CAIA Webcast: Private Credit and Why it’s a Safe Harbor in Tumultuous Times

Hosted by CAIA Seattle and CAIA San Francisco, this panel discussion explored how the impact of COVID-19 on the global economy has affected the opportunity set across the private credit landscape. It discussed how private credit strategies, including private real estate debt, have navigated the current environment and the impact experienced with deal flow, yield expectations, and perceived investment safety. The panel also explored why private credit as an asset class can still offer a safe harbor even in these tumultuous times and their post-COVID outlook for continued investment opportunities. Speakers represent the views of allocators to private credit as well as those actively managing debt portfolios.

Panelists

• Jeehae Lee, Partner & Deputy Chief Investment Officer, Bridge Debt Strategies

• Lalantika Medema, Executive Vice President and Alternative Credit Strategist, PIMCO

• Jeff Pyatt, Chief Executive Officer, Broadmark Realty Capital

• Shai Vichness, Chief Financial Officer, Churchill Asset Management

Moderator: John Nicolini, Managing Director & Senior Consultant, Verus

CAIA Introduction: Chris Carsley, CAIA

CAIA Closing Remarks: Isela Rosales, CAIA

Transcript

Liz Rosales: Thank you for joining us for CAIA Seattle and CAIA San Francisco's joint event on private credit and why it's a safe Harbor in tumultuous times. This event is being recorded and will be distributed to registrants following the call, we encourage audience participation. So please use the Q&A or chat features at the bottom of your screen to ask questions to our panelists.

 Here to open our event is one of our CAIA Seattle, co-heads Chris Carsley. 

Chris Carsley: Thanks Liz. And thank you everybody for taking the time to join us today.

For this you know, very timely discussion. I want to take a little bit of time to for people who are listening in, who are unaware of what CAIA is. 

It's a professional global organization that's focused on education, research and networking in the alternative investment space. We have about 11,000 members through 31 chapters. And one of the things that I think is a really interesting tipbit is most recently more than, you know, close to 50% of our charter holders are international. They're not you know, in, in the United States. 

So if you have any other questions or interest in CAIA, you can go to ww.caia.org, or you can reach out to your local chapter. We love to hear from people , and understand what people are looking for and how they can be part of our alternate investment network.

And with that said, I want to pass it on to John Nicolini from Versus and he'll take us away on our event.

John Nicolini: Thank you, Chris. So we've got about 60 minutes to talk about the topic of private debt. The private debt is a kind of a catch all term for a lot of different forms of credit, but we're really going to be focusing on real estate and the corporate loan market, just given the expertise of our panelists today.

So those are the two areas that I'll focus on with my questions. We'll start with some intros, I guess I'll kick it off and then we can make it, we go around to each of the panelists and they can provide their own background. So my name is John Nicolini, I work as a private markets consultant with various investments.

I also lead the real assets research team, and that covers everything from real estate to infrastructure and natural resources. And maybe we can go to Shai next and he can give us his background. 

Shai Vichness: Thanks, John. Good afternoon, Good evening everyone. So Shai Vichness, I'm the chief financial officer of Churchill Asset Management.

Churchill based in New York is a majority on affiliate of Nuveen, which is the asset management arm of the TIAA. One of the world's largest pension funds. We manage about $30 billion focused on middle market private equity sponsor owned businesses, and we provide senior debt equity co-investment and private equity fund investments, as well as mezzanine debt investments to private equity owned businesses in the middle market.

John Nicolini: Maybe we can go to, I'm just, I'm just going on the panelists order here Lalantika if you want to go next. And then Jeff, after that.

Lalantika Medema: Sure. Lalantika Medema with PIMCO. I'm an executive vice president focusing on our alternative credit and private strategies platform. We manage about 35 billion in alternative credit and private strategies across our complex, specifically focusing on the commercial, residential specialty finance and corporate segments. So covering a fairly broad range of both real estate and asset based sectors. 

Jeff Pyatt: I'm Jeff Pyatt. I'm the CEO of Broad Mark Realty Capital. John and Chris. Thanks for having us. We do first deed of trust lending nationally, primarily for construction and development financing, a lot of single family and multifamily within that, within that segment,

John Nicolini: Jeehae I don't have you open my panel, but I'm sure you're here somewhere.

Jeehae Lee: Sure I'm here. Hi everyone. I'm Jeehae Lee I am a partner there at Bridge Investment Group and also the deputy chief investment officer of the Bridge debt strategies, fixed income vertical there Bridge Investment Group manages about 20 billion plus of AUM and out of my bridge debt strategies, actual vertical, we manage about 7 billion of AUM across debt investments, mostly in Freddie Mac case series, as well as direct lending.

We're focused primarily in multifamily, but also land across other property types as well. We're currently the number one BP's buyer of Freddie Mac case series for a number of less, a few last years, as well as also we CRE CLO issuer. 

John Nicolini: Thank you. So this is a timely topic. You know, a lot of institutional investors are grappling with low expected returns across traditional asset classes.

And I can speak for at least my client base, whether that's an endowment or a public pension, they're really facing the same issue where equities and fixed income, just aren't providing high enough expected return to really meet their spending obligations. So good news for our panelists. You know, I think private equity, private credit will likely be the recipient of more money in the coming year or so. Really as investors reached for these there, you know, necessary returns and they look to the sort of the illiquid markets to, to provide some of that.

So first question, I'll start with instance to all panelists is, you know, a year ago we encountered a virus that disrupted many facets of our daily life.

And I kinda want to hear from each of you how you've managed through COVID maybe talk about the biggest surprises or lessons learned. And, and going through this unprecedented you know, 2020, and now 2021. Maybe Jeehae, if you want to kick this off. 

Jeehae Lee: You know, I think everyone kind of knew at the onset of COVID that something was going to go down, but I think, you know, a year later now we can really see that what we went through in the last year with this pandemic is very different from any of the other crises that we've gone through recently in the financial sector.

I think obviously in the GFC, it was very much honed into a particular industry, I would say, or a particular area of certain parts of the world. But you know, what we went through this year was worldwide. It had everyone across all countries across all sectors. And I think the world has never seen anything like that before.

