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Private Credit, IPOs, and Washington · Bloomberg Intelligence

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Speaker 2: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
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Speaker 2: All right, private credit. You know, we love this topic.
0:58
Speaker 2: It's a big growing mark.
1:00
Speaker 3: One and a half around one and a half trillion.
1:02
Speaker 2: Oh my goodness, and you know it's just been growing.
1:04
Speaker 2: I've been calling out that having seen a bunch of
1:07
Speaker 2: credit blobs back in my day. There's going to be something.
1:10
Speaker 2: There's no regulation of this market. Something's going to go wrong.
1:13
Speaker 2: And I keep saying it, but it keeps growing. And
1:15
Speaker 2: I'll tell you what. Pretty much everything we know about
1:16
Speaker 2: the credit private credit business, we learned from Randy Schumer.
1:20
Speaker 2: He's a coet of Senior Lending, a Churchill Asset Management
1:22
Speaker 2: here in New York.
1:23
Speaker 4: Randy, you said ninety yep, I have work to do,
1:27
Speaker 4: yes exactly.
1:28
Speaker 2: I'm just I don't want to put all the blame
1:29
Speaker 2: on you, but talk to us about the growth of
1:33
Speaker 2: this business. Is private credit business has been such a
1:36
Speaker 2: big growth story on Wall Street really since the end
1:38
Speaker 2: of the Great Financial Crisis? How concerned are you about
1:41
Speaker 2: the development of this market? Should investors and should regulators
1:45
Speaker 2: be concerned?
1:46
Speaker 4: And Jess is now part of the private credit policse Yes,
1:48
Speaker 4: she is. Well, the timing of this is great. Thanks
1:51
Speaker 4: for having me on because what's happening is that And
1:55
Speaker 4: I talked to someone on a podcast that we're doing
1:58
Speaker 4: recently that's coming out I think this week about that
2:01
Speaker 4: exact question. Why are people so concerned and why is
2:04
Speaker 4: this viewed as a bubble as opposed to natural growth
2:07
Speaker 4: of moving loans from the public banking sector into the
2:11
Speaker 4: non regulated, which is what the regulators wanted. And he said,
2:14
Speaker 4: because it's new, it feels new. It's not public. These
2:17
Speaker 4: loans are not traded. These are middle market companies. And
2:21
Speaker 4: part of that is just getting educated in the asset claus.
2:24
Speaker 4: You guys have been doing a great job in doing
2:26
Speaker 4: that and helping me get the word out. I think
2:28
Speaker 4: Mark Rowan Apaula pointed out the fact that it's really
2:31
Speaker 4: investor education, and the more education there is, the better
2:34
Speaker 4: that we look. But the fact of the matter is
2:37
Speaker 4: that this is actually a natural evolution away from traded
2:41
Speaker 4: assets where the banks were considered to be not healthy
2:44
Speaker 4: holders of these loans, and so the private credit market
2:47
Speaker 4: has responded to the immense amount of appetite because of
2:51
Speaker 4: so much of market volatility, these loans are untraded and
2:55
Speaker 4: I liquid loans, as opposed to being a negative, are
2:58
Speaker 4: viewed as being positive to a lot of investors, institutional
3:01
Speaker 4: investors who are looking to allocate to non traded, non volatile,
3:07
Speaker 4: less correlated assets. So the reason that the asset class
3:11
Speaker 4: has grown so much is because the investors are looking
3:14
Speaker 4: for alternatives to the sixty forty correlation, you know, the
3:17
Speaker 4: allocation model.
3:18
Speaker 5: That we talked about.
3:20
Speaker 4: And at the end of the day, these are middle
3:22
Speaker 4: market loans. These are low risk, relatively low levered, fully
3:27
Speaker 4: secured with financial covenants, and so think of private credit
3:31
Speaker 4: as middle market lending for grownups. Okay, it's very stable
3:36
Speaker 4: lending that is being now packaged in multiple funds, very
3:41
Speaker 4: diverse investor base across many, many, now thousands of investors
3:46
Speaker 4: who are investing in this asset class, who have experience
3:50
Speaker 4: in other complicated asset classes such as real estate and
3:54
Speaker 4: private credit and public equities and fixed income, and so
3:58
Speaker 4: it's actually meeting a demand and the demand is growing
4:01
Speaker 4: as more investors realize what an opportunity and benefit it is.
4:05
Speaker 3: What is your investment approach for private credit, specifically for
4:09
Speaker 3: your clients, what do you advise them to do and
4:11
Speaker 3: how to have that exposure.
4:12
Speaker 5: Yeah.
4:13
Speaker 4: So we're also very fortunate to be owned by a
4:16
Speaker 4: very large entity called TIAA, which is their holding company,
4:20
Speaker 4: right or Neuvene, which is a trillion dollar asset manager,
4:24
Speaker 4: and they have hundreds of billions of dollars in fixed
4:28
Speaker 4: income and public equities and real estate and municipal bonds,
4:31
Speaker 4: and what their investors are looking at the same thing
4:34
Speaker 4: as our investors at Churchill looking for is the stability
4:38
Speaker 4: of returns. And so in a normal environment, a senior
4:41
Speaker 4: credit we've talked about this will will get you kind
4:44
Speaker 4: of a seven percent on leveraged yield in the current environment,
4:47
Speaker 4: which is why it's very attractive right now because rates
4:50
Speaker 4: are up, they're earning a twelve percent on levered yield,
4:53
Speaker 4: and so when they look at the returns of twelve
4:55
Speaker 4: percent versus what they're getting in other markets, we're representing
5:01
Speaker 4: a lower risk profile and so that's adding to the
5:05
Speaker 4: appetite that these investors are looking for now. In our case,
5:08
Speaker 4: we can offer them senior debt opportunities, we can offer
5:12
Speaker 4: them junior capital, we can offer them private equity. So
5:14
Speaker 4: we have a number of asset classes that we're also
5:18
Speaker 4: offering our private equity sponsors in terms of their financing options.
