Professor Glenn Okun on Mastering the Art of Startup Finance Amid Economic Swings

Unlock the secrets of securing capital for your startup as I, Michael Gayed, join forces with NYU Stern’s own Professor Glenn Okun to unravel the complexities of entrepreneurial finance in today's challenging economy. Together, we dissect the current climate where surging interest rates are reshaping the terrain for rising businesses, scrutinizing the high barriers and intensified competition for investment. This episode is a treasure trove for entrepreneurs looking to navigate the stormy seas of venture capital and establish a stronghold in a market where Goliaths are increasingly dominant.

Venture beyond the startup scene with us as we also tackle the thorny issues around the green energy transition and the fallout from COVID-induced financial landscapes. Diving into the world of investment strategies, we question the viability of passive approaches in an age of market anomalies and scrutinize the energy sector's pivot toward practices that favor shareholders. With Professor Okun's expertise lighting the path, we examine the forces of political sway, corporate power plays, and technological breakthroughs that could very well overturn the status quo of the investment universe. Tune in for an episode that promises to equip you with the insights to make savvy decisions in a market brimming with both peril and promise.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:09

my name is michael guyad, publisher of the lead lag report. Joining me for the rough hour is, uh, the man, the myth, the man who taught me a couple things, uh, from nyu, mr, professor glenn oaken. Uh, mr, or should I call you professor?

Speaker 2: 0:20

I feel like it's just a clay professor after whatever you like michael, you're an alumni now, so it's right, professor. Whatever you like, michael, you're an alumna now, so it's.

Speaker 1: 0:26

Right. So that means you're going to ask me for money at the end of this conversation. I never do that. So, Professor Hogan, introduce yourself to the audience for those watching. Who are you? What's your background? How'd you get involved as a professor? What are you doing currently?

Speaker 2: 0:41

I'm a professor of management, entrepreneurship and finance at NYU Stern School of Business.

Speaker 1: 0:47

I focus on entrepreneurial finance, venture capital and private equity investing, and on startup management and growth management subjects where we put capital or talent and time in a position of highest possible risk with the hope of justifiable returns. Let's get right into that, because I'm going to assume it's a little more nuanced and harder to do just that in a higher interest rate environment. When I graduated many, many years ago, you did not have zero interest rate policy. This was before the GFC. But a lot's happened in terms of the cost of capital and then the justifiable rates of return that different small businesses can try and target. Talk about just sort of the evolution of the cost of capital when it comes to entrepreneurialism, when it comes to trying to build a small business into something that's larger.

Speaker 2: 2:12

We have had a persistent long we never have enough startup capital, and startups, of course, cannot access the conventional debt markets, and so it's true it's one of the few bromides of entrepreneurship. That's actually true. The first round of capital is the most difficult to raise. Simply by virtue of that scarcity. We have come through a period of abnormally large amounts of startup capital still scarce, but not as scarce by virtue of unusually low interest rates during the COVID period. That financial repression, designed to prevent a depression, also made capital much more aggressive because fixed income rates of return were driven to unappealing interest rate levels, and that increased the flow of capital into every equity asset class, including venture capital funds and private equity funds.

Speaker 2: 3:24

Now that we have reestablished higher interest rates, we're seeing the deceleration of capital flows both into venture capital and private equity funds, but we're also seeing a collapse in the exits for portfolio companies, for private equity and venture capital firms to sell their portfolio companies or taking them public. We've had a very small number of transactions relative to recent history. Relative to recent history, that has the effect of both damaging the returns to the existing funds but also reducing the available institutional capital for new funds. A lot of institutions actually recycle the capital distributions from their existing funds into commitments, into new funds, funds into commitments into new funds. And so this suggests that, barring a 400 basis point reduction in interest rates, which I'm not expecting, I expect we're going to see a reduction in the risk capital that's available not only for early stage ventures, but also for the more later stage investments in mature companies that private equity firms make.

Speaker 1: 4:54

Is it scarcity or is it concentration in specific sectors? In other words, it's just getting funneled more towards tech. I mean, I remember whatever. Two and a half, three years ago, all the news stories were around all this VC money and private equity money going into anything blockchain, anything crypto, and it seemed like everything else was dry around that. How much of it is scarcity versus? Just, there are not that many. There's not much of a desire to go outside of the hot sector of the moment the hot sector of the moment.