And so. Having the travel sort of restrictions coming into play, having all sectors kind of really halted as well as everyone, obviously working from home as we are here today is a big thing that I think people really did not foresee. You know, with that being said, I think you're right on point John, in terms of investments that people are going to be turning towards private equity for all those reasons.

And I think we're obviously here to talk about that. I was very surprised that a lot of our competitors, even though, you know, you have gone and seen through pockets of market downturn, we're not ready for the illiquidity that was going to come. I think there were a lot of big household names that were hit with illiquidity and margin calls and with Repo and et cetera.

And I think that was the biggest thing that it came so fast and so quick and put down a lot of big names that we knew. And I think the last lesson that we really learned at least for our fund is that you really have to be obviously opportunistic of those situations and you really need to have infrastructure in place to deal with a situation like this.

That it's not just only about being able to turn the business when you're in the office, but being obviously able to recognize and understand how to pivot from that and how to deal with that. And that can obviously go into investments, but it can also go into how we actually do our daily work. So you know, I think it's something that it was really unheard of that everybody kind of had to go through, but I think one year almost to the mark today you know, we're all here and we've obviously found different ways to invest.

And I think you know, we've, we're still learning and we're still trying to figure out how to create opportunities in a, in a time like this.

Lalantika Medema: Building on Gina's comments as it relates to liquidity. I think the really interesting thing is just the fact that up until March of 2020, I think people had gotten very comfortable with how liquid markets were and how properly functioning things seem to be. And what really happens when there is a crisis or when there is volatility, is that there is this flight to quality and there is massive risk across the board that ends up being kind of dissipated and it has to be addressed.

And so from that perspective, I think one of the big lessons learned on our side and the observations I should actually say was just, you know, Thinking about the liquidity of your portfolio, not just in the best times, but actually thinking about it in the most stress times. And that was something that we had been at the forefront of during the GFC.

It was something that we thought about in managing our strategies, you know, 13, 14 years ago. And it was something that certainly drove how we manage our portfolios today. And I think that having that measure of conservatism, having that measure of having that recognition for how things can change really becomes key.

And to your point, you Jeehae, I think it's certainly differentiated people who were able to work through and navigate that period and go on offense versus folks who may have found that their most liquid assets were actually not really that liquid. 

Shai Vichness: Yeah. I mean, interestingly for us, I think one of the key lessons here was just sort of the, the importance of relationships and who you're doing business with.

So, you know, providing sort of just a corporate perspective since we are lending to companies that are owned by private equity you know, for one we tend to focus away from industries that are very cyclical and that were directly impacted, but we did have roughly call it 15 to 20% of our portfolio that we call sort of directly in line of sight of COVID and the severe impacts. What was interesting to us and we sort of knew this going in, given and I know there's questions later around sort of the equity capitalizations, and how much are these companies trading for, but you have sponsors who one have real skin in the game. But two who had a track record of supporting their businesses. And we found that to be especially true going through this challenging period.

And now that we're sort of coming out to an extent of the other side it's just interesting that the equity support that we saw come in it's really paid off those companies that sort of made their way through. We, as lenders have helped and had felt comfortable working with our private equity sponsors to get to the other side together.

And that for us was one of the key takeaways. I mean, we knew that how important that was, we've obviously been through the global financial crisis. It was important then, but it was incredibly important when you saw this precipitous drop in earnings for some of our businesses where EBITDA as a metric and what your leverage multiple laws really didn't matter.

It was all about liquidity. It was all about the support and it was all about getting to the other side of this together. And that was really a key takeaway for us across our portfolio,.

Jeff Pyatt: What they said. We, we one of the things that, that we found well, so in March, early on, there was as, as Jeehae said, there was a, there was a precipitous and abrupt pull back on credit, our competitors and their credit or sources just dried up. 

It was a nice little competitive holiday for those of us that, that had the ability to continue lending they're also in the construction industry. There were, there were shutdowns and there were, you know, there were other municipal shutdowns and all those kinds of things.

I would say that, and that impacted borrower's ability to finish projects and otherwise good projects got delayed. They might've gone into default. The big surprise for me that came out of all of that was how well real estate values held up during this and, and in looking back a year and, and certainly the, the real estate market has done well.

It's one of the, one of the industries. I'm glad that I'm, I'm thankful that I'm in. But I think it also speaks to the underwriting that has done on these private credits to credit quality, you know, speak to my peers here on this panel and ask them how they're doing. And I think all would, would say that that because of all the diligence that went into underwriting projects, when things were wonderful and then 90 days later when they were tipped over on their ear, that, that credits held up pretty well.

John Nicolini: I'll have to come back to the question evaluations, cause it's, it's a, it's a concern for my team really more on the equity side, but I'll have to come back to that question later on, because that would be kind of interested to hear your thoughts on that. But next question is really, really related to the title of this the panel, which is private credit, why it's a safe Harbor and tumultuous times.

And maybe the question is really kind of challenging that thesis, but your views around private credit, truly acting as a safe Harbor. Or is it just another sort of illiquid platform that we're, you know, portfolios are marked infrequently? You've got smoothing of returns so the perception of lack of volatility in correlation and just kind of want to get your thoughts if, if that if you see it as, as really a safe Harbor asset.

Shai Vichness: Yeah. I'm happy to open that one. I look, I think it depends on sort of what your objectives are when thinking about private credit. I think the question that you were sort of alluding to around what happens to valuations in in volatility periods in private credit, clearly there is you know, a muted impact.

When you think about how our now our credits are valued, how our investments are valued, they're not liquid, they're not traded. For us as we compare our assets to say the broadly syndicated loan market, for example, which traded down into the seventies in March we did not see that type of effect with respect to our valuations were valuing our credits.

Fundamentally, we're looking at where new issue spreads are. And we did see a dip or five or six points. But I think that volatility is sort of appropriate when you think about just sort of the differential in the two markets how they function. The point that I'm making about how investors come to this market and what they're looking for, if you think about our investor base: it's insurance companies, don't like volatility, it's pension fund investors who don't like volatility.

So I really think there's actually an alignment there between sort of what the expectation is for the asset class. How the values travel in periods of volatility and when the broadly syndicated the liquid markets diverge, that's when it's obviously most most stark in terms of that, that divergence.

So, so those would be my comments just in terms of the evaluation itself. But then if you also think about how you're accessing the market and what your objectives are, this is a long-term buy and hold you're in a closed end fund. Your expectation is that you're going to follow that credit all the way through its life cycle.