5:22
Speaker 4: So we're taking the same financing choices that we're giving
5:27
Speaker 4: our clients on the financing side to the investors on
5:32
Speaker 4: the investing side. And that's what makes the sort of
5:35
Speaker 4: nice balance which I think as it investors and frankly,
5:39
Speaker 4: the media and regulators get to understand the asset class.
5:43
Speaker 4: You know, this is not fast money. This is money
5:45
Speaker 4: that investors are focusing long term assets with us long
5:50
Speaker 4: term liabilities because these loans don't disappear tomorrow, they're not traded,
5:55
Speaker 4: and that kind of stability is really at a premium
5:57
Speaker 4: right now.
5:58
Speaker 2: Who is a typical investor in one of your funds,
6:02
Speaker 2: So yeah, we.
6:02
Speaker 4: Don't really have typical investors. We have them from a
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Speaker 4: broad array of types of investors. So we have pension plans,
6:10
Speaker 4: we have wealth wealth funds, we have sovereign wealth funds,
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Speaker 4: we have insurance companies, and essentially, as more and more investors,
6:20
Speaker 4: particularly sophisticated investors, are looking at their options in this
6:24
Speaker 4: higher for longer world, they're thinking, you know, I need
6:28
Speaker 4: a premium yield because I can get five percent on
6:31
Speaker 4: treasuries right now, but I also want stability and those
6:36
Speaker 4: are the things that are attracting now even further down
6:40
Speaker 4: the food chain in terms of family offices and retail.
6:43
Speaker 4: And I think as the asset class grows, and we're
6:46
Speaker 4: calling it kind of the new paradigms, the as investors
6:51
Speaker 4: look at the benefits that private credit is offering and
6:54
Speaker 4: they're seeing some very sophisticated players in this market. They're
6:58
Speaker 4: they're saying, how can we party paid in this asset class.
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Speaker 3: Do you see any red flags that are bubbling up
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Speaker 3: in private credit any corners?
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Speaker 4: Yeah, Well, the thing that is most I think concerning
7:09
Speaker 4: to anybody who has experience in the asset class is
7:11
Speaker 4: high interest rates. Because the thing that when you look
7:15
Speaker 4: at your portfolio with rates now at five and a
7:18
Speaker 4: half percent from a benchmark perspective versus zero a year
7:22
Speaker 4: and a half ago, the interest coverage is shrinking across portfolios,
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Speaker 4: and so everyone looks at that as a risk, and
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Speaker 4: it's a real risk, and so you have to build
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Speaker 4: a portfolio that is ready to accept those higher rates.
7:37
Speaker 4: And the way we do it is we look at
7:39
Speaker 4: very defensive sectors that have high free cash flows that
7:43
Speaker 4: are owned by private equity firms who can grow these
7:46
Speaker 4: businesses to keep pace not only with where GDP is,
7:50
Speaker 4: but also where some of the higher growth sectors in
7:54
Speaker 4: areas like healthcare and business services are going. So give
7:58
Speaker 4: an example, the average growth in both revenues and IBATA
8:01
Speaker 4: in our portfolio right now is about twelve and a
8:03
Speaker 4: half percent. So when you look at the GDP which
8:06
Speaker 4: is bouncing around two three four percent something like that.
8:09
Speaker 4: You're looking at businesses that we think will grow through
8:13
Speaker 4: whatever cycle is coming. It looks like probably a soft
8:16
Speaker 4: or no landing is going to be expected, but our
8:19
Speaker 4: businesses are really faster growing than that. But they also
8:22
Speaker 4: tend to be businesses that are market leaders that will
8:26
Speaker 4: be able to sustain any kind of downturn even if
8:28
Speaker 4: we do have it.
8:29
Speaker 2: What's the deal flow you're seeing from your private equity sponsors.
8:33
Speaker 2: What's it been like today in this higher interest rate environment.
8:35
Speaker 4: We just got the October numbers. We are the most
8:39
Speaker 4: as of the end of October, the most active direct
8:42
Speaker 4: lender in the market right now in the United States.
8:44
Speaker 4: The reason that that's happening is that our private equity
8:47
Speaker 4: sponsors continue to have dry powder that they are raising
8:50
Speaker 4: in their own funds. They wanted to put it to work.
8:52
Speaker 4: They've identified areas of interest, as I mentioned, in these
8:56
Speaker 4: defensive sectors that in this current economy are doing well,
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Speaker 4: and they realize that next year is probably going to
9:02
Speaker 4: be a better year than people think, probably not going
9:05
Speaker 4: to have a recession, and so they're trying to vote
9:07
Speaker 4: with their feet and they're looking for scaled players like
9:11
Speaker 4: Churchill that can write large checks where we have relationships
9:14
Speaker 4: and I think I mentioned this last time. We're an
9:15
Speaker 4: investor in their funds and so we were sort of
9:18
Speaker 4: first in line to be asked to join these deals.
9:22
Speaker 4: We still tend to be pretty picky. We probably do
9:25
Speaker 4: about five percent of the deals that come in the door.
9:27
Speaker 4: So we're looking for it only the best of the best,
9:30
Speaker 4: knowing that we don't know what's coming next year. I mean,
9:33
Speaker 4: think about where we were two or three years ago
9:35
Speaker 4: with COVID and in traits and the good thing. And
9:38
Speaker 4: this goes back to this issue a bubble. These middle
9:41
Speaker 4: market companies have been tested. They've been tested through low rates,
9:44
Speaker 4: they've been tested through high rates, they've been tested through
9:46
Speaker 4: low inflation, they've been tested through high inflation. And so
9:50
Speaker 4: I think the benefit that needs to be explained more.
9:54
Speaker 4: And this is part of this education is why these
9:58
Speaker 4: companies actually do well, in some cases even better than
10:01
Speaker 4: some of the larger companies, because they tend to be
10:04
Speaker 4: in structures that are more conservative, and also with lending
10:08
Speaker 4: partners sisters ourselves that are basically built for the long run.
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Speaker 4: We're going to work through whatever problem these companies have
10:14
Speaker 4: to get to a final resolution. That's a positive one.
10:18
Speaker 3: Since your clients have money to use that's sitting on
10:20
Speaker 3: the sidelines. What do you think this tells us about
10:22
Speaker 3: the direction of the economy. They're willing to take more risk.
