WEBVTT NOTE Created by CaptionSync from Automatic Sync Technologies www.automaticsync.com 00:00:00.086 --> 00:00:02.196 align:middle >> Welcome back to the Alt Goes Mainstream podcast. 00:00:02.556 --> 00:00:06.906 align:middle Today's episode is with an experienced asset allocator who has operated at the intersection 00:00:06.906 --> 00:00:09.246 align:middle of insurance and asset management throughout his career. 00:00:09.616 --> 00:00:14.946 align:middle We sat down in Prudential's Newark studio with PGIM's head of Multi-Asset 00:00:14.946 --> 00:00:17.016 align:middle and Quantitative Solutions, Phil Waldeck. 00:00:18.266 --> 00:00:21.406 align:middle Phil is responsible for nearly $140 billion in AUM, 00:00:21.496 --> 00:00:25.556 align:middle where the business unit leverages PGIM's deep public and private markets expertise 00:00:25.986 --> 00:00:30.366 align:middle for the purpose of developing customized portfolio solutions to meet insurer 00:00:30.746 --> 00:00:32.386 align:middle and other investors' unique objectives. 00:00:33.706 --> 00:00:37.686 align:middle Phil previously served as Chief Transformation Officer at Prudential, 00:00:37.686 --> 00:00:39.906 align:middle CEO of Prudential's Workplace Solutions Group, 00:00:40.506 --> 00:00:42.716 align:middle and as President of Prudential's retirement business, 00:00:42.956 --> 00:00:45.566 align:middle which comprised of $250 billion in assets. 00:00:45.566 --> 00:00:48.956 align:middle Phil was also the architect of Prudential's pension risk transfer business, 00:00:49.216 --> 00:00:51.486 align:middle which he grew to over $170 billion. 00:00:51.786 --> 00:00:54.826 align:middle Phil and I had a fascinating conversation about the intersections 00:00:54.876 --> 00:00:56.356 align:middle between insurance and asset management. 00:00:57.156 --> 00:01:00.206 align:middle We covered the evolution of how insurers allocate to private markets, 00:01:00.836 --> 00:01:05.196 align:middle the importance of asset liability management, how insurers are leveraging their balance sheet 00:01:05.266 --> 00:01:09.796 align:middle to invest in private markets and collaborate with alternative asset managers, how insurance 00:01:09.796 --> 00:01:13.326 align:middle and asset management interacts and the benefits of an integrated platform, 00:01:14.096 --> 00:01:18.426 align:middle how Pru's trillion dollars across public and private credit informs how they invest, 00:01:18.936 --> 00:01:21.056 align:middle and why insurers are allocating to private credit. 00:01:21.756 --> 00:01:25.376 align:middle Thanks, Phil, for sharing your perspective and wisdom on insurance and private markets. 00:01:25.466 --> 00:01:25.976 align:middle We hope you enjoy. 00:01:26.516 --> 00:01:28.866 align:middle [ Music ] 00:01:29.366 --> 00:01:31.396 align:middle >> Phil, welcome to the Alt Goes Mainstream Podcast. 00:01:31.766 --> 00:01:32.336 align:middle >> Michael, thank you. 00:01:32.406 --> 00:01:33.246 align:middle It's great to be here. 00:01:33.406 --> 00:01:36.476 align:middle >> Well, great to be here in the Prudential studio. 00:01:36.476 --> 00:01:38.146 align:middle Thanks for having me in Newark. 00:01:38.336 --> 00:01:41.556 align:middle I think we have such a fascinating conversation on tap today. 00:01:42.066 --> 00:01:47.296 align:middle Your background, I think, is so interesting as it relates to the evolution of both insurance 00:01:47.296 --> 00:01:50.206 align:middle and asset management and now private markets, private credit in particular. 00:01:50.676 --> 00:01:52.906 align:middle So first, would love to start with your background. 00:01:52.906 --> 00:01:55.726 align:middle You've been at Pru for quite a long time, done a bunch of different roles. 00:01:55.726 --> 00:02:00.256 align:middle So let's start there because I think that will provide a really interesting evolution 00:02:00.256 --> 00:02:01.776 align:middle of the firm as a backdrop to your background. 00:02:02.706 --> 00:02:05.116 align:middle >> Sure. Well, Michael, this intersection of insurance 00:02:05.116 --> 00:02:07.206 align:middle and asset management, that is PGIM and Pru. 00:02:07.206 --> 00:02:07.956 align:middle That's who we are. 00:02:07.956 --> 00:02:13.666 align:middle But it's also me, meaning I've sort of lived that, having grown up in the insurance, 00:02:13.666 --> 00:02:17.526 align:middle I ran the retirement business, so grew up in the insurance franchise. 00:02:17.526 --> 00:02:20.916 align:middle But there was such an asset-intensive business, you know, 00:02:20.916 --> 00:02:23.846 align:middle pension risk transfer being a great example of that, stable value, 00:02:23.846 --> 00:02:31.116 align:middle etc. And I now lead a business within PGIM, which is serving insurers and reinsurers. 00:02:31.116 --> 00:02:33.896 align:middle So again, that intersection of insurance and asset management, 00:02:34.236 --> 00:02:36.976 align:middle that's been my focus for decades. 00:02:37.606 --> 00:02:39.036 align:middle >> Two things I want to unpack there. 00:02:39.076 --> 00:02:44.926 align:middle One is your background, first working in the insurance side with retirement. 00:02:45.406 --> 00:02:50.096 align:middle How do you think about that now, taking what you learned then and applying 00:02:50.096 --> 00:02:53.976 align:middle that to serving insurers in the multi-asset group that you built? 00:02:54.066 --> 00:02:59.596 align:middle >> Well, job one as an insurer and an asset manager supporting an insurer is you've got 00:02:59.596 --> 00:03:00.776 align:middle to understand the liabilities. 00:03:01.136 --> 00:03:06.506 align:middle And getting the liabilities and getting the ALM, the asset liability management, 00:03:06.706 --> 00:03:11.546 align:middle right is the art of this, meaning you've got to make sure that you've got the liquidity. 00:03:11.856 --> 00:03:15.756 align:middle You've got to make sure that under stress, that not just the base case 00:03:15.756 --> 00:03:19.616 align:middle where everything is smooth sailing, that you have the ability as an insurer 00:03:19.616 --> 00:03:23.906 align:middle to weather those storms and to capture opportunities when there's stress. 00:03:23.906 --> 00:03:28.086 align:middle That's when your existing portfolio has challenges, but that's also when spreads widen 00:03:28.086 --> 00:03:31.526 align:middle and there's more opportunity and getting that right mix of public 00:03:31.526 --> 00:03:34.726 align:middle and private credit for the type of liability. 00:03:35.286 --> 00:03:39.666 align:middle And it varies significantly for really long life insurance liabilities 00:03:39.666 --> 00:03:41.696 align:middle versus short retail annuities. 00:03:41.856 --> 00:03:44.536 align:middle For example, very different strategies would back those up. 00:03:45.136 --> 00:03:50.296 align:middle >> On that point, how do you think about allocators thinking about risk? 00:03:50.296 --> 00:03:55.346 align:middle Because I think ALM gets to the heart of one of the big questions, particularly as it relates 00:03:55.346 --> 00:04:01.186 align:middle to deciding whether to choose public or private, which is liquidity risk or duration. 00:04:01.346 --> 00:04:05.856 align:middle How do you think about ALM in the context of liquidity as it relates 00:04:05.856 --> 00:04:08.976 align:middle to private markets' products interacting with the rest of the portfolio? 00:04:09.126 --> 00:04:13.696 align:middle >> Well, it's the intersection of the assets, the liabilities, and the capital 00:04:13.696 --> 00:04:19.996 align:middle and the regulatory regime that an insurer faces and the accounting and other priorities. 00:04:19.996 --> 00:04:24.736 align:middle So, you know, insurers have such customized needs, meaning you've really got 00:04:24.736 --> 00:04:27.676 align:middle to understand what the pebble in the shoe of the insurer is. 00:04:27.886 --> 00:04:29.356 align:middle You know, are they really worried about, 00:04:29.666 --> 00:04:33.466 align:middle if they're a publicly traded insurer, about gap volatility? 