So that interim volatility really doesn't matter in the same way that it does in the traded strategy, because you're not entering and exiting. Where that gets expressed in private credit, is if you look at the public business development companies, for example, right. So a listed product that's assets in private credit, those traded extremely poorly down from par to 50 cents on the dollar and now back to par again. 

So there are certainly ways if you want to get volatility in this asset class, that you can get it. But most of our investors are looking for that, that safe Harbor that you get by investing in a private credit strategy. 

Jeehae Lee: Yeah. I mean, I would echo that comment because I think within the private credit sector, you're going to get a spectrum of different ways that different, I think funds are going to be monitoring value.

I do absolutely agree that obviously when you're in a closed end fund, the end all be all is going to be very, the absolute yield that you are going to be getting. So you know, people do not, you know, tend to tend to believe obviously that the biggest difference between the private close and fund versus for example, a hedge fund is going to be that, just that right, that you are going to be holding the investment to end.

And if you fundamentally believe that the value of what you are investing in is there, it will be true at the end of that term. Now, with that being said, You know, we run four funds out of my group and they're all closed on funds, but we actually do mark to mark all of our positions. And we are probably one of very few.

We're probably in the minority, I think of close on funds that do do a mark to market. You know, it may be because our background is obviously from commercial real estate on, you know, the South side that we believe that the mark to market is important. But, you know, I think that there's another reason for why, especially in the last year, you know, we thought that it was important to mark to market because we were buying different investments at certain prices.

So for us, it was very hard to argue to our investors that we're going to buy an instrument or an investment that is essentially the same investment and not. mark our positions, you know, to that price. You know, we think that, you know, and I think it's, you know, maybe the, the trader in me that believes really that, that is what the investment should reflect.

But again, you know, that volatility, I think, is something that I think that I felt safe with that I think, you know, our investors fell fine going to sleep with because they knew that they are in a close end fund. Right. And they do know that there is going to be, you know, volatility in between, but that it will come back.

And with that being said, you know, one year, you know, fast forward to today, you know, we're actually probably we've already, you know, made up whole, essentially all the volatility that we've had since last March. Right. So I do think that, you know, if at anything, it does prove that when you are in a closed end private equity fund, that you will be able to come back to the true value of what you believed your investment was supposed to be at.

John Nicolini: Thank you. We'll move on to the next question. This is I'll direct this to Lalantika, has the private loan markets seen any pricing impact this year ? As, as we've seen rates move upwards, especially in government bonds. Is that causing any ripples in the loan market? I'm just curious to just see what, what you're seeing on your side.

Lalantika Medema: Yeah, absolutely. So look, I think that on the loan side, especially when I think about the areas that are, that our team has been focusing on and the residential loan market, right example. The past year, given where rates have been, it's been an, an, a phenomenal opportunity opportunity on the refinancing side, you've seen so much activity.

Originators were pressed, I think with resources had flows that they hadn't seen for, for a fairly long time, just given where rates went to. And now with rates slowly starting to trend up, you're certainly seeing a pause there. I think it's certainly impacting prepayment speeds. It's impacting it's extending out cash flows.

So it is shifting the opportunity set. I think the areas that we focus on are also ones that involve deep credit work. So in many ways, while they are, while you do see some impact from the move in rates, both up and down, you're also talking about very, very detailed analysis at the loan level where it's not just the rate equation, it's the credit of the borrower.

And you have these. Consumer elements that also affect the opportunity set. And we're a year into the pandemic. People are still working from home. People are still dealing with various with, with their own considerations, with their own challenges, as it relates to employment, to housing, all of these different factors.

And so from the consumer perspective, there certainly are questions and, and opportunities out there in relation to that. But just purely based on the move in rates, I'd say that there's less of a sensitivity there, more of a difference as to the types of assets and the types of borrowers and opportunities. We're focusing on 

John Nicolini: Shai. Moving on to maybe the corporate side you know, we've definitely seen spreads come in on the private private side of the middle market loans. There's certainly been some talk about the covenant protections available. Some pundits have raised red flags about the loan market.

Maybe give your firm's view on the attractiveness of the middle market loans and really how you see your clients positioning that asset class. 

Shai Vichness: Yeah, it's an interesting question. Cause I, when I look back over the course of 2020, and then into the first quarter of 2021, 2020 was almost sort of three different years if you will.

Right. We had kind of the first quarter where we work on frankly, a record pace through the first couple of months of the year March 9th, I think was our last day in the office. And that was kind of when the pipeline went dry. So we closed, whatever was left and then, and then it was sort of, you know, dead for the next two quarters in terms of deal volume.

And then you saw the fourth quarter kind of come back with a vengeance, just there was so much pent up demand. And leaving the third quarter early the fourth quarter, there was a real opportunity there to take advantage of wider spreads. And by that, I mean, anywhere from a hundred to 200 basis points wide, the pre COVID levels attractive credits that were not impacted by COVID.

We actually had a separate challenge, which was having underwrite a credit that actually has a COVID tailwind. And thinking about sort of, how do you adjust out whatever that bump was that that credit might be experiencing and how that was an interesting dynamic and dialogue with the sponsors in that regard. And then, you know, going into the first quarter, you almost have sort of a bit of a hangover if you will.

Because there was just so much activity in the fourth quarter and while pipeline is there, it's been a little bit slow to resurge having said that a lot of our peers some of whom might have had challenges in terms of portfolio and we're busy triaging really the worst fears haven't materialized. Right?

Unless you were heavily exposed to travel and leisure, or if you had energy exposure areas that were really impacted, for the most part all those revolver fundings that occurred over the course of the year as CFOs, drew down their capital structure to make sure they had cash on hand. Those have since been repaid.

And you've seen a lot of that competition sort of come back in. So I think the points you're observing in terms of where pricing has gone, we're probably still a little bit wider than where we were pre COVID, but not much, maybe 25 to 50 basis points.

 Leverage attachment points, honestly, really didn't tighten all that much. So I feel like from our perspective, at least in terms of what we're seeing, we're roughly where we were pre COVID leverage really isn't up necessarily materially. On the terms, it's kind of interesting. So we, we definitely saw a severe tightening in terms. Right, so moving in lender's favor in the third and fourth quarter, we've seen a bit of a reversion to the mean, but I would say on balance, the terms are still lender friendly.