10:26
Speaker 4: Yeah, well I think that amazingly. It looks like the
10:29
Speaker 4: FED is engineered some kind of soft lending. Will see
10:32
Speaker 4: what happens. It feels like their language continues to be hawkish.
10:35
Speaker 4: They want to keep people on their toes. But if
10:38
Speaker 4: that's the case, and I do believe that it is,
10:40
Speaker 4: that next year will be a solid, solid year, that
10:44
Speaker 4: could be a good thing. Now in general, I do
10:46
Speaker 4: believe that inflation will be higher and rates will still
10:49
Speaker 4: be higher. But this is kind of the normal that
10:52
Speaker 4: we forgot about that hasn't been with us for fifteen years, right,
10:56
Speaker 4: You've had zero interest rates for a large part of
10:58
Speaker 4: that time. This zero gravity environment we got used to
11:02
Speaker 4: all of a sudden. You know, we're like the Apollo
11:04
Speaker 4: astronauts that they get you back or anybody from in
11:08
Speaker 4: these long space missions, and they can't walk because they're
11:11
Speaker 4: not used to the way to gravity. That's kind of
11:14
Speaker 4: how we're feeling right now. I think the world is
11:16
Speaker 4: not used to having a five percent FED funds rate,
11:19
Speaker 4: but in fact that's the average over the last sixty years.
11:22
Speaker 4: So I think we're returning to that, which is good
11:25
Speaker 4: because when you have zero interest rates, it sort of
11:28
Speaker 4: inspires some problematic behavior. But I think this new normal
11:32
Speaker 4: is actually very positive for private credit and for investors
11:36
Speaker 4: in general.
11:36
Speaker 2: Randy, thanks so much for joining us. Really appreciate you
11:38
Speaker 2: coming in the studio again. Randy Schummer. He's co head
11:41
Speaker 2: of senior Lending and his senior managing director at Churchill
11:44
Speaker 2: Asset Management, one of the leading private credit providers in
11:48
Speaker 2: the marketplace. And again, it's a business. I'm just looking
11:52
Speaker 2: at the some Bloomberg reporting here private credit market has
11:55
Speaker 2: roughly tripled in size since two thousand and fifteen.
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12:14
Speaker 2: Twenty twenty three was not a great year, kids for
12:17
Speaker 2: the IPO market. It was just kind of muted at best.
12:20
Speaker 6: Here.
12:20
Speaker 2: I guess there was a little bit more hope for
12:22
Speaker 2: twenty twenty four. We had some news today Shine the
12:25
Speaker 2: China found an online fashion company that won over one
12:27
Speaker 2: hundreds of millions of shoppers around the world. Has confidentially
12:30
Speaker 2: How confidentially can it be if it's followed to go
12:32
Speaker 2: product in the US and welcome be one of the
12:34
Speaker 2: biggest IPOs in years. Brian Lynch joins is she's head
12:37
Speaker 2: of market insight at Equities in So, Brian, just give
12:41
Speaker 2: us a little summation. How was twenty twenty three in
12:44
Speaker 2: terms of IPO activity?
12:47
Speaker 7: Thanks for having me. Twenty twenty three was certainly an
12:50
Speaker 7: extremely quiet year for IPOs. So far, we've seen about
12:54
Speaker 7: twenty three billion in IPO proceeds, higher than last year,
12:58
Speaker 7: but drastically and lower the the three hundred billion we
13:01
Speaker 7: had seen up to this point in twenty twenty one.
13:04
Speaker 7: So it's been a quiet year. And the fall cohort
13:07
Speaker 7: of IPOs that we did see so Clavio, Instacart, Arm Birkenstock,
13:12
Speaker 7: really did not pave the way for others to follow.
13:16
Speaker 7: It looks like Birkenstock as of today is the only
13:18
Speaker 7: one training above their open price. So it's been a
13:20
Speaker 7: tough year for IPOs. Yet there is a lot of
13:23
Speaker 7: demand f I pos and there are thousands of unicorn
13:27
Speaker 7: companies sitting on the sidelines, you know, figuring out their
13:30
Speaker 7: next move.
13:31
Speaker 3: What does this mean for twenty twenty four.
13:33
Speaker 7: Then yeah, I do think we'll see the market pick
13:37
Speaker 7: up in twenty twenty four, you know, both from a
13:40
Speaker 7: macro perspective, as you know you talked about a bit earlier,
13:44
Speaker 7: we are seeing better macro indicators. We have job growth,
13:48
Speaker 7: we have strong GDP, Inflation is cooling. You know, there's
13:52
Speaker 7: an end in sight when it comes to rate hikes
13:54
Speaker 7: or you know, even rate cuts, So that puts us
13:57
Speaker 7: in a better position. And ultimately a lot of these
14:01
Speaker 7: companies are feeling a lot of pressure from both early
14:03
Speaker 7: investors and shareholders to achieve liquidity. You know, look at
14:07
Speaker 7: Read at a company that was rumored today to be
14:10
Speaker 7: considering an IPO in twenty twenty four. This is a
14:14
Speaker 7: company that was found in two thousand and five, so
14:16
Speaker 7: they've been private for eighteen years. There's a lot of
14:19
Speaker 7: pend up demand for liquidity, and wild platforms like equity
14:22
Speaker 7: Zen can enable some of that liquidity while they're private.
14:25
Speaker 7: It really takes a public market exit for vast number
14:29
Speaker 7: of investors to have access and you know that wide
14:32
Speaker 7: scal liquidity for early shareholders.
14:35
Speaker 2: Is Kim kardashing going to save the IPO market? I
14:38
Speaker 2: hear she's got a company called Skims, which I'm sure
14:41
Speaker 2: John Tucker.
14:41
Speaker 6: Is aware of, but oh he do that's wearing at
14:44
Speaker 6: this skirf.
14:45
Speaker 2: Yeah, talk to us about like, I don't know, what
14:49
Speaker 2: do you know about Skims?