00:04:33.466 --> 00:04:38.416 align:middle And if you need derivatives for long liabilities to get that interest rate sensitivity 00:04:38.416 --> 00:04:42.406 align:middle so the assets move with the liabilities, well, how much appetite is there 00:04:42.406 --> 00:04:46.446 align:middle for volatility on the gap financial statements? 00:04:46.446 --> 00:04:51.566 align:middle And how much liquidity do you have on public assets to be able to post collateral 00:04:51.806 --> 00:04:55.576 align:middle and collateral under stress to support those derivatives? 00:04:55.786 --> 00:04:59.746 align:middle So getting the public-private credit has other component parts. 00:04:59.746 --> 00:05:06.996 align:middle And it's different if it's a US risk-based capital insurer versus a reinsurer in Bermuda 00:05:07.026 --> 00:05:12.096 align:middle or a Japanese insurer or a UK insurer with solvency in the UK. 00:05:12.096 --> 00:05:15.166 align:middle How do you optimize in the environment that that insurer has to live in? 00:05:16.446 --> 00:05:18.926 align:middle >> There's the insurance side of ALM. 00:05:19.416 --> 00:05:23.886 align:middle It also feels like the wealth management world, as they adopt private markets more, 00:05:23.886 --> 00:05:27.376 align:middle and you're sitting in the middle of that as both an insurance firm and asset manager, 00:05:27.986 --> 00:05:31.266 align:middle but the wealth management world seems to be thinking about ALM more 00:05:31.266 --> 00:05:32.946 align:middle as a way to think about private markets. 00:05:33.376 --> 00:05:38.046 align:middle How do you think that mindset of what you just talked about with ALM can or should, 00:05:38.046 --> 00:05:42.226 align:middle maybe it shouldn't, be ported over to the wealth management channel as it relates 00:05:42.226 --> 00:05:44.976 align:middle to the individual client thinking about private markets? 00:05:45.236 --> 00:05:54.476 align:middle >> Well, I think the retail individual investor does not have the same ALM construct 00:05:54.476 --> 00:06:00.016 align:middle as an institutional relationship, where that liquidity may be much more distant 00:06:00.156 --> 00:06:01.806 align:middle because of the nature of the cash flow. 00:06:01.806 --> 00:06:06.646 align:middle If I take a pension risk transfer, and, you know, those payments happen every month 00:06:06.646 --> 00:06:09.336 align:middle until somebody dies, well, that's decades of payments, 00:06:09.576 --> 00:06:12.696 align:middle very different than a retail investor who could take their money out. 00:06:12.696 --> 00:06:16.666 align:middle Even after maybe a market value adjustment or a surrender charge, 00:06:16.886 --> 00:06:21.396 align:middle there's still much more liquidity that the retail investor potentially has. 00:06:21.396 --> 00:06:26.206 align:middle And if you're using the ALM principles, that helps in constructing the portfolio. 00:06:26.626 --> 00:06:32.336 align:middle But it still has illiquidity, and there will be queues, and there will be credit cycles. 00:06:32.336 --> 00:06:36.986 align:middle And during those periods, the investor will need to have the staying power 00:06:37.316 --> 00:06:39.926 align:middle because they won't all be able to hit the exit at the same time, 00:06:39.926 --> 00:06:42.236 align:middle and certainly not at the prices they would like. 00:06:43.526 --> 00:06:46.946 align:middle >> You get to the topic of liquidity in that answer. 00:06:47.576 --> 00:06:53.196 align:middle How do you think investors, whether they're insurance investors or individual investors, 00:06:53.196 --> 00:06:54.806 align:middle should think about and approach liquidity? 00:06:55.436 --> 00:06:57.136 align:middle >> Well, I think that's back to ALM. 00:06:57.136 --> 00:07:01.716 align:middle Liquidity is the thing that can really burn investors, can really burn insurers. 00:07:02.356 --> 00:07:07.566 align:middle So I think it's the how do you have the right mix of public and private and flavors of public 00:07:07.566 --> 00:07:12.096 align:middle and private to create sufficient liquidity for the construct? 00:07:12.096 --> 00:07:18.386 align:middle And again, for a retail investor, it depends on their total portfolio and where this fits 00:07:18.386 --> 00:07:22.316 align:middle within their portfolio, because it wouldn't be an investor's only exposure. 00:07:22.586 --> 00:07:24.816 align:middle And if it's an exposure that they need to, you know, 00:07:24.816 --> 00:07:26.976 align:middle pay college tuition with, it's not going to work. 00:07:27.616 --> 00:07:31.446 align:middle >> I think that's a great jumping-off point to what you do now because you think 00:07:31.446 --> 00:07:34.286 align:middle about portfolios and asset allocation holistically. 00:07:35.546 --> 00:07:39.106 align:middle I think that's so important when you think about private markets. 00:07:39.316 --> 00:07:44.496 align:middle I think if we think about portfolios, they've shifted from this mindset of 60/40 to now, 00:07:45.406 --> 00:07:47.296 align:middle I think of it more as buckets and spectrums. 00:07:47.296 --> 00:07:53.466 align:middle So you're taking liquidity or illiquidity risk on the spectrum, whether that's public credit 00:07:53.466 --> 00:07:56.386 align:middle or private credit, whether that's public equity or private equity. 00:07:56.656 --> 00:07:59.796 align:middle And that's how investors are starting to think about things. 00:08:00.036 --> 00:08:05.176 align:middle How do you think about the total portfolio and how that relates to private markets, 00:08:05.176 --> 00:08:07.466 align:middle because it feels like you have to really understand the total portfolio 00:08:07.756 --> 00:08:10.166 align:middle if you really want to make sense of where private markets fits 00:08:10.166 --> 00:08:10.976 align:middle in a portfolio and how it fits in? 00:08:11.726 --> 00:08:14.916 align:middle >> Yeah, so I think, you know, I'll use the insurer example because I think 00:08:14.916 --> 00:08:20.216 align:middle that is most quantifiable and very well-established practice. 00:08:20.216 --> 00:08:23.496 align:middle So you need to make sure you understand the expected cash flows, 00:08:23.496 --> 00:08:27.936 align:middle how those cash flows could change, you know, if rates go up, if the currency changes, 00:08:28.646 --> 00:08:30.886 align:middle if people surrender their policies. 00:08:31.026 --> 00:08:34.116 align:middle That could create more liquidity than your base case assumptions. 00:08:34.116 --> 00:08:34.936 align:middle Well, how much more? 00:08:35.216 --> 00:08:37.866 align:middle And what would that then do to the overall portfolio? 00:08:38.126 --> 00:08:39.576 align:middle And what is your ability to weather that? 00:08:39.896 --> 00:08:43.916 align:middle So building the portfolio has to have that right combination of duration 00:08:43.916 --> 00:08:49.656 align:middle for interest rate sensitivity, private assets for diversification and for additional yield, 00:08:49.656 --> 00:08:54.006 align:middle and public assets for duration and for liquidity. 00:08:54.286 --> 00:08:57.976 align:middle That is a combination that, again, will vary by the nature of the liability. 00:08:58.866 --> 00:09:01.396 align:middle >> How do you think about the adoption of private markets 00:09:01.396 --> 00:09:04.436 align:middle within an insurer's asset allocation? 00:09:05.006 --> 00:09:06.546 align:middle >> Well, it's not a new thing. 00:09:06.866 --> 00:09:13.976 align:middle I think because the private credit arena has expanded so significantly in the last 5, 00:09:13.976 --> 00:09:18.076 align:middle 10 years, people perceive it as if it's new. 00:09:18.076 --> 00:09:21.576 align:middle PGIM and Prudential were issuing private credit in the 1920s. 00:09:22.406 --> 00:09:29.616 align:middle There's 100 years that we've been making loans to private companies for long-term liabilities. 00:09:30.216 --> 00:09:34.316 align:middle Now, the extent of that menu is much, much more complex today. 00:09:34.316 --> 00:09:37.906 align:middle And when people even say private credit, often they're thinking direct lending. 