speaker 1: and their fixed income portfolio like direct lending to stress debt,
23:51
Speaker 1: specialty financing. And the third thing that's helping that flows
23:56
Speaker 1: to the industry is the fact that the fees have
23:59
Speaker 1: come down a lot. A lot of institutions used to
24:02
Speaker 1: point at the industry and say, hey, we don't want
24:03
Speaker 1: to pay two and twenty it's too much. But in
24:06
Speaker 1: a recent survey by um UH of the industry, the
24:11
Speaker 1: average management fee is now one point three eight percent
24:16
Speaker 1: and performance fee is UH fifteen point nine percent, and
24:20
Speaker 1: that's standard hedge fund fee. There is a two tiered
24:24
Speaker 1: fee structure which is giving large institutional investors a significant
24:30
Speaker 1: feed discount on the standard fee. So a lot of
24:33
Speaker 1: these big institutional investors are able to get in it
24:35
Speaker 1: like one in ten, which makes a lot more attractive.
24:38
Speaker 1: So you're to day you've had a hundred and fifty
24:40
Speaker 1: billion dollars pour into the hedge fund industry. The main
24:44
Speaker 1: driver of assets next year is going to be manager turnover.
24:49
Speaker 1: You know, I just mentioned hundred and fifty net flows
24:52
Speaker 1: in the industry, but there is a natural turnover of
24:55
Speaker 1: managers and at if you assume the average investor Holton
24:59
Speaker 1: manage for seven years, that means of the industry turns
25:03
Speaker 1: over every year on four point three trillion dollars is
25:09
Speaker 1: six hundred and forty five billion. And that's that's in
25:13
Speaker 1: an average year. And we're predicting that the turnover will
25:16
Speaker 1: be record high next year and done. I guess my
25:21
Speaker 1: thought process over the last four or five, six, seven
25:23
Speaker 1: years has been most of the hedge fund money is
25:26
Speaker 1: going to the big players, the citadels of the World's
25:30
Speaker 1: the point seventy two is I don't see as many
25:34
Speaker 1: folks coming off of Wall Street the trading desk and
25:36
Speaker 1: Morgan Stanley and raising or billion on a long short fund.
25:40
Speaker 1: Are those days over? Where's the money going? Well? So
25:45
Speaker 1: I think of assets are going to five of funds,
25:51
Speaker 1: and I do think disproportionate amount is going to the
25:55
Speaker 1: largest managers, and I think that's bad. I mean, when
25:58
Speaker 1: you look at the performance of larger managers versus smaller
26:02
Speaker 1: managers over long periods of time, larger managers underperform. You know,
26:07
Speaker 1: there's a hedge fund index called the h f R
26:12
Speaker 1: I index, and that index shows performance for hedge funds
26:17
Speaker 1: that are equally weighted, so every hedge fund is weighted
26:21
Speaker 1: the same size, and they also have an asset weighted composit.
26:25
Speaker 1: And if you look at performance over the past or
26:28
Speaker 1: you to date, uh, the equally weighted one is up
26:32
Speaker 1: ten and the asset weighted which is dominated by the largest,
26:36
Speaker 1: is up only six. So large hedge funds has significantly underperformed.
26:41
Speaker 1: Over twelve months, large hedge funds have underperformed by eight percent.
26:46
Speaker 1: They've underperformed by four percent over three years. So what
26:51
Speaker 1: happens is a lot of people like to invest in
26:54
Speaker 1: the glamorous hedge funds to the largest and they get
26:58
Speaker 1: way too much as that's a ner great security ideas,
27:02
Speaker 1: get to looking over larger asset base, so the best
27:05
Speaker 1: diamonds in the rough are not the largest hedge funds. Typically. Hey, Don,
27:10
Speaker 1: thanks so much for joining us. We always appreciate getting
27:12
Speaker 1: a kind of the latest on the world of hedge funds,
27:15
Speaker 1: capital raising, where the money's going strategies, and we always
27:18
Speaker 1: get that with Don Steinberg, CEO and President of Agecroft
27:22
Speaker 1: Partners based in the former capital the Confederacy, Richmond, Virginia,
27:26
Speaker 1: home of the University of Richmond Spiders, my alma mater there. So, uh,
27:31
Speaker 1: Don giving us the latest of hedge funds. You know,
27:33
Speaker 1: I kind of looked at the hedge fund business when
27:35
Speaker 1: I left Wall Street and I said, boy, that's a
27:37
Speaker 1: young man's game, and it is a difficult game, and
27:39
Speaker 1: the folks that make their living there, I think generally
27:43
Speaker 1: earn it. It is a tough game, but a lot
27:45
Speaker 1: of successful folks there. Thanks for listening to the Bloomberg
27:47
Speaker 1: Markets podcast. You can subscribe and listen to interviews with
27:51
Speaker 1: Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller.
27:56
Speaker 1: I'm on Twitter at Matt Miller three. An onfall Sweeney,
28:00
Speaker 1: I'm on Twitter at pt Sweeney. Before the podcast, you
28:03
Speaker 1: can always catch us worldwide at Bloomberg Radio