14:51
Speaker 7: Sure? So Skims kind of bucks the trend of some
14:55
Speaker 7: of these other companies. They were just founded in twenty nineteen,
14:58
Speaker 7: so a relatively young company valued out of four billion
15:02
Speaker 7: dollar valuation over the summer, but they're rapidly growing. They
15:07
Speaker 7: obviously have a strong brand name, you know, the connection
15:11
Speaker 7: with Kim Kardashian certainly helps. And you know, from what
15:14
Speaker 7: I've heard, they have a strong product as well. So
15:17
Speaker 7: if they did IPO next year, they would certainly be
15:21
Speaker 7: different than a lot of these ten fifteen, almost twenty
15:24
Speaker 7: year old companies that we expect to hit the markets.
15:27
Speaker 3: What industry groups are doing better at going public at
15:33
Speaker 3: this point versus others that are struggling. Is it more
15:36
Speaker 3: company specific or is it more industry specific?
15:41
Speaker 7: I think it is company specific to some extent. You know,
15:45
Speaker 7: there are certain things that any company is going to
15:48
Speaker 7: need to exhibit to have a successful IPO. They need
15:51
Speaker 7: to be showing profitability, they need to be in growth,
15:54
Speaker 7: and they need to have a strong brand that investors
15:57
Speaker 7: know and recognize. That being said, a lot of these
16:00
Speaker 7: companies this fall showed some of those elements and still
16:04
Speaker 7: weren't successful. The industries that we're seeing the most investor
16:09
Speaker 7: interest in in the private markets are AI and machine learning,
16:13
Speaker 7: so not surprising, information technology so pure tech companies, and fintech.
16:19
Speaker 7: So those are the areas we're seeing interest in the
16:21
Speaker 7: private markets. When you look at AI and machine learning,
16:25
Speaker 7: a lot of these companies are younger companies who are
16:28
Speaker 7: less likely to be close to an IPO. So I
16:32
Speaker 7: think some of these pure tech companies that have really
16:35
Speaker 7: attractive multiples could be the ones, you know that have
16:38
Speaker 7: a more successful debut.
16:41
Speaker 2: You know, Brian, I wonder what the what are the
16:43
Speaker 2: bankers saying as to why they didn't get more done
16:47
Speaker 2: in twenty twenty three. Like back in my day, as
16:49
Speaker 2: long as this market wasn't crashing, I could push out
16:51
Speaker 2: a lot of stuff out the door, particularly from companies
16:54
Speaker 2: that are really looking for some liquidity. What are they
16:57
Speaker 2: saying here, what kind of market do they need? I mean,
16:59
Speaker 2: the S Andp's up sixteen seventeen eighteen percent, even equal
17:02
Speaker 2: weighted it's up four or five percent, So it's not
17:04
Speaker 2: like the market's down.
17:08
Speaker 7: I think you're right. The macro indicators show that we
17:11
Speaker 7: are in a pretty good place for companies to exit.
17:15
Speaker 7: I think that there's just a lot of trepidation in
17:18
Speaker 7: the market given that we haven't seen a blockbuster IPO
17:22
Speaker 7: be successful, you know, this year or last year really,
17:26
Speaker 7: so it's I think it's more of an investors are nervous.
17:30
Speaker 7: They're looking for someone to lead the packing kind of
17:32
Speaker 7: tell everyone, Okay, this is going to work out fine,
17:34
Speaker 7: and we've yet to really see that. I do think
17:38
Speaker 7: once we see one or two really successful IPOs, the
17:41
Speaker 7: doors will open more because you know, the macro factors
17:45
Speaker 7: are there and it should be a decent market to exit.
17:48
Speaker 7: That being said, I think another factor that impacts a
17:51
Speaker 7: lot of these companies is that if they raise capital
17:54
Speaker 7: in twenty twenty one, it's very unlikely that that valuation
17:57
Speaker 7: is still where the market is unless they into it.
18:01
Speaker 7: So they're just going to have to accept that the
18:03
Speaker 7: IPO at a lower evaluation, you know, if they're trying to.
18:06
Speaker 2: Exit, well, Shine could be maybe one of these companies
18:09
Speaker 2: because it's I think according to the Wall Street Journal
18:12
Speaker 2: reporting Shine, which is it's a Chinese company, so that
18:15
Speaker 2: could be an issue for some people. But it's now
18:16
Speaker 2: based in Singapore, was valued around sixty six billion dollars
18:20
Speaker 2: in a fundraising round in May, and is likely to
18:23
Speaker 2: aim for an even higher valuation in an initial public offering,
18:26
Speaker 2: So I guess. And it's got Gold and Sachs and
18:29
Speaker 2: JP Morgan and Morgan Stanley. So I mean, it seems
18:31
Speaker 2: like all the elements are there for Shine. Do we
18:34
Speaker 2: have any sense of timing Shine would be early twenty
18:36
Speaker 2: four later twenty four.
18:39
Speaker 7: Indications look like this would be an early twenty four IPO.
18:43
Speaker 7: But this is also a company that has had its
18:46
Speaker 7: valuation decrease. They raised capital in twenty twenty two at
18:50
Speaker 7: one hundred billion dollar valuation, earlier this year raised again
18:54
Speaker 7: at a sixty six billion dollar valuation, and as you said,
18:57
Speaker 7: looking at an eighty or ninety billion dollar valuation. So
19:00
Speaker 7: they haven't bucked that trend of companies that have had to,
19:02
Speaker 7: you know, accept that their twenty twenty one twenty twenty
19:06
Speaker 7: two valuation may not be where the market is anymore.
19:09
Speaker 7: But to your point, it's a company that has achieved
19:13
Speaker 7: twenty three billion dollars in revenue, had its most profitable
19:16
Speaker 7: half in the first half of this year. You know,
19:19
Speaker 7: it was growing rapidly with new distribution centers in the US, Canada,
19:23
Speaker 7: and Europe. They're opening new manufacturing centers in Brazil and India.
19:28
Speaker 7: So a lot of growth going on there, but also
19:31
Speaker 7: some concerns about their relationship with China, you know, IP infringement,
19:36
Speaker 7: labor practices and some other things. So certainly not a
19:40
Speaker 7: straight forward story on this one.