So, whereas we've kind of given back pricing we've we've said, okay leverage. I would say the terms are still slightly lender favorable, but things like covenant rights, which historically are, you know, exist in the broadly syndicated market. It's it's crept in at times to the middle market and still largely not present, but we're starting to see signs of that.

As competition has come back and as capital has, has remained focused on this asset class in your opening comments were very apropos. We've been very successful in fundraising. Our peers have been successful in fundraising there a lot of capital chasing these opportunities. So it's on us to remain disciplined and pick our spots.

But that, that opportunity, that window, that we saw post GFC, which lasted much longer really has kind of snapped back here and has certainly not lasted nearly as long now in our market. And I see my fellow panelists nodding. So I'm guessing it's the same in their market as well.

John Nicolini: Yeah. Jeff real estate has made for our clients, certainly, probably one of the areas of most concern. You know, exposure to retail office in particular, maybe give us some thoughts on where you're finding attractive opportunities within real estate areas. You think maybe investors should be cautious or avoiding altogether.

Jeff Pyatt: So again, as a company that specializes in construction and development lending and all, and a lot around single and multifamily, I'll, I'll try to focus on that and not speak to areas that I don't know.

I still like it. There's been, there's certainly been some downward pressure in urban markets on rents. Our offices are in Seattle. And so I can speak to Seattle. They're down about 20% in downtown Seattle. There are a lot of building permits projects in the hopper that are going to get built and there's concern around that. I'm not overly concerned.

 People are going to come back into the cities. People are going to go back to their offices for some number of days a week, and we'll all figure that out on our own cap rates are still reasonable in my opinion. And I don't see them changing much. Again, my perspective is short term because we do, we do the lending that gets a project started and built in and stabilized.

We don't do long-term financing. And so I'm less concerned about a cap rate five or seven years out than I am 24 months out. I'm not too concerned about that. I think as as rent areas that I'm sort of interested in, I as, as the rent moratoriums or the mortgage moratoriums and the foreclosure moratoriums that the eviction moratoriums as those all come to an end, I think there are going to be a lot of opportunities.

And I think all the big distress debt funds they got put together last year in a hurry. We'll certainly take advantage of all of those, the big obvious ones, I think for the average investor. There are going to be a lot of small and medium-size opportunities that, that to keep a landlord from losing a building, he might look for some, a little bit of equity or look for a little bit of subordinate debt maybe with a kicker on it.

And so I th I think there are going to be , in the real estate space, a lot of really nice opportunities for investors, both big and small. I like hospitality .Again if, I'm loaning money to a, somebody that's looking to building a hotel, they're not going to be complete for 24 months. 

And based on my itch to get out of the house and take a trip when I can. And everybody that I know saying the same thing, I think that that hospitality for, for our book of business is a pretty good spot to be. And that's, you know, that's not original thought. That's, there's a lot of people saying the same thing. The one place that, that I see caution that I would ask people to exercise caution is is real state lending, especially again, in the single family and multifamily segment has gotten fashionable.

And when things get fashionable, the smart money starts getting supplanted by a more aggressive money. And yeah, and one of my maxims that I kick around our office is that it's easy to loan money out. It's hard to get it paid back. And, and I , I predicted over the next couple of years there are going to be a lot of real estate loans that struggle.

And so I would, if I was going to offer up a piece of caution, it would be check resumes as, as you were looking at this industry, but there's, there's just a lot of good opportunities out there. 

John Nicolini: Thank you. Jeehae a similar question, but from your perspective, any sectors, geographies, you know, regions within real estate market that concern you in your firm?

Jeehae Lee: There are a couple of things to consider when you think about real estate generally. And I think Jeff mentioned this before too, but you know, the one thing that we should absolutely remember is that right, real estate fundamentals are actually quite strong. I think that's one lesson that we actually learned from the GFC and coming out of it when we rebooted the real estate sort of sector in the finance area, you know, everyone was very cautious around credit. Rating agencies learned their lesson.

I think lenders learned their lesson, borrowers learned our lesson. And so to this day, you know, even from that, you know, GFC crash. I think the real estate even though, you know, obviously we went from initially, maybe lending 60% in 2010 and 2011 to now, 75%. Now people pushing data percent. Now we're about shooting back because of COVID, but whatever it may be, I do think like cap rates, for example, are fundamentally where they should be in most areas.

And so I think that in itself has helped the situation that we are in when COVID kind of hit us. The other thing I believe is that, you know, when COVID hit, we were very worried on the onset about will people be able to make rents, will people be able to, you know, actually get payments on all of their you know, payments on a monthly basis.

And we were actually very surprised that rents were being paid. That, you know, actually there was weren't that many delinquencies as we initially thought that there could be. I think there's obviously a couple of things that helped with that. Government stimulus obviously is one of them. The other, I think, is that just because everybody is staying at home, the tendency to protect your home and make payments on your home to make sure that you have a secure place is also very important.

You know, for us, we've been positioned very well because our fund heavily focuses on multi-family .And, you know, we still obviously very much believe that multi-family is one of the most risk resilience or property types within commercial real estate. But you know, even within multifamily, I believe that, you know, the class B and class C sector, which is really the bread and butter of where America lives, where the job creation is right now. That is the sort of the sub sector of multifamily that is absolutely protected. 

You know, I think the, the fashionable sort of luxurious primary markets, you know, these class, A luxury towers, are going to suffer. They have suffered over the last year and we'll continue to do so as people kind of figure out their finances,. But the Class B, Class C, if anything, we've always seen historically, they actually performed better in a recession because you have movement from A going into B and C. 

You obviously have more people staying in B and C to protect our family structure. And then the other thing is just the way the market, the US market is developing right now with a lot of e-commerce happening. Industrial is obviously very important. It's a very, very I think insulated that maybe the second most insulated property type after multifamily, but in those areas where, you know, the e-commerce hubs are actually being created, those multi-family sectors are also continuously booming.

And so, you know, for us, we've always been focused on multi-family, but I think if anything, the last year has very much proven that that is definitely probably an area that you want to be in, but you do have to be cautious. I think of which type of multifamily and which geographical multifamily you are investing in, because I do think it will make a huge difference in terms of where you have the cashflow stickiness.

