Episode summary
The Private Credit Unwind Is Coming – Tony Yoseloff
The Master Investor Podcast With Wilfred Frost
· · 44 min · Hosts: Wilfred Frost · Guests: Tony Yoseloff
Summary
Tony Yoseloff argues that the current macro backdrop still has echoes of the 1970s and the early 2000s: market concentration is high, rate shocks still have long tails, and an oil spike from Iran could add another inflationary leg. He says it is not clear the inflationary effects of the early 2020s are fully gone, and if inflation re-accelerates enough to force the Fed back toward hikes, the result could be recessionary in the US.
On private credit, Tony says the unwind was predictable because direct corporate lending had attracted too much capital and was marketed as a double-digit return business when he thinks it is really a mid-single-digit asset class. He says true default rates are already 5 or 6%, recovery values have fallen sharply over time, and software lending is especially vulnerable because many borrowers have little hard asset value to support recoveries.
He is more constructive on global diversification, arguing that US investors have become too inward-looking. Davidson Kempner has long invested abroad, and Tony highlights India as an underappreciated credit opportunity because its market is large, growing, and its bankruptcy regime has improved materially over the past decade. He closes by stressing that successful investing means knowing in advance why an idea can lose money, not just why it might work.
Key takeaways
- Tony Yoseloff thinks the current environment still rhymes with the 1970s and early 2000s because of concentration, rate shocks, and possible oil-driven inflation.
- He says direct corporate lending is a mid-single-digit return business, not a double-digit one, and that capital flooding the space is now catching up with reality.
- Tony says true default rates in private credit are already 5% to 6%, with recoveries on first-lien debt down to 36 cents on the dollar last year.
- He says software exposure is a key risk in private credit because many borrowers have limited hard assets and weak recovery value if businesses fail.
- Tony believes US investors are too inward-looking and says India is attractive because of its growth profile and improved bankruptcy laws.
- His investing rule is to know in advance why you might lose money and how much you could lose before making the investment.
Notable quotes
“I think there are some similarities with one and some similarities with the other”
“we've believed this was a mids singledigit asset class in terms of expected rate of return for a very long time”
How the episode opens
It's really hard to know um how long things are going to last in um in Iran, but I would say that, you know, it's not totally clear to me that we've killed the inflationary uh impacts of the um early 2020s already. Um and so when you add on to that um the potential for having uh an oil shock, that that creates what could be potentially a very disruptive uh environment. Lending does go through uh cycles.
There's no free lunch in this stuff. And you know, my truisms of investing are that capital chases returns and markets become efficient over time. And just a tremendous amount of capital flow into this asset class, specifically direct corporate lending.
And you know, that's just starting to catch up. True default rates in these markets are already uh five or 6% and have been the last couple of years. Um that's nothing to do with oil, nothing to do with Iran, nothing to do with, you know, some of the software loans that are getting a lot of press today.
It's just because, you know, companies themselves have had a really hard time um adjusting to higher interest rate environment. We sit at Davidson Keaptainner between public and private markets. We have very active businesses in in both.
And you know, one of the um nice things about public market investing is, you know, the market tells you every day what things are worth. Welcome to the Master Investor podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, politicians, and business leaders in the world, giving you, our listeners, the edge. The Master Investor podcast is sponsored by BMY Investments, Else and Interactive Brokers.
Please do remember the views expressed in this podcast are for general information purposes only.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- private credit unwind
- rate shocks
- default risk
- event-driven investing
- inida credit opportunities
Companies and tickers mentioned
- Davidson Kempner
- Warner Bros. Discovery
Watch the episode
Watch “The Private Credit Unwind Is Coming – Tony Yoseloff” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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