19:42
Speaker 3: We only have about a minute left. But what other
19:44
Speaker 3: companies should we keep on our radar that could potentially
19:47
Speaker 3: go public next year?
19:49
Speaker 7: Yeah, Reddit's one that we mentioned. They are in comations
19:54
Speaker 7: to potentially file next year. They're private for a very
19:58
Speaker 7: long time, and really they have solidified themselves as one
20:02
Speaker 7: of the leading social media platforms in the US. They
20:05
Speaker 7: made you know, a lot of splashy news in the
20:08
Speaker 7: error of the meme stocks their subreddits. Wall Street Back
20:13
Speaker 7: was really you know, the catalyst for a lot of
20:16
Speaker 7: the retail momentum in the stock market. So I think
20:19
Speaker 7: they are an important one to watch and see. Geek
20:23
Speaker 7: is another one that has confidentially not sorry, not confidentially,
20:27
Speaker 7: had filed to go public, hasn't yet, but has grown significantly,
20:32
Speaker 7: and we know they're considering an IPO, so we have
20:34
Speaker 7: eyes on that one as well.
20:36
Speaker 2: All right, well, hopefully twenty four will be be a
20:37
Speaker 2: better IPO market than we have more opportunities to talk
20:39
Speaker 2: to Brian. Brian Lynch is head of market insight at Equities.
20:44
Speaker 5: In you're listening to the tape cans are live program
20:47
Speaker 5: Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio,
20:51
Speaker 5: the tune in app, Bloomberg dot Com, and the Bloomberg
20:54
Speaker 5: Business App. You can also listen live on Amazon Alexa
20:57
Speaker 5: from our flagship New York station Just say hello, what's playing?
21:00
Speaker 5: Bloomberg eleven thirty.
21:04
Speaker 2: Just met Paul Sweeny live here on Bloomberg Interactive Broker.
21:06
Speaker 2: This is a treat, folks. Neil Hennessy joins us chief
21:09
Speaker 2: market strategist The Hennessy Advisors. He started this back in
21:12
Speaker 2: nineteen eighty nine. I'm not gonna call him old, I'm
21:15
Speaker 2: gonna say he's a seasoned investor. It but we share something.
21:19
Speaker 2: We share something. We both started our careers at Pain whatever,
21:23
Speaker 2: which is a great brokerage, firm, investment bank, great retail presence.
21:28
Speaker 2: Back in the day, it was acquired by I don't
21:30
Speaker 2: know where this now is, but now it's basically the
21:32
Speaker 2: guts of ubs here in the US, but the House
21:35
Speaker 2: of Pain Neil, thanks so much for joining us here.
21:37
Speaker 2: You see a market like this SPX up seventeen to
21:40
Speaker 2: eighteen percent, but it's you take out the Magnificent seven
21:44
Speaker 2: and what do we got here? So how do you
21:46
Speaker 2: look at markets like this that doesn't feel like a
21:49
Speaker 2: healthy market.
21:50
Speaker 8: Well, the market really hasn't gone any place. I mean,
21:53
Speaker 8: as of yesterday, you look at the Nasdaq was up
21:55
Speaker 8: thirty seven percent, but you take out they always say
21:57
Speaker 8: eight stocks, we'll get to the magnificence seven here in second.
22:00
Speaker 8: But essentially you take those out, the market's up seven percent,
22:03
Speaker 8: so it's really gotten no place. That downs up to
22:05
Speaker 8: and a half or three percent.
22:07
Speaker 6: So those eight.
22:08
Speaker 8: Companies have controlled the market. But interesting enough, then you
22:13
Speaker 8: get to three weeks ago, I guess we came up
22:15
Speaker 8: with the new slogan magnificent seven.
22:17
Speaker 6: Then Netflix went.
22:19
Speaker 8: Out, but that made me think to go back to
22:22
Speaker 8: nineteen sixty when the movie was made, The Magnificence Short.
22:27
Speaker 8: So I'll give you something to think about here is
22:30
Speaker 8: in that movie, the ending, they hired seven gunslingers to
22:33
Speaker 8: help protect the town and there are only three left.
22:37
Speaker 8: So you tell me which three of the seven are
22:40
Speaker 8: going to be left?
22:41
Speaker 2: So what do you do with a market that has
22:43
Speaker 2: that lack of breath? I know you guys at Hennessey
22:45
Speaker 2: are value investors, So how do you approach this market?
22:50
Speaker 2: How has it changed maybe over the last several years?
22:52
Speaker 8: As you know, you know value, what is a place
22:57
Speaker 8: that you want to be if you want to play again?
23:00
Speaker 8: So look at the SMPT five hundred you're talking about.
23:05
Speaker 8: Apple is seven over seven percent of that thirteen percent
23:09
Speaker 8: of the Nasdaq. And if you think logically, would you
23:12
Speaker 8: put thirteen percent of your money in one stock?
23:16
Speaker 6: Probably not?
23:17
Speaker 8: Okay, So but that's what people have been doing at
23:20
Speaker 8: some point in time, just like the late nineties when
23:23
Speaker 8: all the value managers were getting fired because if you
23:25
Speaker 8: weren't twenty three years old and you didn't have a
23:27
Speaker 8: dot com on your forehead, you were fired. But essentially,
23:32
Speaker 8: you know, I love the mid cap arena, like the
23:35
Speaker 8: Hennessy MidCap thirty. And the reason I like that is
23:38
Speaker 8: mid cap stocks have really outperformed everything over time, and
23:43
Speaker 8: they're large enough to withstand an economic tsunami. They're big
23:49
Speaker 8: enough to make an acquisition that would be a creative
23:52
Speaker 8: to them from a smaller company. But they're also big
23:55
Speaker 8: enough to be acquired by a larger company and be
23:58
Speaker 8: a creative.
23:59
Speaker 6: There.
24:00
Speaker 8: You see a lot of value in that mid cap
24:03
Speaker 8: arena right now.
24:05
Speaker 3: What stocks or industries in midcaps do you like?