John Nicolini: Does that just a follow up question. Do you, I know this is an area of concern for our team is the sort of gateway markets to San Francisco, Seattle, New York, LAs of the world, versus the more suburban or even the Sunbelt cities. Do you, I guess agree that, that, that the gateway markets are more of a concern for your team versus again, the suburban?

Jeehae Lee: Yes. I mean, the gateway cities are more of a concern for us, generally speaking, even pre pandemic. In the sense that, you know, we don't tend to compete in these markets where a lot of bigger guys are fighting for blood. You know, like we don't want to be one out of 10 competitors looking for loan and trying to win loan there.

We really believe the relative value is in these secondary growth cities where, you know, there may be a lot of borrowers, but maybe not that many lenders . We're in a very unique position because we also have equity verticals that own assets in these areas. And so we know these secondary cities very well.

So we are uniquely positioned, I think, to have information advantage in these areas. But you know, we do believe that, you know, the growing secondary market has been a very underserved market for a very long time. A lot of lenders, including banks, including you know, kind of the bigger sort of funds out there are all over these flashy gateway sort of places.

 They want to do, you know, the Park Avenue offices. They want to do the Four Seasons in Hawaii, but no one really knows about them multifamily and Denver, Colorado, or in Nashville, Tennessee, but really indeed the cashflow stickiness is there. That's where jobs are being created. That's where families are moving.

That's where you can actually get cashflow to be there. In terms of, you know, from a, from a lender's perspective. And so, you know, for us, that's always been a focus of ours. And I do think that, you know, look not all multifamily is equal. So you do want to definitely dig in a little bit to figure out where the value is, and that can be geographical. That can be obviously, you know you know, I think size loan size, whatever it may be, but I think the sub property types and geographical regional sort of differences do make a huge difference. 

John Nicolini: Thank you. Pivoting a little bit to the corporate side, Shai. I know your firm does mostly sponsored loans, but to the extent you're, I'm sure you're well versed on the non sponsor side as well, but what is your views on the sort of comparable risk of the sponsor versus non-sponsored side of private credit in the middle market?

Shai Vichness: Yeah. It's certainly a question that we get often from investors is we do focus on sponsored and there's this whole non-sponsored universe out there that, that some of our peers and folks we know do focus on look for, for us, it really just boils down to the, the consistency of the return profile.

Right. And what I mean by that is that when you're partnering with private equity sponsors, who themselves have a track record that you can underwrite .It gives a lot of comfort around what's the likely outcome for that business. Now, every business has to stand on its own. And of course the underlying credit underwriting is, is the most important.

But in a lot of ways, you know, who the owner is what's their history of supporting businesses that maybe go sideways is in a lot of ways as important when, when estimating what the risk is going to be. Now on the flip side, when you think about non-sponsored lending, they're still radically more returned to be had there, right?

Non-sponsored credits non-sponsored borrowers tend to pay a little bit more for their credit precisely for that reason, right. There's not that same ability to, underwrite the owner in the same way. What's interesting to us just observing sort of, what's gone on here over the last year and, and through cycles, generally. When you're doing non-sponsored lending, you really have to be much more prepared to be an ultimate owner of that business at the end of the day because the capital support is not always visible and it may not always be there in terms of a family owned business or an entrepreneur on business where you really don't have the same visibility into what standing behind that.

 So I think those are the trade offs. Now, a lot of people make a lot of money doing non-sponsored lending. At the end of the day, it is an area that it can be attractive, but from our perspective given the fact that we tend to be more conservative, we're looking for less volatility as opposed to more and prefer to work collaboratively with our private equity owners to, to get through challenging periods that's worked historically better for us.

So I would say a little bit less return on the front end, but lower volatility non-sponsored is exactly the opposite of that. And it certainly, in times of stress, the workload, the resources required to work through those challenges with entrepreneurial businesses you know, very different than when dealing with institutional quality private equity sponsors.

John Nicolini: Okay. Did just did COVID the environment around COVID did that influence risk management for your firm? And if you know the other panelists, if you'd like to address that on your side as well, feel free. 

Shai Vichness: Yeah. I'll start just in terms of sort of what we did in, in early days in the pandemic, when the pipeline really sort of went away, as we shifted our resources towards triaging the portfolio.

So from a risk management perspective, just in terms of the way that we monitor our portfolio the types of credits that we underwrite the standards to, which we had to write, it really didn't change anything. We were pretty well positioned going into the pandemic, given the industry focuses, or I should say the industries, can you avoid know it really benefited us in the way we underwrite credit, which is to a pretty severe downside scenario.

Now, none of us could foresee what, what happened here. But you know, we do have the downside protections built in. What we did do, however, is we instituted, for example, standing investment committee meetings focused exclusively on triaging, all of the requests that were coming in from our borrowers.

So whether that be financial covenant waivers, amendments addressing liquidity issues at certain of our portfolio credit. So there was much more of a focus away from sourcing and origination and underwriting. Towards portfolio management and that really persisted for the second and third quarter, when you were able to start now pointing our resources back towards underwriting transactions.

But the direct dialogue with the sponsors, with the management teams of the companies that we're lending to that's consistent throughout our portfolio management. And that was just elevated really at the start of the pandemic, checking in frequently what's happening? What are you seeing,? Where the revenue trends and really trying to get ahead of that.

It's really an all hands approach when you hit times of stress.

John Nicolini: We do ,I'm sorry to keep peppering your questions here, but it just came to me. Is, do you think loan docs in going forward will have any sort of provisions for, for pandemic related disruptions? I mean, is there anything like that that you're seeing?

Shai Vichness: Yeah.

John Nicolini: They've asked for.

Shai Vichness: We haven't re we haven't seen it. I think that's a tough one. You know, when you think about transactions that we're about to close are set to close on the eve of the pandemic, we definitely saw at least one or two situations where private equity sponsors walked away. In some cases that led to, you know, difficult conversations because of, you know, are you able to trigger a Mac clause or are you not pandemics?

You're usually not an out. We have not seen that creep into our loan documentation. I'd be curious to know from our, my fellow panelists, if that exists in the real estate market, but we have not seen that in the middle market credit space. 