00:09:38.086 --> 00:09:40.236 align:middle Well, there's so many flavors of private credit. 00:09:40.236 --> 00:09:43.976 align:middle So what fits with what combination, that's a whole discussion in itself. 00:09:44.066 --> 00:09:46.676 align:middle >> On that point, let's go there a little bit. 00:09:46.676 --> 00:09:53.826 align:middle So, when it comes to an insurer's allocation of capital, are there certain flavors 00:09:53.826 --> 00:09:56.056 align:middle of private credit that fit better than others? 00:09:56.906 --> 00:09:59.396 align:middle >> Depends on the liability, which I will always go back to. 00:09:59.396 --> 00:10:01.086 align:middle It depends on the liability in the ALM. 00:10:01.086 --> 00:10:04.076 align:middle So if you have illiquid cash flows, well, 00:10:04.076 --> 00:10:06.856 align:middle you can lock up private credit for longer time periods. 00:10:06.856 --> 00:10:10.376 align:middle So private placements can work really well there, both investment grade 00:10:10.376 --> 00:10:13.916 align:middle and below investment grade, if you have shorter retail annuities, 00:10:13.916 --> 00:10:19.786 align:middle floating rate type capabilities, securitized versions of private credit, private ABF, 00:10:19.786 --> 00:10:22.776 align:middle residential mortgage loans, floating rate capabilities. 00:10:22.776 --> 00:10:24.796 align:middle Direct lending fits in that arena as well. 00:10:25.366 --> 00:10:29.296 align:middle And then part of this is not only the combination of flavors of private credit, 00:10:29.496 --> 00:10:32.736 align:middle but also how that fits with flavors of public credit. 00:10:33.206 --> 00:10:36.226 align:middle So if I'm an insurer and I'm trying to compete, you know, I want the yield, 00:10:36.816 --> 00:10:40.736 align:middle private credit has an origination timeline that you need to then fill. 00:10:41.386 --> 00:10:46.966 align:middle Well, to do this well, you need to not only have the breadth of capabilities and the quality 00:10:46.966 --> 00:10:50.006 align:middle of what you're deploying so it can handle credit cycles, 00:10:50.196 --> 00:10:53.976 align:middle but you also need to have the quantity of it when the insurer needs it. 00:10:54.816 --> 00:10:58.926 align:middle >> I think you bring up a really important point, which is the engine origination. 00:10:59.656 --> 00:11:02.026 align:middle How do you think about getting an engine origination? 00:11:02.876 --> 00:11:06.896 align:middle >> The best way to get an origination engine is to build it over time. 00:11:07.506 --> 00:11:09.126 align:middle Fast isn't always best. 00:11:10.076 --> 00:11:14.486 align:middle And, you know, as you are deploying, this is where public and private comes together well. 00:11:14.486 --> 00:11:18.706 align:middle So, for example, if you have private CLOs with direct lending 00:11:18.706 --> 00:11:24.606 align:middle or other investment collateral underneath it, you can use public structured products 00:11:24.846 --> 00:11:28.696 align:middle until you get the private origination and then rotate into the private. 00:11:29.296 --> 00:11:31.226 align:middle But in terms of what's the best build, 00:11:31.436 --> 00:11:34.586 align:middle our philosophy has been we have built this out over decades. 00:11:35.136 --> 00:11:40.346 align:middle We have a really deep credit culture with a well-dispersed across, 00:11:40.346 --> 00:11:44.846 align:middle particularly North America and Europe, but a global origination set 00:11:44.846 --> 00:11:47.406 align:middle of teams that have direct relationships. 00:11:47.406 --> 00:11:52.856 align:middle So, in addition to sponsored and intermediated direct lending and forms 00:11:52.856 --> 00:11:56.446 align:middle of private credit origination, private placements, as an example, 00:11:56.706 --> 00:12:00.916 align:middle commercial mortgage loans, we're doing so in direct negotiations, 00:12:01.086 --> 00:12:04.976 align:middle which means you get protective covenants, which means you have relationships with the firms. 00:12:05.126 --> 00:12:10.756 align:middle So they want to stick with you through good times because you've done workouts in bad times, 00:12:10.756 --> 00:12:16.476 align:middle both to not take the money back in a way that would be painful when they're under stress, 00:12:16.556 --> 00:12:20.916 align:middle but doing it with renegotiating the terms so you get paid more over time. 00:12:20.916 --> 00:12:24.696 align:middle It takes those skills, both origination, underwriting, 00:12:24.856 --> 00:12:28.016 align:middle protective terms, and then workouts. 00:12:28.016 --> 00:12:31.446 align:middle It takes all of that together, which is why that is best homegrown. 00:12:31.726 --> 00:12:35.536 align:middle Now, you can expand it through acquisitions, and we've done that. 00:12:35.536 --> 00:12:40.996 align:middle So Deerpath, for example, is an acquisition PGIM did in the direct lending space. 00:12:40.996 --> 00:12:46.256 align:middle But the trick there is to get really high quality and to have the cultures work. 00:12:46.256 --> 00:12:47.866 align:middle As you know, it's a talent business. 00:12:48.296 --> 00:12:51.976 align:middle You've got to keep the talent and not do damage via an acquisition. 00:12:52.806 --> 00:12:55.806 align:middle >> How would you define the talent and culture at PGIM? 00:12:56.016 --> 00:12:57.496 align:middle >> It is a credit culture. 00:12:57.906 --> 00:13:00.566 align:middle It is a culture that is long-term focused. 00:13:00.566 --> 00:13:02.466 align:middle I would say it is a no-drama culture. 00:13:02.466 --> 00:13:04.686 align:middle It's very, very high substance. 00:13:04.686 --> 00:13:08.946 align:middle >> Some of those things, I think, describe the DNA of an insurance firm well. 00:13:08.946 --> 00:13:12.886 align:middle I want to take it in a slightly different direction, because as you were talking 00:13:12.886 --> 00:13:18.306 align:middle about the origination engine and what that means, at the end of the day, to some extent, 00:13:18.716 --> 00:13:22.696 align:middle you're responsible for real money and individuals 00:13:23.036 --> 00:13:25.726 align:middle and businesses or people at businesses. 00:13:26.586 --> 00:13:31.976 align:middle So much of private credit is actually financing a lot of these businesses on Main Street. 00:13:31.976 --> 00:13:33.906 align:middle They could be small or medium-sized businesses. 00:13:34.316 --> 00:13:41.016 align:middle As we know, the largest portion of $100 million-plus companies in the US and globally, 00:13:41.016 --> 00:13:44.236 align:middle it could be Europe, Asia, etc., are in private markets. 00:13:45.456 --> 00:13:49.286 align:middle Because you're an insurance company that deals with real money at the end of the day 00:13:49.286 --> 00:13:53.746 align:middle and real people as the end client, do you ever make that connection? 00:13:53.746 --> 00:13:57.256 align:middle And do clients ever really understand that connection of those two things, 00:13:57.256 --> 00:14:00.906 align:middle that you're really financing the engine of the economy, and then that may end 00:14:00.906 --> 00:14:05.976 align:middle up in their annuity or their policy or their investment that they have with you? 00:14:06.836 --> 00:14:07.696 align:middle >> Yes, but. 00:14:07.786 --> 00:14:13.826 align:middle So the yes, but, Michael, is it certainly is part of our DNA in terms of purpose. 00:14:13.826 --> 00:14:15.976 align:middle So I think both on the asset management 00:14:15.976 --> 00:14:18.776 align:middle and the insurance company side, that is part of the culture. 00:14:19.146 --> 00:14:24.966 align:middle But also, I would say for borrowers, as opposed to retail investors, 00:14:24.966 --> 00:14:27.976 align:middle borrowers have that long-standing relationship. 00:14:27.976 --> 00:14:33.036 align:middle We had a client event at the Milken Conference, and there was a borrower 00:14:33.036 --> 00:14:34.896 align:middle that had worked with us for decades. 