“So what just happened?” I asked the chairman of the insignificantly sized investment company TwoHoots Asset Management as we now sat awkwardly in a pub round the corner from our chance meeting. “For my part, I was taking a cunning shortcut to the tube and the next thing I know some voice from the shadows is asking me if I ‘want to make a deal’.
“And, to be clear, this isn’t chucking-out time in Kings Cross, it’s half-past-three in the afternoon a stone’s throw from the Bank of England.” “Oh stop – I’ve already apologised,” huffed the chairman. “The alley was pretty dark and I just didn’t recognise you.” “Clearly not,” I agreed. “But what I’m driving at is, How have you sunk to this? Why are you buttonholing strangers and trying to sell them, of all things, private credit?”
“And how else would you suggest I do it?” the chairman almost wailed. “The whole system has broken down – and not in the way it’s supposed to.” “Meaning?” I prompted. “Surely you’re aware there is a natural order of things in investment?” said the chairman. “Yes, but I sense we may have different interpretations here,” I replied. “What’s yours?” “It’s as good a way of passing the time as any, I guess,” the chairman shrugged.
“Especially as the fish aren’t biting outside. So … where to start? The beginning, I suppose – and, as tends to happen with investment, the origins of an upcoming financial crisis can be traced within the last one. After the horrors of 2008/09, it was widely felt the banks had not proved as adept at this lending lark as one might expect from those who do it for a living – and so maybe it shouldn’t be quite so concentrated in their hands.
Glory days
“Thus began the glory days of private credit and, as tends to happen with investment, if you could get a piece of the action, you took a piece of the action.” “And regardless of having any expertise in the subject,” I suggested. “Quite so,” nodded the chairman. “Really, the tourists do make it so awkward for the rest of us. Anyway, what is now the TwoHoots private credit book duly sparked into life and began to tick along very nicely, thank you.
“But then, as tends to happen with investment, the very decent numbers being posted are spotted by a wider audience, demand picks up, due-diligence standards are not quite as exacting as they once were and, um, mistakes are made. Two in particular, in this instance: lending to companies that eventually cannot pay back some of what they owe and/or lending to companies that eventually cannot pay back any of what they owe.
“Throw in the recent curveball that has been the preference for private debt among some chunky players in the technology fraternity as a way of, let us say, camouflaging the extent to which they are borrowing for the first time in their history and it all gets a little sweaty.” “Do you know – I think I may have seen this film before,” I said. “Unfortunately not quite,” the chairman sighed.
Transmission mechanism
“That film ends with a grander finale, which requires a transmission mechanism to hit the wider system – and, as history teaches us, there is no better transmission mechanism than retail punters buying something they don’t understand. Trouble is, retail punters have no real ‘in’ to private credit.” “That’s great,” I said, relieved. “No ‘in’, no mechanism, no bubble to burst … and yet … you were out there hawking your wares to the public.”
“At the risk of repeating myself, how else would you suggest I do it?” said the chairman. “It is a long tradition within the wonderful world of investment that, in the fullness of time, the more institutionally-oriented houses repackage their more optimistic assets and offload them to wholesale managers and, in due course, we do the same to the retail mob.
“That is the natural order and yet, this time, the party music appears to be stopping early, which I find hugely inconvenient. Hey – are you sure I can’t interest you in some exciting 2028-vintage loans to a select group of Californian-based go-getters – only three previous owners?”
“After the horrors of 2008/09, it was widely felt the banks had not proved as adept at this lending lark as one might expect from those who do it for a living.