John Nicolini: Yeah. I don't know Jeehae or Jeff, if you've got seen anything like that in your..?

Jeehae Lee: I mean, we haven't seen any really, you know, black and white changes like per se in the loan documents, but, you know, I think it would only be in our favor obviously to make sure and ensure that the risk is tight.

Right. It's like, you know, just because you don't have it in the loan documents, you know, it's actually. It's not in our favor if we let it go. And I think, you know, Shai makes a very good point that a lot of the processes that were in place before have been elevated .You know, if we were checking in, on them on a quarterly basis, just to see if their business strategy has been progressing along now, we were doing it on a bi-weekly basis.

Then we were doing in on a weekly basis. And a lot of the times, even before our borrowers, you know, would even come to us for any sort of a forbearance request, we would really be ahead of them and have that conversation to kind of just see where they are in their business and what they need. And is there something that we can help to extend a period? Or, you know, is there something that, you know, they need some allowance on?

But you know, again, I think that's something that , if it gets to a point that it affects the performance of the investment, that's actually not good for the fund. Right. So I think really beefing up on the processes and our asset management team has been, you know, really busier than ever.

Now they're doing these, you know, walk in virtual, walk in, you know, happy hour, not even happy hour. They're like walking hour office hour types where people can just come in and talk, because we want to ensure that there is , just space for people to make sure that that conversation can be held.

We haven't seen anything happen, you know, on the loan document side or et cetera, but I definitely think that, people are definitely more sensitive to it and we're working hard to make sure we put down, you know, the protocols that we feel are safe to protect our investments.

John Nicolini: Okay. I've got an audience question here. I'll read this out and panelists feel free to tackle it if you'd like. 

So there's lots of money chasing yield. It certainly appears that has accelerated as we're really coming out of this pandemic. Has that affected deal flow? And what is the future outlook for deploying capital in order to meet your client's objectives?

Lalantika Medema: I can start out on that. I can start out on that. From our perspective, I think that as you've seen so much capital being raised over the last year in different segments, having a more flexible approach to investing in these private markets has been pretty beneficial because I do think that you see these capital flows, you see capital being deployed to specific asset classes or sectors or geographies, and just being able to pivot and being able to move to other areas has been very helpful.

I think one of the elements that we've seen is: the types of portfolios and the types of risks that we see sellers unloading or looking to exit out of tends to be fairly diverse as well. So it's no longer can I find the one buyer for the specific residential loan portfolio, or can I find this one buyer for this specific consumer loan portfolio that has this phyco and this credit score and these characteristics, it tends to be very broad.

And the underlying risk itself tends to be very varied. So you're talking about looking at very large portfolios where the return profile doesn't necessarily fit just a mid-teens bucket and might go into the high single digits. It might be in the mid single digits and the sellers just looking for a more holistic solution.

So we are certainly seeing larger portfolios that are coming out or seeing portfolios that really have a wide range of underlying characteristics where having that flexibility and having a platform that can absorb that risk across the board becomes very beneficial. And then we're also seeing situations where, and there's this real crossover between public and private markets.

You know, we spent a lot of our time talking about private markets because that's what this panel is all about, but clearly public markets have seen this tremendous rally. So we'd be remiss to not also talk about how you can use that rally to your benefit. We look at securitizing assets selling into the public demand.

And I think that that becomes a very important way to access illiquidity premium, but also exit out of it. So there's a lot of conversations and a lot of very excellent points about how we get into the risk. But I think the other element that investors should be thinking about is how do you get out of it? How can you maximize that optionality? 

And when you are seeing the structure of recovery and public markets buying private assets, you don't always necessarily need to hold them until maturity. There's a lot of other ways that you can also exit out of that and, and create additional value.

John Nicolini: So given all this influx of money and capital into your space, I think, you know, a lot of investors want to know how managers distinguish themselves you know, in a very competitive environment. So I guess, what are your, for the, for the LP community, what would you say are some of the things they should be looking for among managers and how do you think managers should, should distinguish themselves in this environment?

Jeff Pyatt: I've got my mute off. 

John Nicolini: Okay. Go for it. Jeff.

Jeff Pyatt: I'm going to go back to a comment that I made earlier, and that is look at resumes. And first of all, the there's the worlds of washing off cash. It's also stocked with an awful lot of really competent managers. And so for me, what, what I would encourage investors to look for is, is. What does Shai have to offer versus Jeehae?

 And , and then make sure that that's an area that I want to be in and then make sure that, of that, that you're dealing with best in class. And, and I think that's pretty easy to do as far as asset classes go. Again, whether it's real estate, whether it's senior security, whether it's a mez fund, an equity fund, all of those have a place and they all have their risk and we all know that.

And so it's picking those and then, and then finding, finding the people that have the kind of reputation. I'm not, as of course, I'm going to say this. I would not be as concerned with pricing, pay a manager, pay it, pay a manager, a good price to do a good job. It'll be the best money you spend and then let them do their jobs well.

Jeehae Lee: Yeah. I mean, I think one thing that, you know, Jeff mentioned is you want to look at their resumes. I really think it's important to look at the timeframe of their resume in the sense that, you know, everyone could perform well in a good environment. Right? But you, if you want to look at track record, look at their manager, how they perform in a downturn, how did they perform? How did they get out of their crises? How did they actually protect our investments?

 I think that's one of the number one things that you would want to focus in on. The other thing is actually what Lalantika said before about not just being a one trick pony, you want a manager that has the flexibility to pivot.

You want to fund that it's not just doing one strategy. You want to have a manager that has the ability to be able to look at the changing markets. And within there, obviously, you know, major strategy, how are they able to figure out yields? How are they able to pivot into a different area to create yield?

How are they able to protect their certain investments in a different way than other managers? And I think that's really important to make sure that you're not honed in, in just one corner and stuck there because things can happen. You know, no one knew that Clover was going to happen and something like this that has never had history before has occurred.

And it's really, I think may come to light. A lot of different managers come to surface the ones that are able to do this and the ones who honestly cannot. And, you know, I think that's something that you really want to think about. You know, I wouldn't really focus in on, you know, the flashy household names and you know, how much money they have and how much money they manage, because we saw so many of those competitors actually, you know, far sell their portfolios overnight.

And so, you know, it's more important to see, the resiliency of the team and also their ability to really broaden out and pivot with market changes. 