24:09
Speaker 8: Well, you know, you know energies energies there, But I
24:14
Speaker 8: mean if you look at names that people don't associate
24:18
Speaker 8: too much when you get the radio, TV or something
24:20
Speaker 8: like that, is Comfort Systems, big deal, but most likely
24:25
Speaker 8: they did part of this building because they're industrial and
24:29
Speaker 8: building and putting in the ventilation, hating air things of
24:33
Speaker 8: that sort.
24:34
Speaker 5: You know.
24:34
Speaker 8: They earn eight dollars a share and pay a dollar dividend,
24:37
Speaker 8: so logic would tell you there's plenty of room to
24:40
Speaker 8: raise the dividend.
24:42
Speaker 2: You can set up seventy to date, so yeah, you
24:44
Speaker 2: call for seven billion dollar market cap company fix is
24:47
Speaker 2: a ticker, Yeah.
24:48
Speaker 6: And then you can look at Sprouts farmers market.
24:51
Speaker 2: Wait, wait, this is a public company.
24:53
Speaker 6: Hold on, huh.
24:53
Speaker 2: I'm going to go ahead and.
24:55
Speaker 6: I'm just going Sprouts up on the terminal. Okay.
24:58
Speaker 8: You know it's farmers market, and truly when you walk
25:01
Speaker 8: into the store, you feel like you're in a farmer's market.
25:03
Speaker 6: There's produce all over.
25:04
Speaker 8: And then if you think about inflation, food prices that
25:08
Speaker 8: have gone up, and you go, well, geez, do I
25:11
Speaker 8: really want to get into a specialty market like that
25:14
Speaker 8: or Whole Foods? Well, there's a big difference between Sprouts
25:17
Speaker 8: and say Whole Foods or and that's simple that you know,
25:21
Speaker 8: you look at the produce and you look at the
25:23
Speaker 8: vegetables and stuff, and you just add a little bit
25:25
Speaker 8: of positive and you can make a very cheap meal
25:27
Speaker 8: for a family. And that's that's their their niche. They
25:31
Speaker 8: have about three hundred stores, mainly on the West coast.
25:34
Speaker 8: But you know, here's this company that makes three dollars
25:37
Speaker 8: a share and doesn't pay a dividend. So you know,
25:40
Speaker 8: there's so much value out there you just keep keep
25:45
Speaker 8: looking for it and then buy and hold it.
25:47
Speaker 2: S FM is the ticker there. It's got about a
25:50
Speaker 2: four point three billion market cap, up thirty percent year
25:52
Speaker 2: to dat. How do you guys at Hennessy define value?
25:56
Speaker 2: I mean, is there a pe threshold? How do you
25:58
Speaker 2: scream to find sprouts for farmer's market is I know
26:00
Speaker 2: analyst didn't come to you and say, hey, I just
26:02
Speaker 2: went into this great farmers market. I think we should
26:04
Speaker 2: buy it. So I'm guessing you guys screen here.
26:06
Speaker 6: Well, you're right.
26:08
Speaker 8: Everybody has to a certain Every money manager has a formula. Yep, okay,
26:13
Speaker 8: And we have a formula and what we do is
26:15
Speaker 8: once a year we rework the formula. So essentially it's
26:19
Speaker 8: looking for companies between one and ten billion dollars in
26:22
Speaker 8: market cap. We're looking for increase in earnings. The main
26:28
Speaker 8: point being a price is sales ratio of one point
26:31
Speaker 8: five or less. So we're not going to pay more
26:33
Speaker 8: than a dollar fifty for a dollar in sales. And
26:36
Speaker 8: that's where the value is. Because earnings, just like anybody,
26:40
Speaker 8: you can manipulate earnings by taking a ride off or
26:43
Speaker 8: adding this, or taking a game, and earnings don't pay
26:47
Speaker 8: your bills. Cash flow pays your bills. And so when
26:50
Speaker 8: you start to look at a truer number, unless you're
26:53
Speaker 8: going to do an Enron, it's sales, right, and so
26:57
Speaker 8: we won't like I say, pay it more than a
26:59
Speaker 8: dollar fifty for dollar and sales. Now you take those
27:02
Speaker 8: magnificent magnificent easy for me to say, the seven or
27:07
Speaker 8: eight stocks, and you're looking at a price of sales
27:10
Speaker 8: of you know, somewhere in the nine ten. So you
27:14
Speaker 8: know we're they're buying. You know, there are eight times
27:18
Speaker 8: what our threshold.
27:19
Speaker 3: Is at least, what are you selling?
27:22
Speaker 8: Well, we're not selling anything because when we do this formula,
27:26
Speaker 8: at the end of the formula, we buy to thirty
27:28
Speaker 8: companies okay that hit the list and essentially buy them
27:32
Speaker 8: an equal dollar mounts, hold them for one year, and
27:36
Speaker 8: then readjust the portfolio to then the thirty stocks that
27:40
Speaker 8: hit our list and buy them an equal dollar mounts.
27:43
Speaker 8: But the last stage of that is we're looking for
27:44
Speaker 8: companies that have or stocks that have price appreciation over
27:48
Speaker 8: three or six month period, and then we buy the
27:52
Speaker 8: top thirty that have the best price appreciation after one year.
27:57
Speaker 8: And you sort of ask, why would you do price
27:59
Speaker 8: pre and aren't you just chasing the market.
28:02
Speaker 6: The reality is really.
28:04
Speaker 8: Smart managers more than me, they've been buying these companies
28:08
Speaker 8: for a while. They've just been holding their hand little
28:10
Speaker 8: by little by little by little, so over a three
28:13
Speaker 8: six twelve month period it goes up. So we're not
28:16
Speaker 8: catching it in the first inning, right, We're catching the
28:18
Speaker 8: stocks in their third inning, fourth inning, which is where
28:21
Speaker 8: you want to be.
28:22
Speaker 2: Okay, sounds reasonable to me. It's a plan. You've been
28:25
Speaker 2: doing it a long time and must be working. Neil Hennessy,
28:27
Speaker 2: chief market strategist, Hennessy Advisors based out there.
28:31
Speaker 9: What's the name of the town again, the Vado Marine County, Nevado,
28:34
Speaker 9: Marin County, which is really a beautiful place to be
28:37
Speaker 9: and I don't know why, you know, everybody doesn't set
28:39
Speaker 9: up shop in Marin County.