00:14:34.896 --> 00:14:39.496 align:middle And this guy had built a wine business, so, you know, loaning to vineyards. 00:14:39.496 --> 00:14:44.226 align:middle We've got a whole decades of experience loaning to California vineyards, as an example. 00:14:44.426 --> 00:14:47.736 align:middle And he described how he has built his business and how, 00:14:47.736 --> 00:14:49.596 align:middle in good times and bad, we've been a partner. 00:14:49.996 --> 00:14:54.646 align:middle And, you know, it's something that made you feel really proud about how we've been a source 00:14:54.646 --> 00:15:00.496 align:middle of private capital, to your point, that is growing businesses that may not be as visible 00:15:00.496 --> 00:15:03.976 align:middle in terms of how people think about public credit markets. 00:15:04.496 --> 00:15:10.046 align:middle And the long-term capital that we deploy, which is third-party capital, 00:15:10.046 --> 00:15:13.676 align:middle as well as Prudential's general account balance sheet capital, 00:15:14.116 --> 00:15:16.016 align:middle we've been doing that well for decades. 00:15:16.016 --> 00:15:17.516 align:middle And I think that's part of our identity. 00:15:18.156 --> 00:15:23.276 align:middle >> We talk a lot about the investor side, choosing private over public, 00:15:23.276 --> 00:15:24.756 align:middle particularly as it relates to credit. 00:15:24.756 --> 00:15:25.996 align:middle And in some cases, that can make sense. 00:15:25.996 --> 00:15:28.236 align:middle In other cases, it makes sense to choose public credit. 00:15:28.786 --> 00:15:32.066 align:middle We don't talk as much about the borrower side, choosing private over public. 00:15:32.736 --> 00:15:36.836 align:middle I'd love to unpack that aspect of things, too, because that example illuminates that. 00:15:36.836 --> 00:15:44.496 align:middle But how do you think businesses think about the decision and maybe now have more options 00:15:44.496 --> 00:15:49.336 align:middle as they think about choosing private credit over public credit when it comes 00:15:49.336 --> 00:15:51.966 align:middle to the investment marketplace of where they can actually take in capital? 00:15:52.386 --> 00:15:55.926 align:middle >> Well, again, this is an old trend, not a new trend. 00:15:56.106 --> 00:16:01.006 align:middle So while we've been such a large player in the private credit arena for decades, 00:16:01.316 --> 00:16:06.416 align:middle PE-backed asset managers are quite prominent in this space now too. 00:16:06.826 --> 00:16:08.556 align:middle But before then, it was about the banks. 00:16:08.556 --> 00:16:10.936 align:middle And the banks were tough competition over the years too. 00:16:11.506 --> 00:16:17.096 align:middle So borrowers can work with the banks, can work with asset managers like ourselves, 00:16:17.096 --> 00:16:18.846 align:middle and they can work in the public markets. 00:16:18.846 --> 00:16:24.416 align:middle And they're going to go where the right combination of priorities best fits them. 00:16:24.416 --> 00:16:29.466 align:middle So do they need a long-term credit relationship where it's not just about today, 00:16:29.466 --> 00:16:31.906 align:middle it's about borrowing in the future in tougher times? 00:16:32.066 --> 00:16:33.456 align:middle That might be a private arrangement. 00:16:33.776 --> 00:16:37.236 align:middle They might have something where they don't want public scrutiny, or they might not -- 00:16:37.236 --> 00:16:38.976 align:middle you know, so they wouldn't issue a public bond. 00:16:39.166 --> 00:16:44.976 align:middle Or they might have a need that has both speed and execution certainty that's important, 00:16:44.976 --> 00:16:49.326 align:middle and complexity that the public markets might not tolerate as well. 00:16:49.326 --> 00:16:53.626 align:middle And as you know, we've got an enormous public credit business. 00:16:53.626 --> 00:16:57.146 align:middle And when you take our public and private credit capabilities together, 00:16:57.146 --> 00:16:59.236 align:middle it's more than a trillion in size. 00:16:59.236 --> 00:17:01.066 align:middle So we're a credit behemoth. 00:17:01.066 --> 00:17:05.236 align:middle But the borrowers have the same element of choice that investors do, 00:17:05.486 --> 00:17:07.646 align:middle which is why it's a natural continuum. 00:17:07.926 --> 00:17:11.366 align:middle And the boundary between public and private is blurring. 00:17:11.366 --> 00:17:13.976 align:middle It's not as crisp: this is private, this is public. 00:17:14.046 --> 00:17:19.996 align:middle >> On that point for you, as an allocator of capital, how do you think having both 00:17:19.996 --> 00:17:24.756 align:middle of those businesses, the public and private credit business under one hood, and at size 00:17:24.756 --> 00:17:29.686 align:middle and scale, trillion dollars plus, how does that help you think about this blurring of lines 00:17:29.686 --> 00:17:30.976 align:middle that we see between public and private credit? 00:17:31.046 --> 00:17:36.586 align:middle >> And the only piece I would add to what you described, in terms of public-private scale, 00:17:36.826 --> 00:17:42.406 align:middle but it's also global, and just the extent to which you need to have those capabilities, 00:17:42.616 --> 00:17:46.526 align:middle both public asset management and private origination across the globe, 00:17:46.876 --> 00:17:48.886 align:middle it's a pretty short list that looks like us. 00:17:48.886 --> 00:17:54.266 align:middle And if I think about how to differentiate PGIM from respected competitors, 00:17:54.266 --> 00:18:00.046 align:middle there's lots of niche capabilities that are good in a sector, but to have the breadth 00:18:00.046 --> 00:18:06.386 align:middle of public securitization, private ABF, CMLs, direct lending, middle market 00:18:06.386 --> 00:18:09.336 align:middle and lower-middle market, large-cap direct lending, 00:18:09.546 --> 00:18:14.796 align:middle you just go across that whole continuum, I like the way we can construct solutions. 00:18:15.046 --> 00:18:19.066 align:middle And when you look at asset owners, their worlds have gotten really complicated. 00:18:19.176 --> 00:18:22.326 align:middle If it's insurers, it's gotten complicated because of competition, 00:18:22.586 --> 00:18:24.776 align:middle because of regulatory challenges. 00:18:24.776 --> 00:18:30.276 align:middle If you look at pension funds, you know, what's the scale with which they've added strategies, 00:18:30.276 --> 00:18:34.246 align:middle especially in the private arena, versus a scale in which they've added staff? 00:18:34.966 --> 00:18:37.196 align:middle The former is growing a lot faster than the latter. 00:18:37.886 --> 00:18:41.786 align:middle Insurers and pension sponsors need to do more with fewer managers. 00:18:42.236 --> 00:18:44.416 align:middle That's where I think we can show up well. 00:18:45.216 --> 00:18:50.366 align:middle >> I want to unpack that point because I think this is a trend in private markets broadly, 00:18:50.366 --> 00:18:56.646 align:middle which is there's less relationships that LPs will generally have. 00:18:56.706 --> 00:18:58.386 align:middle How do you think that unfolds? 00:18:58.386 --> 00:19:03.136 align:middle And what does that mean for the industry as you think about being an asset manager 00:19:03.376 --> 00:19:07.736 align:middle in this space, needing to provide solutions to LPs of all different types? 00:19:08.166 --> 00:19:12.056 align:middle >> Well, I think, you know, one is the breadth of capabilities. 00:19:12.426 --> 00:19:14.586 align:middle And, you know, we just discussed that. 00:19:14.586 --> 00:19:17.806 align:middle But I think it's also the credibility in each of those arenas 00:19:17.806 --> 00:19:19.316 align:middle because you still have to really deliver. 00:19:19.586 --> 00:19:25.746 align:middle And that credibility has to be sustained, which means that you have to have the capital inflows 00:19:25.746 --> 00:19:28.056 align:middle to be able to originate the private assets. 