Speaker 2: 5:31

What we're experiencing is both a contraction in the capital being committed to new funds and we're also seeing a concentration of that capital in a smaller number of funds. This is the traditional flight to quality phenomenon that occurs in a contraction phase for private risk capital. Some institutions will simply eliminate or reduce their asset allocations. Others will maintain an asset allocation but make a smaller number of larger commitments. So it's the strong get stronger, which is why you'll see periodically in the Wall Street Journal the big name venture capital and private equity asset management firms the Apollos, the Carlyles. They can raise substantial sized funds, maybe not as large as they would like, but they're still able to raise large funds. But we've had an absolute retreat away from first time. Venture and private equity funds and more boutique firms are also struggling to either raise a follow-on fund, a successor fund, or raise a fund near their target size had to delay its closing of its 16th venture capital fund and they had to close it at one-third of the original target size.

Speaker 1: 7:22

And so we are seeing a fairly significant reduction here. Okay, you use that term. The strong gets stronger, the Pareto principle gets even more Pareto principled, If that's how to speak. The 80-20 becomes even more concentrated. I wonder if there's any way that can reverse, because when I hear that, if I'm thinking from my younger self being an entrepreneur, if I have the sense that the strong gets stronger, that the capital is just being funneled to these big players, it's kind of demotivating to be an entrepreneur when it just seems like you're not going to be able to get ahead unless you're already ahead.

Speaker 2: 7:59

That's why you see a focus on a small number of investment teams. The investors with capital, the general partners of these funds, are the only investment decision makers with capital to invest. They're going to be very sensitive to any preferences of their limited partners, so they won't wander outside of an industry that excites their LPs, and so this is terribly disheartening for founders. What causes this to change is predictable. The timing over which it changes is completely unpredictable, and so we are early in a portfolio asset value right down and right off cycle in venture funds. Private equity really hasn't started yet, and so what is typically the case? We will go through not a number of quarters, but a number of years, perhaps as many as four to six years, when capital slows, will remain, diminished into new funds. Write downs and write offs in existing funds will be taken At some point. They become inevitable because funds reach the date at which they expire and have to liquidate. Because funds reach the date at which they expire and have to liquidate, if our general partners can't sell, these companies can't take them public. When we get to the end, everything will get marked to market, and we're operating in an environment now where, with the diminished supply of credit and the much more conservative valuation discipline in the market in private equity, for example, where companies have frequently been financed on the debt side at the three to four-year time period. Now that the average holding period in private equity funds is back to a five-year hold on a portfolio company, two and a have general partners trying to manage private portfolio companies that they never intended to have to refinance. They invested under the presumption they would sell or take them public before senior and subordinated debt came due. So, unfortunately, private equity is getting hit on both sides, not only facing downright depressing prospects in the exit market, but they're facing a refinancing environment. Very much like a commercial real estate investor. We took out a big mortgage. It was aggressively underwritten. Now it comes due, we can't refinance it in total. So if we're going to refinance it on these tougher terms, at the higher interest rate environment with depressed asset values, we have to contribute additional equity at the closing to avoid defaulting on the loan. This is something private equity has not experienced since the early 1990s. This has happened before, although there are very few people around who had a chance to observe it. I was one of those people, and so this is when General partners in an absolute panic. If they can't refinance it, they're forced in a position of default or reinvestment.

Speaker 2: 12:15

Reinvestment may be impossible. A fund may be out of its investment period. In other words, it may no longer have access to capital. Even if it has access to capital, limited partners may not want more capital being invested in devalued portfolio companies. They may view it as investing good money after bad, investing good money after bad, and so what we're likely to see although it won't be coordinated, it'll be on a fund by fund, portfolio company by portfolio company basis we will start to see loss of value, no-transcript, and so these are prolonged periods of poor performance when we're effectively devaluing and disposing because we can't, with a single, unified solution, dispose of the assets. So, in the global financial crisis in 2008, where we were infected with an enormous mass of low-quality, defaulted subprime mortgages well, subprime mortgages, for the most part. Well, subprime mortgages for the most part are a homogenous asset base. You can devise a single solution and devalue and dispose relatively quickly, and then address the capital inadequacies that result at institutions that acted as investor or lender in those circumstances.

Speaker 2: 14:25

What will be much more challenging this time? We have a set of problems in private equity that will relate back to a series of lenders. In venture capital, we will have a series of problems related to certain leasing companies that will provide financing. So venture-backed companies can lease equipment, but it's to a significant dollar amount. Similarly, we have this kind of problem as well in the commercial office real estate market, where we have what's estimated to be what could be as much as a trillion and a half.