28:41
Speaker 5: You're listening to the tape. Can's our live program Bloomberg
28:44
Speaker 5: Markets weekdays at ten am Eastern on Bloomberg Radio, the
28:48
Speaker 5: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
28:51
Speaker 5: You can also listen live on Amazon Alexa from our
28:54
Speaker 5: flagship New York station, Just say Alexa playing Bloomberg eleven thirty.
29:00
Speaker 2: Let's get to Washington, DC because there is a lot
29:02
Speaker 2: going on in Washington DC that will impact markets, impact
29:05
Speaker 2: individual companies. So we like to get a sense of
29:07
Speaker 2: kind of what are the investors, the professional investors, how
29:11
Speaker 2: are they kind of discounting what's happening in Washington, DC
29:14
Speaker 2: and some of the policy and regulatory risks. So we
29:16
Speaker 2: always appreciate checking with Jen Flinton. She is head of
29:19
Speaker 2: US Government Affairs at Investo, a huge money management firm. Jen,
29:24
Speaker 2: I'm sure there's a whole bunch of issues that you
29:26
Speaker 2: guys are following down there in DC. I'd like to
29:29
Speaker 2: start with my government is it going to shut down
29:32
Speaker 2: anytime soon? I need to be worried about that.
29:36
Speaker 10: Well, not until January for certain appropriations bill. So a
29:42
Speaker 10: couple of weeks ago they were able to pass a
29:43
Speaker 10: continuing resolution that's that stop gap funding for the government
29:48
Speaker 10: into January, so we're not going to have a holiday
29:52
Speaker 10: shutdown threat. We'll have two basic tiers. It'll be January nineteen,
29:59
Speaker 10: which you'll have have the Agriculture bill, the Energy bill,
30:03
Speaker 10: the milk con and VA bill. Those will be dealt
30:07
Speaker 10: with by January nineteenth theoretically, and then you'll have a
30:10
Speaker 10: February second where you get the really hard appropriations bills
30:13
Speaker 10: done right. So that's Defense, Labor, HHS, Homeland, think, Immigration,
30:19
Speaker 10: Interior think, environment, and so they'll have to come together
30:24
Speaker 10: over the holidays and then going into next year on
30:28
Speaker 10: these bills, the House and Senate.
30:30
Speaker 3: So how likely are we going to see another eleven
30:33
Speaker 3: hour type of situation leading up to these deadlines?
30:36
Speaker 10: It's pretty likely, I'm afraid. I mean, look, you have
30:39
Speaker 10: the Senate that is marking to f y twenty three
30:42
Speaker 10: numbers and you have the House that's marking.
30:44
Speaker 7: To f y twenty two numbers.
30:46
Speaker 10: That's a big difference in money, right, So they're going
30:51
Speaker 10: to have to.
30:52
Speaker 2: Find why are they doing it differently?
30:55
Speaker 10: Yeah, So the agreement on the debt ceiling negotiations over
30:59
Speaker 10: June was to mark to f y twenty three, which
31:03
Speaker 10: is what the Senate's doing. But conservatives in the House
31:07
Speaker 10: were very unhappy with that budget ceialing negotiation, so they
31:12
Speaker 10: got appropriations to agree to mark to f y twenty two.
31:16
Speaker 2: Interesting, all right, So they can't even agree on that,
31:19
Speaker 2: all right. So a lot is going to fall to
31:21
Speaker 2: this new House Speaker, Mike Johnson, Republican from Louisiana. Is
31:26
Speaker 2: there any reason to believe that he's going to be
31:28
Speaker 2: more successful integrating his far right part of his party
31:33
Speaker 2: so they can actually get something done in the House.
31:36
Speaker 10: That's an excellent question, and we're going to know a
31:38
Speaker 10: little bit about that over the next thirty six forty
31:41
Speaker 10: eight hours as he meets with the conference and tries
31:45
Speaker 10: to get an agreement to move the NDAA, which is
31:49
Speaker 10: the National Defense Authorization Act, which must be done by
31:52
Speaker 10: the end of the year. They never let that lapse.
31:55
Speaker 10: It's been like sixty years since that slap. So that
31:58
Speaker 10: House to get done before they break for the holidays.
32:01
Speaker 10: And then there's got to be some agreement around the
32:04
Speaker 10: supplemental bill, the one hundred and six billion dollars supplemental
32:07
Speaker 10: bill for Ukraine, in Israel and no Pacific the border.
32:13
Speaker 10: And he is sort of juxt opposing the negotiations in
32:18
Speaker 10: the Senate and has to figure out what his own
32:20
Speaker 10: conference can swallow.
32:21
Speaker 7: And those meetings are happening this week.
32:25
Speaker 2: So what's the I mean, do we are we? If
32:29
Speaker 2: I'm an investor and I thinking about Washington, DC and
32:31
Speaker 2: think about policy, am I beholding to literally a handful
32:34
Speaker 2: of representatives for just movement of my government?
32:40
Speaker 8: Well?
32:40
Speaker 10: Quite, frankly, it is a very tight margin. Not just
32:45
Speaker 10: in the House you have about a four vote margin
32:48
Speaker 10: and in the Senate one vote margin. So yes, there
32:51
Speaker 10: has to be compromised, there has to be negotiated agreement,
32:55
Speaker 10: and that means making a lot of people unhappy in
32:59
Speaker 10: order to move these bills, these must pass bills, and that,
33:03
Speaker 10: quite frankly, is the same situation that McCarthy was in
33:06
Speaker 10: that now Speaker Johnson is in. But the same is
33:10
Speaker 10: true for Majority Leader Schumer the Democrat, and McConnell who
33:15
Speaker 10: are trying to walk this tightline on INDAA and on
33:18
Speaker 10: the supplemental funding and on appropriations. So they're all still
33:23
Speaker 10: in the same seats. It's just you know, one different
33:26
Speaker 10: player here.