00:19:28.056 --> 00:19:31.386 align:middle You need to have the quantitative capabilities 00:19:31.386 --> 00:19:34.826 align:middle and the research capabilities, both public and private. 00:19:34.826 --> 00:19:42.106 align:middle And, you know, taking the RML arena, you know, residential mortgage loans, that is a very data 00:19:42.106 --> 00:19:44.556 align:middle and operationally intense environment. 00:19:44.556 --> 00:19:47.656 align:middle You need to have scale to be able to do that efficiently and well. 00:19:47.966 --> 00:19:52.416 align:middle You need to have cred throughout credit cycles and to be able to retain your people 00:19:53.046 --> 00:19:56.636 align:middle and to show -- You know, if you look in recent years, 00:19:56.636 --> 00:19:58.526 align:middle everybody has got a good track record right now. 00:19:58.766 --> 00:20:00.926 align:middle But how did they do over longer periods? 00:20:00.926 --> 00:20:03.996 align:middle And the number of managers that have 20-year track records, 00:20:04.366 --> 00:20:06.976 align:middle short and, you know, few and far between. 00:20:07.886 --> 00:20:12.486 align:middle >> What does that mean, do you think, you work with both institutional 00:20:12.946 --> 00:20:18.146 align:middle and wealth channel clients, do you think there's certain clients 00:20:18.146 --> 00:20:21.226 align:middle who care more about longer track record? 00:20:21.226 --> 00:20:25.866 align:middle Because obviously, there's now firms that are either partnering, manufacturing new products. 00:20:25.896 --> 00:20:27.316 align:middle They have shorter track records. 00:20:27.316 --> 00:20:29.926 align:middle Evergreen structures, in some cases, have shorter track records just 00:20:29.926 --> 00:20:32.896 align:middle because they just started to exist. 00:20:33.496 --> 00:20:36.156 align:middle How do you think LPs, whether they're institutional or wealth channel, 00:20:36.156 --> 00:20:39.976 align:middle do you think they think about what you just said, and how do they think about that? 00:20:40.406 --> 00:20:43.786 align:middle >> Well, I think they are putting their arms around these issues. 00:20:43.786 --> 00:20:47.586 align:middle And, you know, there's a whole menu of challenges that they need to understand, 00:20:47.586 --> 00:20:49.646 align:middle that they have to defend in front of their committees. 00:20:49.836 --> 00:20:53.056 align:middle So how do they model these assets? 00:20:53.156 --> 00:20:57.146 align:middle What assumptions should they use, especially if there's shorter track records, 00:20:57.146 --> 00:21:03.676 align:middle not only for the private credit originator, but sometimes for that sector or asset class? 00:21:03.676 --> 00:21:05.926 align:middle You know, ABF is probably a great example of that. 00:21:05.926 --> 00:21:07.776 align:middle The track record isn't as long. 00:21:07.996 --> 00:21:10.826 align:middle Recent history is optimistically too good. 00:21:11.056 --> 00:21:12.736 align:middle Spreads are relatively narrow. 00:21:12.736 --> 00:21:15.466 align:middle So, you know, there's a risk consideration. 00:21:15.466 --> 00:21:17.276 align:middle How do you measure that risk, particularly 00:21:17.276 --> 00:21:21.596 align:middle with private valuations not having the measurement points 00:21:21.596 --> 00:21:24.976 align:middle with which you can then assess it with, you know, sophistication? 00:21:25.046 --> 00:21:31.116 align:middle And do you have the modeling skills, which is part of the firepower we can bring to the table, 00:21:31.116 --> 00:21:34.176 align:middle not only with our deep data, we think we have a data advantage, 00:21:34.456 --> 00:21:37.966 align:middle but we have a modeling capability that is valuable to outside investors? 00:21:38.696 --> 00:21:43.546 align:middle >> One thing you're hitting on there is just how the asset management space is evolving. 00:21:44.376 --> 00:21:47.206 align:middle Firms can go at it on their own. 00:21:47.686 --> 00:21:48.666 align:middle They can partner. 00:21:48.746 --> 00:21:53.976 align:middle There's partnerships between asset managers and other asset managers, traditional alternatives. 00:21:54.296 --> 00:21:57.176 align:middle There's partnerships between alternative asset managers and insurers. 00:21:57.226 --> 00:22:01.276 align:middle How do you think that this whole space is shaking out? 00:22:01.406 --> 00:22:03.656 align:middle And how do you think about that? 00:22:04.046 --> 00:22:05.946 align:middle >> Well, I think scale is going to matter. 00:22:05.946 --> 00:22:09.776 align:middle So it is helpful to be big because you have breadth of capabilities, 00:22:10.096 --> 00:22:12.016 align:middle and there are arenas where you need to partner. 00:22:12.016 --> 00:22:15.256 align:middle >> How do you think that that's going to evolve as some 00:22:15.256 --> 00:22:18.246 align:middle of these private equity firms add other capabilities? 00:22:18.246 --> 00:22:23.006 align:middle Many of these firms are, to some extent, multi-strategy asset managers. 00:22:23.886 --> 00:22:29.296 align:middle Do you think there's room for both partnership and competition in other areas? 00:22:29.296 --> 00:22:30.086 align:middle And do you think that will happen? 00:22:30.086 --> 00:22:34.756 align:middle Because you're also an insurance business, and a lot of insurance businesses end up partnering. 00:22:34.756 --> 00:22:37.306 align:middle And certainly, the alternative asset managers want to partner 00:22:37.306 --> 00:22:39.726 align:middle with the insurance firms for a number of obvious reasons. 00:22:39.726 --> 00:22:42.976 align:middle How do you think that that delicate balance will unfold? 00:22:43.046 --> 00:22:45.846 align:middle >> I think that there will be more and more of that. 00:22:45.846 --> 00:22:49.376 align:middle So, you know, I was on the phone with a Japanese insurer last night. 00:22:49.726 --> 00:22:54.646 align:middle I met with a Japanese bank today, a sovereign wealth fund 00:22:54.646 --> 00:22:56.046 align:middle from the Middle East earlier in the day. 00:22:56.296 --> 00:22:58.746 align:middle There's so many different players in this arena. 00:22:58.746 --> 00:23:01.076 align:middle And we will do more with insurers. 00:23:01.206 --> 00:23:05.666 align:middle Almost all the insurers, but for a relatively short list, 00:23:05.786 --> 00:23:07.606 align:middle do not have the private asset origination. 00:23:08.716 --> 00:23:15.756 align:middle PGIM is unusual, being owned by Pru, having that longstanding private asset origination. 00:23:16.056 --> 00:23:20.346 align:middle There are PE-backed players that are creating marriages, establishing 00:23:20.346 --> 00:23:22.956 align:middle or acquiring insurers, or stakes in insurers. 00:23:23.206 --> 00:23:25.366 align:middle So I think that trend is going to continue 00:23:25.366 --> 00:23:30.026 align:middle because most insurers won't be able to build that from scratch. 00:23:30.026 --> 00:23:32.496 align:middle You know, I described build being better than acquiring. 00:23:32.776 --> 00:23:34.496 align:middle And they will need partners to compete. 00:23:35.166 --> 00:23:38.756 align:middle >> Something you talked about, I think, can be extrapolated to private markets 00:23:39.156 --> 00:23:45.396 align:middle in insurance portfolios more broadly, which is what are you most concerned about when it comes 00:23:45.396 --> 00:23:48.976 align:middle to private markets being employed in insurance portfolios? 00:23:49.046 --> 00:23:52.566 align:middle >> Well, I think it's back to liquidity in ALM. 00:23:52.566 --> 00:24:00.066 align:middle I think also there has been such growth in private credit and particularly in ABF, 00:24:00.066 --> 00:24:05.336 align:middle in securitized capabilities, in large-cap direct lending. 00:24:05.646 --> 00:24:08.996 align:middle There'll be a credit cycle, and there will be credit losses. 00:24:08.996 --> 00:24:13.876 align:middle And that will put pressure on insurers and on asset managers, 00:24:13.876 --> 00:24:15.926 align:middle and that will create some challenges. 