Shai Vichness: So I'm gonna, I'm gonna agree with Jihan on a couple of points and disagree with one. So the, as a, as a one trick pony, who's incredibly focused.

You know, we actually think that that plays to our strength and style drifts could potentially be dangerous. Although I do take your point about there's a broad asset class to be able to put it within it makes make sense. So you know, I think the consistency of approach, the point about track record and having invested through multiple cycles is of course critical. And that's something to look for.

 But I also think, you know, when you're dealing with now, you've got a qualified manager. What are the other points of differentiation? In our market, I think we can assume that us and our peers are pretty good at, at credit selection. So the question is how do we source, how do we originate?

What sort of the, the angle that we have there has certainly been critical in terms of our success in resonating with investors. I mentioned before we do manage capital up and down the capital structure, including committed capital to private equity funds. So that's sort of our secret sauce if you will, in terms of, in terms of sourcing and originating.

But I think there's that nuance once you get to the shortlist of managers is now, how do you pick and choose between them and finding some angle that you think is going to drive differentiated access to transactions, at least in our case is something important to look for?

John Nicolini: Did the, Shai, did the competitive landscape shift at all during COVID? I mean, have you seen I guess that landscape move over the last year. 

Shai Vichness: Yeah, I, you know, I think it's just continuing to trend it's been there. Right? So it's essentially in our market, it's, it's more or less an arms race. Right. So being larger, having scale, being able to commit to the whole transaction speak in size has always been important. That's become increasingly important. 

We did see a little bit of a shakeout through COVID, as I said, you know, the worst fears really haven't materialized. So a lot of those folks who maybe took a break have sort of come back, but taking a break has, you know, has costs in this market and sponsors sort of remember who was there to support me -in the tough times.

So a manager like us who's, who's been consistently in the market and of course that plays to our strength, but it's really about size and scale and the larger we're getting larger and the smaller sort of getting squeezed out certainly in our market. Gotcha. 

John Nicolini: We have got about 10 minutes left, so I may have time for one more question.

So this is going to be a kind of a catch all for everyone, but what is your best guess as to sort of where we are in the credit or economic cycle? And and I guess, what do you sort of facing that, that view on? I don't know, any of the real estate wants to tackle that one first or we put but Shai up, but feel free to, to jump in.

Lalantika Medema: Me. I'm happy to kick off. Look, I think that a best guess, depending on timeframe, I think that's a big element, you know, where are we in one year? Where are we in 10 years? I think that right now, when I look at the, when we look at the opportunities that going forward, there's a lot of uncertainty. I think that the vaccine coming out right now with the here, seeing so many individuals getting vaccinated, seeing things slowly, starts to maybe appear like they're getting normal. Makes things feel like we're tracking to words. Remembering what things were like pre March of 2020. 

But nevertheless, I think there's a lot of uncertainties and a lot of elements that can create more volatility in the future. I think a couple areas I'd highlight in terms of just holders of risks.

I think that you know, you talked about the competitive landscape potentially shifting. If you do see another blip of volatility, what does that do to the committee, to the competitive landscape? You saw many mortgage rates that were hit with a tremendous amount of volatility in the first quarter of 2020, and many of them have since recovered and many of them are, are, are in very strong now.

 I, so I think there's the shift where even right, a year later, people who were very challenged or who were under pressure sure. Have been able to right-size have been able to figure out where to focus, but now you have other questions that lead to more uncertainty for all. 

It looks like dialing in from home. What does the office look like in a couple of years when you actually start to see lease rollovers? Is there the same demand? Is there the same density? Is there the same locations? All of those things come into question. I don't think there's an easy way to assess how companies respond to a work from home dynamic that they've effectively been forced into now, but over the course of the next couple of years can potentially adjust based on their own employee needs and requests.

And then in other asset classes, outside of real estate, I think to the consumer, you have student loan debt that remains one of the biggest topics out there in terms of just what happens, but the amount of debt outstanding. What does that do to those opportunities? How does that affect the return profile?

And then in the residential market, I think housing has been in kind of a really bright spot in the last year. And if you contrast that to the GFC, that was a time period where housing was at the epicenter of the crisis .Today, you know, a year ago, when we looked at our home price appreciation forecast, we thought that home prices would be flat over the course of the next year, but they go down, they go back up and in reality, home prices have been stronger than ever in the last year.

So I think all of these things just highlight how quickly opportunities change and how tough it is to predict exactly where we will be in in a timeframe going forward. But I do think again, having. Whether it is focusing on a single vertical and having the flexibility to move across that vertical or focusing on many verticals. I think flexibility is key.

 I think having the right resources to analyze these opportunities and being as close to an asset becomes key as well. So just knowing that, regardless of how things evolve, you have the team, you have the experience and you have the wherewithal to navigate. Yeah. Yeah.

Jeehae Lee: Yeah, I would, I would absolutely agree with that. You know, I think the one thing that everybody seems to be agreeing on these days is that unpredictability is kind of the new norm and the changes there, the changes are exchanges are actually, you know, reflective of what we think the future is going to be.

And, you know, certainly if you look at, you know, the curve, you know, there's a steepening of the curve, which obviously reflects that people are not so secure and where we are, but obviously we are better than where we were last year. But then with that being said in the last, you know, even last six weeks, you know, I feel like things are a little bit more, worser off the, maybe where we were in September, October of last year.

And so, you keep seeing these little ups and downs in the market and seems like any little thing is actually causing a huge wave in the market and just goes to reflect the insecurity. I think of the market right now. We just don't know which way to go. And I think the only thing everyone can agree on is that we don't know which way it's going to go.

And so , I really agree that, you know, having that flexibility, the ability to really just understand that change is going to happen and being able to pivot, even if you are a one trick pony, you know, how to ride that pony in many different ways. And so that I think is the important thing is that you want a manager that can have that.

And that they're not so honed in on just doing one thing one way, because certainly we've all learned that, you know, I think we, we definitely need to be flexible about how things can get done in our business. 

Jeff Pyatt: Okay. As I look at my fellow panelists, I figured my age is probably equal to three of theirs.

And so I'll, I'll give up a perspective that's a little more battle worn maybe. We are in one end or the other of a pendulum that we, we clearly went into last March and we went into one and in 2000 we went into one with a recession. I think the key is the old saying that slow and steady wins the race.