33:28
Speaker 3: So as far as looking at how some of these
33:31
Speaker 3: deadlines kind of overlap with the next Federal Reserve well
33:34
Speaker 3: not the next Phedoserve meeting, that decision's on December thirteenth,
33:37
Speaker 3: but the meeting the first meeting at the beginning of
33:39
Speaker 3: next year. It's actually January thirtieth and thirty first, So
33:42
Speaker 3: you have some of these shutdown deadlines coming up close
33:44
Speaker 3: to that. How do you think this could potentially impact
33:48
Speaker 3: anything coming up when it comes to some of that
33:50
Speaker 3: policy decision when you have issues going on the other
33:53
Speaker 3: side with the government.
33:54
Speaker 10: Yeah, I mean, quite frankly, Congress doesn't look much to
33:57
Speaker 10: the monetary policy issues of the and it's questionable, I
34:02
Speaker 10: think how much the FED considers the you know, annual
34:05
Speaker 10: budget appropriation process the fiscal issues as it makes its
34:10
Speaker 10: monetary decisions. And so while it is a congruence of
34:15
Speaker 10: issues that are all going to arise at the same time,
34:17
Speaker 10: and I expect that will make the markets a little
34:20
Speaker 10: you know, you know, volatile around around these important deadlines.
34:26
Speaker 10: I do think that as we enter into twenty twenty
34:29
Speaker 10: four with this election year, you're going to see after
34:32
Speaker 10: these appropriations bills are settled, the shift is going to
34:35
Speaker 10: be a hard shift into election year politics and that
34:40
Speaker 10: really is going to be the driver going into twenty
34:42
Speaker 10: twenty four.
34:43
Speaker 2: So is that kind of the message Like if I'm
34:45
Speaker 2: a you know, Invesco port portfolio manager, equity portfolio manager
34:48
Speaker 2: or fixed income and I called you up and I say, Hey,
34:51
Speaker 2: what's the biggest I don't know risk for me and
34:55
Speaker 2: my portfolio coming out of Washington, DC?
34:57
Speaker 6: What is it?
34:58
Speaker 2: Do you say? It's just I guess the upcoming election.
35:00
Speaker 2: What are some of the big what's the big issue
35:02
Speaker 2: for you?
35:03
Speaker 7: Yeah?
35:03
Speaker 10: So the next what six eight, nine weeks are really
35:08
Speaker 10: going to be the vast majority of legislation that's going
35:11
Speaker 10: to get done. That's going to be, as I said,
35:13
Speaker 10: the NDAA, the approbes, but also some tax extenders which
35:17
Speaker 10: are possible by the end of the year. And then
35:20
Speaker 10: it's going to be a lot of messaging bills you're
35:23
Speaker 10: going to see in the House. They're going to try
35:25
Speaker 10: to do a lot of messaging. If they can't get
35:27
Speaker 10: something done on immigration within the context of this supplemental bill,
35:32
Speaker 10: they're going to push. They're going to continue to push
35:34
Speaker 10: on that border issue. It's going to be a major
35:36
Speaker 10: message for House Republicans. And then you're going to see
35:40
Speaker 10: a lot of executive action. You're going to see the
35:43
Speaker 10: agencies taking it upon themselves, within their own discretion or
35:46
Speaker 10: discretion as they define it, uh to move the agenda
35:50
Speaker 10: of the administration things that they weren't able to get
35:54
Speaker 10: done over the next last three years, or that they've
35:56
Speaker 10: been working to resolve and finalize over the past three years.
36:00
Speaker 10: And so that's really what I'm telling folks to look
36:03
Speaker 10: at right now is watch those executive actions.
36:07
Speaker 3: So what are the most immediate things that you're watching
36:10
Speaker 3: in the next few weeks as far as what people
36:13
Speaker 3: need to be focused on in Washington.
36:15
Speaker 10: Well, first we've got to watch these negotiations on appropriations,
36:20
Speaker 10: and we will be behind the scenes watching that very closely.
36:25
Speaker 10: But over the next thirty six forty eight hours, it'll
36:28
Speaker 10: be really interesting to see how these members sort of
36:31
Speaker 10: resolve on the NDAA, that Defense Authorization Act, which is
36:35
Speaker 10: very important. Conference technically meets on Thursday, but they could
36:39
Speaker 10: have a decision by Friday because they've been negotiating this
36:42
Speaker 10: behind the scenes, and there's some amendments that could be
36:46
Speaker 10: added to that that we'll be looking for, some related
36:51
Speaker 10: to AI, some related to crypto money laundering issues, some
36:56
Speaker 10: relating to outbound investment in China. So we're looking for
37:01
Speaker 10: whether those will be included in the final NDAA. But
37:05
Speaker 10: then it will be a race to the appropriation's deadlines
37:09
Speaker 10: and making sure that they fund the government that is
37:13
Speaker 10: important to the rating of the US but also sort
37:17
Speaker 10: of the faith in this Congress's ability to get things done.
37:22
Speaker 2: Well, a lot of work to do. We'll certainly follow
37:25
Speaker 2: up with you Jen on that. Jen Flinton, she's the
37:28
Speaker 2: head of US Government affairs for Invesco. Trying to keep
37:31
Speaker 2: track of all the legislation, all the policy work that's
37:34
Speaker 2: being done in Washington, DC and how it impacts investco
37:38
Speaker 2: porfolio managers and their investment holdings. You know the analogous
37:43
Speaker 2: person for Bloomberg Intelligence that does that work as Nathan
37:45
Speaker 2: Dean for Bloomberg Intelligence. It's so important for investors that
37:49
Speaker 2: have a good feel for what's going on down in Washington,
37:51
Speaker 2: d C.
37:53
Speaker 1: Thanks for listening to the Bloomberg Markets podcast. You can
37:56
Speaker 1: subscribe and listen to interviews at Apple Podcasts or what
38:00
Speaker 1: whatever podcast platform you prefer. I'm Matt Miller. I'm on
38:03
Speaker 1: Twitter at Matt Miller nineteen seventy three.
38:06
Speaker 2: And I'm Paul Sweeney. I'm on Twitter at pt Sweeney.
38:09
Speaker 2: Before the podcast, you can always catch us worldwide at
38:11
Speaker 2: Bloomberg Radio