00:24:16.866 --> 00:24:19.356 align:middle >> I think a lot of people have talked about this. 00:24:19.356 --> 00:24:24.726 align:middle And in that context, they've talked about underwriting standards and making sure you work 00:24:24.726 --> 00:24:27.856 align:middle with a partner that's done this for a long time and that has a track record. 00:24:28.206 --> 00:24:31.336 align:middle It's not that people are blind to this, but I think, to your point, there may be a cycle. 00:24:31.866 --> 00:24:37.056 align:middle What do you think allocators can do now to really think about the challenges 00:24:37.056 --> 00:24:38.586 align:middle that may come ahead at some point? 00:24:39.236 --> 00:24:42.676 align:middle And who are the types of firms that they should be allocating to today 00:24:42.676 --> 00:24:43.936 align:middle so they can avoid some of those things? 00:24:44.056 --> 00:24:46.696 align:middle >> Yeah, so I think, again, it's a question of when we'll have credit cycles. 00:24:46.696 --> 00:24:48.046 align:middle And, you know, that's a debate. 00:24:48.046 --> 00:24:50.886 align:middle But so at some point, insurers will face this. 00:24:50.886 --> 00:24:55.116 align:middle I think what they will need are asset managers that really understand the liabilities, 00:24:55.456 --> 00:25:01.046 align:middle really understand the regulatory environment in which the insurer is operating, 00:25:01.046 --> 00:25:06.376 align:middle has the data to back up the insurer for its modeling and its regulatory conversations, 00:25:06.376 --> 00:25:12.016 align:middle but also its own internal risk and governance, which is this is a good time 00:25:12.016 --> 00:25:15.556 align:middle when things are relatively stable. 00:25:15.776 --> 00:25:21.066 align:middle You know, when the next shock comes is not clear, but now is a good time to be going 00:25:21.066 --> 00:25:24.556 align:middle through your stress testing and, in particular, to be stressing your liquidity. 00:25:24.696 --> 00:25:30.796 align:middle What is your ability to post collateral for those derivatives under rate scenarios 00:25:30.796 --> 00:25:35.046 align:middle when rates rise, spreads widen, policyholder redemptions? 00:25:35.046 --> 00:25:41.866 align:middle What if the assumption is too conservative and you end up with a more aggressive environment 00:25:41.866 --> 00:25:43.976 align:middle in terms of the combination that I just described? 00:25:44.746 --> 00:25:50.036 align:middle >> What's the aspect within the private credit markets that perhaps you're focused 00:25:50.036 --> 00:25:52.206 align:middle on that others maybe are not as focused on right now? 00:25:52.726 --> 00:26:00.566 align:middle >> I think it comes back to keeping the underwriting discipline and the discipline 00:26:00.566 --> 00:26:06.616 align:middle for terms and doing so so that you're not just chasing the opportunity. 00:26:06.616 --> 00:26:13.996 align:middle And in our case, that means direct origination is a great supplement to the origination 00:26:13.996 --> 00:26:18.496 align:middle that comes from intermediaries and sponsored-backed and, you know, 00:26:18.856 --> 00:26:25.696 align:middle doing the are-you-sure test on the credit underwriting and on the stress testing. 00:26:26.046 --> 00:26:27.886 align:middle >> How does that happen in an environment 00:26:27.886 --> 00:26:34.146 align:middle where private credit has grown multiples within last few years? 00:26:34.146 --> 00:26:37.106 align:middle It's $1.7 trillion market roughly. 00:26:37.286 --> 00:26:40.016 align:middle Some people say it could be $30, $40 trillion market 00:26:40.016 --> 00:26:42.816 align:middle if you include certain things on a bank balance sheet. 00:26:43.576 --> 00:26:49.246 align:middle And there's also pretty significant demand from investors to invest into private credit. 00:26:49.246 --> 00:26:55.826 align:middle So how does the industry make sure it is cognizant of what you said, 00:26:56.036 --> 00:27:00.416 align:middle which is make sure you do good underwriting, as there's a growing market 00:27:00.416 --> 00:27:01.656 align:middle and more capital flows into the space? 00:27:02.056 --> 00:27:04.096 align:middle >> Well, that has risk associated with it. 00:27:04.096 --> 00:27:07.766 align:middle And I think it is much easier to give the money out than it is to get it back. 00:27:08.096 --> 00:27:11.906 align:middle And in times of stress, that will be tested. 00:27:12.066 --> 00:27:18.406 align:middle And I think individual managers need to have the culture and the governance that is rigorous. 00:27:18.666 --> 00:27:24.186 align:middle And that's, it's really a talent and culture and capability thing, because if it's just 00:27:24.186 --> 00:27:26.796 align:middle about originating, then it's short-sighted. 00:27:26.796 --> 00:27:31.846 align:middle You know, we're a very long-term organization, both on the asset management and insurance side. 00:27:32.136 --> 00:27:37.976 align:middle And part of our approach to private credit is we are a lender of private credit. 00:27:38.126 --> 00:27:41.266 align:middle We are not owning the same companies. 00:27:41.266 --> 00:27:45.556 align:middle If you have both the equity ownership and the debt and you have 00:27:45.556 --> 00:27:49.646 align:middle on the same firms a stress scenario, whose interests are you representing? 00:27:49.966 --> 00:27:51.376 align:middle And there could be conflicts there. 00:27:51.656 --> 00:27:54.886 align:middle That's an example of the type of conflict that we don't have to deal 00:27:54.886 --> 00:27:55.956 align:middle with because we don't own the equity. 00:27:56.106 --> 00:28:00.916 align:middle >> There's another interesting trend in private credit, which ties in, 00:28:00.916 --> 00:28:02.476 align:middle in private markets more broadly, but it ties 00:28:02.476 --> 00:28:04.126 align:middle into something you mentioned earlier, which is scale. 00:28:04.126 --> 00:28:09.956 align:middle So I'll share a bit and then want to hear your thoughts, which is there's this trend 00:28:09.956 --> 00:28:11.826 align:middle of private companies staying private longer. 00:28:12.236 --> 00:28:15.166 align:middle That's certainly benefiting the equity side of the equation, 00:28:15.536 --> 00:28:17.876 align:middle but it's also benefiting the credit side of the equation. 00:28:18.436 --> 00:28:23.216 align:middle Some examples, Apollo did a private credit transaction for Air France, for InBev, 00:28:23.216 --> 00:28:27.776 align:middle and these are, for Intel, like multi-billion, $5, $10-plus billion. 00:28:27.776 --> 00:28:29.196 align:middle Blue Owl did one for Databricks. 00:28:30.396 --> 00:28:34.586 align:middle If private companies choose to stay private longer or companies choose to go 00:28:34.586 --> 00:28:39.796 align:middle to the private markets, does that maybe not -- Doesn't change the underwriting necessarily. 00:28:39.796 --> 00:28:41.976 align:middle You still have to underwrite well and originate well, as you said. 00:28:42.166 --> 00:28:46.716 align:middle But does that change some of the dynamics of this, where there's going to be 00:28:46.716 --> 00:28:51.726 align:middle so many quality options, even in a growing market with more capital coming in, 00:28:51.726 --> 00:28:57.636 align:middle that it could tamper down some of those challenges of certain firms competing 00:28:57.636 --> 00:29:01.436 align:middle for all the same assets, because maybe there might be other really high-quality assets 00:29:01.436 --> 00:29:02.926 align:middle that enter the private credit space? 00:29:03.496 --> 00:29:06.696 align:middle >> Well, I think there's both good paths and bad paths that could develop there. 00:29:06.696 --> 00:29:08.976 align:middle So, yeah, you could have more assets and more companies 00:29:09.166 --> 00:29:10.936 align:middle that choose to do more in the private arena. 00:29:11.256 --> 00:29:15.156 align:middle You also have to be careful about too much capital chasing the same borrowers 00:29:15.236 --> 00:29:16.856 align:middle and making sure that there's discipline there. 00:29:17.126 --> 00:29:20.676 align:middle But then there's other markets where there's less developed capabilities. 