Your, your question early on John was about, about returns and illiquidity and the volatility. And, and I think we always have to look at that, but, but if we look at it on a, COVID calendar we are going to hurt ourselves. We might win big. We might lose big. But if, we, as, as managers take a good longterm, whatever that means for each of us approach and, and we let the, we let the noise just kind of subside and just keep doing what we do fundamentally well, they will do well.

 The investors will do well. Will we miss? Sure. Will we make some mistakes lose money here and there? Yes, but long-term, it's it's the right approach. And I, as I said, I'm a big fan of real estate, so I support it. 

Shai Vichness: Yeah, I mean, just from a corporate perspective, I mean, I, I would, I would honestly agree.

It's it's the volatility of the sort of rush back in that we've seen, you've seen spreads tightened a bit. I mean, it is really hard to predict kind of where we go from here, but I mean, I agree with you, Jeff, we, you know, as a firm we've been at this since 2006, doing exactly what we do. We really haven't changed our focus or strategy, you know, we remain conservative and I think that that's really just how you sort of have to have to live and, and do the deals that make sense to do pass on the deals that don't make sense and, and sort of just take one common stuff while said, Jeff.

John Nicolini: Okay. We've got a couple of minutes left. I I'll have to come back to my original comment earlier about valuations. So this is a bit of a selfish question, but I've got a captive, a captive panelists here, to answer. We certainly have concerns around office in particular valuations in office.

There's a lot of uncertainty. We don't know what's going to happen, but it seems to be the demand for office space will go down. If you're not requiring, you know, staff to be in the office five days a week, like we have historically. So I'm curious from the real estate panelists Shai, you can feel free to, to jump in if you have an answer, but if you, if you're seeing any movement in cap rates in office or have concerns, share concerns that we have that cap rates are not reflecting.

Shai Vichness: Maybe some of the fundamentals. I mean, Jeff, I think you mentioned office leases are down 20% in Seattle. We're seeing them 25, 30%...

Jeff Pyatt: Apartment rents.

John Nicolini: Oh, I'm sorry. Okay. I thought you office, but in San Fransisco office lease is down 25, 30%. We haven't seen cap rates move. And so I don't know if you have views on that in particular.

Jeff Pyatt: Can I take a quick shot? You other panelists?

John Nicolini: Yah.

Jeff Pyatt: So we ... our office will come back to work someday this late summer or fall. We also we're remodeling it currently and we're giving everyone more space. And so the per person footprint is actually going up, which is kind of counterintuitive too. To the office spaces leases rollover.

I don't know, but vacancy rates may go up, but we are going to have to come back to work. I fundamentally believe that we have to interact. There are certain companies that may not, but I think most of us have to have personal interaction. And even if that's only two days a week or three days a week.

And I think that the days of having people sitting cheek to jaw are, are going to at least for awhile go away. And I think that's going to put some upward pressure on space.

Jeehae Lee: Yeah. I mean, I think visibly when, when you, you know, go out and you see that the offices are empty and you see that the groceries are empty, you know, you got to get the sense that these may be the areas that are suffering.

And I do think obviously within the CRV space office and retail are probably the two that are suffering the most. I do think that office surprisingly in terms of payments, hasn't actually fallen behind very horribly. You know , we have an equity vertical, you know, at the parent company and, you know, it's surprising every time we get on a call on a weekly basis where the partners of the office fund will say the actual rent payments actually are not below 90%.

So it just goes to show you that, you know, I think the office tenants want to keep their space and they are hoping to be back. I do think that there will be certain industries within the office area that will see a change. And what I mean by that is I think there are certainly certain pockets of, you know, areas, particularly in San Francisco or Seattle, where, you know, the business that they do can be done at home. Whether it be engineers or software work, et cetera. I do think that there has been a shift in the business model for those certain businesses.

 I do think for, where we are, where it relates to finance or, you know, where we do business, face to face where these meetings and these relationships are very important. I think the office structure will still be intact. You know, at least in New York city, much of Park Avenue where we're located is back. We're back ourselves on a limited basis, but I see a lot of our banks on the same street they're actually requiring all their tutors to be back .Obviously they're all getting tested, they're all getting vaccinated, et cetera. But I do believe that in finance and commercial real estate, that's probably a sector, that is , very prevalent in the office space that can not really function from home maybe on a limited basis, but they will have to at some point be back.

So I think there is, you know, I think there is certainly a downturn in office, but I think it's definitely a sector that will bounce back.

John Nicolini: Okay. Well, we are out of time, so I will turn it over to Isela and I think you'll just close us out. So, thank you, panelist. It's been great. Thank you.

Isela Rosales: Thank you, John. And on behalf of CAIA, just also want to give a warm, thank you to: Chris ,my co-host, John, our moderator, and to each one of our panelists, without you, we cannot continue to host events like this. Now, typically we do our events in person, and so we are looking very much forward to the time when we can do that again. However, I will say that the virtual format does allow us to come together. I would say that we've got pretty much all the time zones in the U S represented just on this panel alone.

 Just a couple of housekeeping items that I think would be important for our audience to know. One is, as Chris mentioned at the beginning of our event, if you do have any questions, want to learn more about the CAIA Association, feel free to reach out to us on the website, www.caia.org. You will see both Chris's and mine information under Seattle and San Francisco, respectively.

 Also for those of you that are CFA charter holders, we do still run the stackable credit credential program, which basically means you can take one exam only versus the two typical exam format and receive your credit designation as well.

And really appreciated all the insight that our panelists had to share here. I really felt like we went around the, the topic of, of credit and where we are in the current market. Is it really a safe Harbor? I liked, I appreciated Shai's comment, Shai's comment about 2020. It was really a story of three chapters because of just how volatile everything went in such a short amount of time here.

And I feel like this panel could very much talk for hours on any number of the questions that were asked. So appreciate again, the time we know that it is late for those people on the West on the East coast, rather it's a 5:30 here on the West coast and also for members, CAIA members that joined us from around the world.

Liz Rosales: So thank you again and good evening to everyone. 

This concludes our webcast. Thank you for joining us. And we hope you'll connect with us again at our next event. Thanks everyone. 

Chris Carsley: Thanks everybody.