00:29:21.276 --> 00:29:24.536 align:middle So I would expect that there will be more happening in Europe over time. 00:29:24.536 --> 00:29:28.616 align:middle And particularly if Europe takes action, and it's not sure they will in terms 00:29:28.616 --> 00:29:33.386 align:middle of private securitization, but securitization markets in Europe, there's an opportunity 00:29:33.386 --> 00:29:37.736 align:middle for capital to be deployed better and not just have bank lending dominate the way it does 00:29:37.736 --> 00:29:37.976 align:middle in Europe. 00:29:38.066 --> 00:29:39.956 align:middle And there are other arenas. 00:29:39.956 --> 00:29:43.326 align:middle You know, the private credit market is very small in Japan. 00:29:43.606 --> 00:29:46.156 align:middle Even the public credit market is relatively small in Japan. 00:29:46.156 --> 00:29:49.676 align:middle So there are market opportunities that should develop over time. 00:29:49.676 --> 00:29:50.666 align:middle It doesn't mean they will. 00:29:51.266 --> 00:29:54.366 align:middle But I think the scale of the opportunity, 00:29:54.366 --> 00:29:56.956 align:middle if we're looking out a decade, should be meaningful. 00:29:57.946 --> 00:30:03.726 align:middle >> So, on that point, thinking about looking out over the next decade, you've been in this space 00:30:03.726 --> 00:30:10.206 align:middle for quite some time, both public and private, what going forward are you most intrigued 00:30:10.206 --> 00:30:11.826 align:middle about as it relates to private markets? 00:30:12.706 --> 00:30:17.406 align:middle >> I think the striking the right balance on liquidity, as we were describing it earlier, 00:30:17.746 --> 00:30:25.046 align:middle and making sure that you've got the right regulatory framework so that good governance 00:30:25.046 --> 00:30:26.976 align:middle and good regulation is healthy for the industry. 00:30:27.046 --> 00:30:31.316 align:middle >> How do you think asset management firms, and in your case, both an asset manager 00:30:31.316 --> 00:30:35.806 align:middle and an insurance firm, can help getting it right on the regulatory front? 00:30:36.086 --> 00:30:38.426 align:middle >> That's something we've been very committed to. 00:30:38.426 --> 00:30:42.056 align:middle And, you know, we're proud of the relationships we have with our regulators. 00:30:42.056 --> 00:30:46.376 align:middle It's really important for leading asset managers and insurers to weigh 00:30:46.376 --> 00:30:48.856 align:middle in on how they think it ought to be governed. 00:30:49.096 --> 00:30:53.796 align:middle And our, you know, peers and competitors, we would welcome them at those tables. 00:30:54.076 --> 00:30:59.136 align:middle >> On that point, from the perspective of what would be for public consumption, 00:30:59.476 --> 00:31:04.556 align:middle what do you think is important from an education perspective, whether it's regulators, 00:31:04.556 --> 00:31:09.426 align:middle it could be to end clients, particularly the individual investors, wealth channel investors, 00:31:10.416 --> 00:31:12.466 align:middle about the merits of private markets 00:31:12.466 --> 00:31:16.976 align:middle that would help them understand what this opportunity set, but also the risk look like? 00:31:17.046 --> 00:31:24.066 align:middle >> I think ALM, liquidity, and then the breadth of the liabilities and the breadth 00:31:24.066 --> 00:31:29.806 align:middle of private credit, so back to, you know, private placements, direct lending, directly originated 00:31:29.806 --> 00:31:38.966 align:middle versus sponsored, CMLs, asset-backed finance, RML, private CLOs, rated feeders. 00:31:39.056 --> 00:31:41.476 align:middle There's such a complex menu. 00:31:41.776 --> 00:31:45.056 align:middle And when people say private credit, that's like saying food. 00:31:45.396 --> 00:31:49.316 align:middle And the breadth of things that are on that menu is extraordinary. 00:31:49.316 --> 00:31:54.306 align:middle And if you only eat the sugar products, as opposed to these flavors of protein 00:31:54.306 --> 00:31:57.136 align:middle with those vegetables, you know, just the complexity 00:31:57.136 --> 00:32:00.486 align:middle of it requires the right understanding. 00:32:00.486 --> 00:32:05.976 align:middle So ALM, liquidity, and breadth of liabilities, breadth of assets, combine them correctly. 00:32:06.496 --> 00:32:09.716 align:middle >> If you could create the perfect meal of private credit, 00:32:09.826 --> 00:32:11.196 align:middle what would that look like in your mind? 00:32:11.606 --> 00:32:15.626 align:middle >> It would depend whether I'm having a PRT breakfast, 00:32:15.626 --> 00:32:17.786 align:middle whether I'm having a retail annuity lunch, 00:32:18.476 --> 00:32:24.136 align:middle whether I'm having an afternoon snack that is whole life insurance. 00:32:24.226 --> 00:32:26.736 align:middle That meal is entirely dependent on the liability. 00:32:27.006 --> 00:32:29.956 align:middle And I think that's also the dynamic that is changing. 00:32:30.516 --> 00:32:34.356 align:middle The insurance industry used to be: I have these liabilities. 00:32:34.616 --> 00:32:35.786 align:middle What assets do you have? 00:32:36.126 --> 00:32:37.576 align:middle Now it's: I have these assets. 00:32:37.576 --> 00:32:39.566 align:middle What liabilities are the right combination? 00:32:39.566 --> 00:32:46.716 align:middle And you will see pricing and scaling up based on asset supply in forming the liabilities. 00:32:46.716 --> 00:32:50.796 align:middle But that perfect combination depends on what you're using it for. 00:32:52.166 --> 00:32:56.336 align:middle >> What do you think, particularly for the wealth channels, 00:32:56.966 --> 00:32:59.656 align:middle those investors should be eating more when it comes to private credit? 00:33:00.256 --> 00:33:04.686 align:middle >> I think a diversified mix of private credit, so not just one flavor. 00:33:05.236 --> 00:33:08.896 align:middle And that they should be doing it in a way that is eyes wide open, 00:33:08.896 --> 00:33:12.006 align:middle that that portion is not short-term liquidity. 00:33:12.296 --> 00:33:17.036 align:middle Even these, quote-unquote, "semi-liquid products" have constraints. 00:33:17.036 --> 00:33:20.736 align:middle And don't count on it for liquidity, count on it for diversification, 00:33:20.736 --> 00:33:23.686 align:middle count on it for incremental yield, especially when spreads are tight. 00:33:24.466 --> 00:33:30.966 align:middle >> Do you think discipline in investing will start to taste better over time? 00:33:31.036 --> 00:33:34.326 align:middle Like, eating your vegetables doesn't always taste good in the beginning, 00:33:34.326 --> 00:33:35.696 align:middle but maybe people grow to like it. 00:33:35.796 --> 00:33:38.976 align:middle Do you think there are aspects of that that people can learn on the investing side as well? 00:33:39.476 --> 00:33:42.496 align:middle >> I think some people will learn it. 00:33:42.606 --> 00:33:45.116 align:middle Others will get coaches, meaning advisors. 00:33:45.116 --> 00:33:51.516 align:middle And I think probably for the retail investor, the advisor is going to be the art here in terms 00:33:51.516 --> 00:33:54.386 align:middle of how to do that well because this is quite complex. 00:33:54.386 --> 00:34:01.016 align:middle And the mix of private assets varies based on capital markets at the time 00:34:01.016 --> 00:34:02.636 align:middle that you're deploying the assets. 00:34:02.636 --> 00:34:05.596 align:middle So today's answer will be different than the answer a year from now. 00:34:06.326 --> 00:34:09.856 align:middle >> The other interesting aspect of all of this, though, is that when you think 00:34:09.856 --> 00:34:11.336 align:middle about food, there's now so many choices. 00:34:11.336 --> 00:34:16.046 align:middle You go to the supermarket, the shelf space is tight, and there's a breadth of choices. 00:34:16.616 --> 00:34:22.316 align:middle How do you think about shelf space and choice as it relates to all the different solutions 00:34:22.316 --> 00:34:25.976 align:middle or products that, particularly the wealth channel now, has to choose from? 00:34:26.446 --> 00:34:29.876 align:middle >> Well, it can be overwhelming, now that we're working this food theme. 00:34:29.876 --> 00:34:31.416 align:middle I shouldn't have tossed it out there, Michael. 00:34:31.416 --> 00:34:37.876 align:middle But the breadth of those capabilities gets back to the do more with fewer firms. 00:34:37.876 --> 00:34:44.186 align:middle And if we're able to have, you know, a Walmart of choices that can combine it 00:34:44.186 --> 00:34:48.576 align:middle into an attractive meal so you don't have to choose every single ingredient, 00:34:48.576 --> 00:34:52.386 align:middle it's already packed, you know, whether it's HelloFresh, whoever packages it for you, 00:34:52.386 --> 00:34:56.376 align:middle how do you have all the ingredients and put together so it works for a good meal? 00:34:58.536 --> 00:35:01.176 align:middle >> I'll borrow something that some firms have used, 00:35:01.176 --> 00:35:04.446 align:middle which is the farm-to-table analogy in private credit. 00:35:04.446 --> 00:35:08.666 align:middle I think John Gray either came up with it or used it, but Blackstone has talked about it a bit. 00:35:09.356 --> 00:35:14.046 align:middle How do you think about there's almost this interesting, if we use the food analogy, 00:35:14.046 --> 00:35:19.006 align:middle there's this interesting trend of, on one hand, it's scale, which makes me think 00:35:19.006 --> 00:35:21.126 align:middle of like, well, Amazon bought Whole Foods. 00:35:21.126 --> 00:35:26.966 align:middle So you have large firms who are the ones who are distributing, whether it's the high-end product, 00:35:26.966 --> 00:35:29.136 align:middle could be the low-end product as well, all going to one place 00:35:29.136 --> 00:35:30.216 align:middle because it's more of a one-stop shop. 00:35:30.216 --> 00:35:32.796 align:middle On the other hand, with something like private credit, you have farm-to-table. 00:35:32.796 --> 00:35:38.896 align:middle And I know that's more on the investment side rather than the distribution side, per se. 00:35:39.166 --> 00:35:41.746 align:middle But how do you think about those two elements of things? 00:35:41.746 --> 00:35:44.606 align:middle Because I think, when you think about the way this is unfolding, 00:35:44.606 --> 00:35:46.906 align:middle particularly private credit, that is a scale game. 00:35:47.306 --> 00:35:51.146 align:middle You can't really be an artisanal player, or you can be, but then you get acquired. 00:35:51.766 --> 00:35:55.676 align:middle How do you think about those two trends kind of shaping the private credit market? 00:35:56.386 --> 00:36:02.696 align:middle >> Back to my, I prefer organic building of capabilities and teams over time rather 00:36:02.696 --> 00:36:05.646 align:middle than fast acquisition and cultural challenges. 00:36:05.856 --> 00:36:09.626 align:middle But there is a tension there, which is there is a breadth of a menu, 00:36:09.626 --> 00:36:12.906 align:middle but there could be some specific niches that you don't have. 00:36:12.906 --> 00:36:17.566 align:middle So, you know, we have arenas in which we either won't have the capability 00:36:17.566 --> 00:36:20.316 align:middle or won't have it, or we'll need more capacity. 00:36:20.586 --> 00:36:24.106 align:middle And so you can take other pieces and bring that into the picture. 00:36:24.996 --> 00:36:29.986 align:middle But back to my public and private credit great, great breadth, 00:36:29.986 --> 00:36:32.626 align:middle that's part of what I like about working at PGIM. 00:36:34.046 --> 00:36:36.766 align:middle >> Relating this to something else you mentioned, which is it really comes 00:36:36.766 --> 00:36:39.796 align:middle down to talent and people in many respects, 00:36:40.756 --> 00:36:44.626 align:middle how do you think this unfolds from the perspective of talent? 00:36:44.626 --> 00:36:49.626 align:middle Because when I think about scale, particularly in private credit, I think that firms 00:36:49.626 --> 00:36:51.946 align:middle that have the scale in many respects have an advantage, 00:36:52.516 --> 00:36:56.566 align:middle not just in origination, but also in distribution. 00:36:57.036 --> 00:37:00.076 align:middle And that makes it much easier to build and scale a business. 00:37:00.486 --> 00:37:04.466 align:middle So does the talent tend to stay at top firms now? 00:37:04.686 --> 00:37:07.646 align:middle Or do you think we'll see -- And yes, there's always people who want to be entrepreneurs. 00:37:07.646 --> 00:37:15.096 align:middle But if you think about private equity or private credit, 20, 30, even 15 years ago, 00:37:15.446 --> 00:37:19.206 align:middle you had a lot of talent that would have spun out at the natural time for them to spin out 00:37:19.206 --> 00:37:20.616 align:middle and start something smaller because they could. 00:37:21.046 --> 00:37:23.506 align:middle Now, because distribution, particularly the wealth channel, 00:37:23.506 --> 00:37:27.596 align:middle requires scale, how does the talent game unfold? 00:37:28.046 --> 00:37:33.906 align:middle >> Well, you think about the private credit arena, people that are private credit, you know, 00:37:33.906 --> 00:37:40.026 align:middle stars in terms of that talent, they're going to want to be able to originate the loans. 00:37:40.296 --> 00:37:45.746 align:middle They're going to want to be able to have a predictable and scalable steady stream 00:37:45.746 --> 00:37:50.386 align:middle of capital to deploy to the borrowing relationships that they've built over time. 00:37:50.386 --> 00:37:53.886 align:middle And if they can't get the capital, even if you're in a great culture, 00:37:54.056 --> 00:37:58.186 align:middle you'll be tempted to work someplace else, either as an individual or a lifted-out team. 00:37:58.456 --> 00:38:02.396 align:middle So I think the distribution part and the brand and the scale matters. 00:38:02.556 --> 00:38:03.976 align:middle But you also have to have the culture. 00:38:04.336 --> 00:38:10.086 align:middle Often, scale is toxic to investment cultures. 00:38:10.086 --> 00:38:13.796 align:middle As firms get bigger, many of them struggle to keep the culture. 00:38:14.046 --> 00:38:20.786 align:middle And that's where having the right leadership and the right core culture as you get bigger, 00:38:20.786 --> 00:38:26.606 align:middle still keeping the quality and the things that those private lenders respect and value. 00:38:27.046 --> 00:38:30.206 align:middle >> So you need to give great chefs all the tools 00:38:30.206 --> 00:38:33.706 align:middle and products they need, but in a bigger-scale platform. 00:38:33.706 --> 00:38:37.086 align:middle >> And with a steady flow of customers into the restaurants 00:38:37.086 --> 00:38:39.766 align:middle that those chefs aren't Maytag repairmen. 00:38:39.766 --> 00:38:41.626 align:middle They're actually delivering the meals. 00:38:41.706 --> 00:38:44.326 align:middle That's their, you know, identity and purpose, why they do it. 00:38:44.506 --> 00:38:45.826 align:middle >> Where brand matters. 00:38:45.986 --> 00:38:46.466 align:middle >> Exactly. 00:38:46.466 --> 00:38:48.726 align:middle >> Wow, we really did a great job with the food analogy. 00:38:48.916 --> 00:38:50.906 align:middle This was a fantastic conversation. 00:38:51.006 --> 00:38:56.586 align:middle Phil, what an interesting perspective into such a breadth of a platform 00:38:56.586 --> 00:38:57.996 align:middle across insurance and asset management. 00:38:57.996 --> 00:38:59.396 align:middle Your career has mirrored that as well. 00:38:59.656 --> 00:39:00.976 align:middle And then we cooked a great meal together. 00:39:01.126 --> 00:39:02.446 align:middle >> Yeah, it was a lot of fun. 00:39:03.116 --> 00:39:03.846 align:middle Thanks, Michael. 00:39:04.846 --> 00:39:07.286 align:middle >> Thanks for listening to this episode of Alt Goes Mainstream. 00:39:07.536 --> 00:39:08.866 align:middle I hope you enjoyed it.