Speaker 2: 15:15

This is a problem geographic market by geographic market, asset by asset. Institutional owners of the largest shopping center in downtown San Francisco defaulted and gave the title back to the lender. We've seen it with a number of office buildings in Los Angeles, again, where high quality institutional owners and institutional asset managers have made the decision that a further investment of equity capital is not justified, based on the future value of these buildings. And so the problem in the office space market is that it's fundamentally overbuilt across most major downtown central business districts in the country, and and there is no one size fits all remedy. So you know, here in New York City, for example, in Manhattan, if you have a bad downtown office building that was built prior to 1950, you can convert that into, you know, multifamily dwelling, you know rental apartments or condos. That model works. It worked after 9-11. It was with the first wave of those conversions.

Speaker 2: 17:08

But if you own a B-grade, a large footprint, modern office building, big square floor plates, that was built in the 1970s, and you don't have tenants there, really can't use that solution, can't break it up into apartments, because most of the apartments wouldn't have windows, and so that becomes the trouble with this kind of a correction in private assets. If you worry about the economy, the only thing you worry about is will there be a concentration of bad assets in the hands of capital providers in one region of the United States? So that's what the Federal Reserve is worried about. They're not worried about nationwide catastrophe, and neither am I. But if we get a concentration of problem assets in any region of the United States, any region of the United States, that the regions of the US are quite susceptible, because in many regions in the United States the majority of business lending is handled by two, three or four regional banks, and so that's where there could actually be damage done to regional economic growth, which of course would affect GDP.

Speaker 1: 18:50

So that actually goes perfectly to that other question I wanted to ask which is at what point is idiosyncratic, systemic? So it is the concentration, okay, no disagreements, but something happens that causes that right. I mean presumably.

Speaker 2: 19:08

Well, the cause of the inflated valuations was the financial repression during COVID, and so we were witnessing excess risk-taking on the investing side.

Speaker 2: 19:27

You can't just blame the investors.

Speaker 2: 19:30

After all, you can't finance a big office building without some lead tenants, and the lead tenants we can thank are all the big tech companies which, up through 2018 and 2019, were growing so rapidly that it was standard practice for them to sign leases in buildings that had not yet been built, for space they didn't need yet, assuming that by the time the building was ready for occupancy, they would have headcount requiring that space.

Speaker 2: 20:07

That entire cycle of rapid growth, of course, has collapsed, and so now we're working through the unwinding of all of that, which will be problematic and time consuming. That's the bad part. If you're a founder, if you're an investor, you don't want to invest in markets that are dealing with an overhang of problem assets, not just tying up capital, but tying up an investor attention. So when an investor is beleaguered by problem assets, they have to work their way out of. They're not making a lot of new investments, they're using their time to try to engage in successful recoveries, and so this has a set of effects. Certainly, none of them are paid for the startup economy.

Speaker 1: 21:46

All of this eventually will create opportunities, obviously. I mean I always go back to if you're a real investor, you want dislocations.

Speaker 2: 21:54

I am if you've been reading the Rabbit Capitalist. I love this. This is my favorite environment because it creates bargain assets. We have to be stock pickers, whether we're investing in publicly traded securities or buying private assets. You can't buy an entire basket of assets. You have to be able to select the ones that are irrationally discounted to future fair market value where you understand how that fair market value can be created, and that's where there are bargains to be had.

Speaker 2: 22:42

In 1990, when we were dealing with the S&L crisis, banks, smaller banks, savings and loans had made lots of ultra-aggressive loans when the capital flows seized up aggressive loans. When the capital flows seized up, there were great individual assets to buy at discounts that are hard to believe. At that point in time, I was an investment manager in the IBM Retirement Fund, which at the time was one of the 10 largest pension funds in America, and we actually bought a brand new office building as an investment in the best part of downtown Dallas, texas. The actual cost of the building was a quarter of a billion dollars. The cost of the building was a quarter of a billion dollars. The building was empty. It didn't have a single tenant. We bought that building for $25 million, understanding that over time we would get at least and that the cash flows even in a depressed market environment would create attractive cash-on-cash returns.

Speaker 1: 24:06

Speaking of irrational discounts, what has a larger irrational discount, technology or energy?

Speaker 2: 24:16

Energy, let's energy. Energy, let's talk about it. Energy is and has been dealing with negative sentiment by virtue of green enthusiasm green energy enthusiasm Now for well over a decade. I previously posted graphs showing the valuation of the green energy index to the oil and gas index. And one looks like it's going out of business that's oil and gas. The other looks like it's the future, increasing in valuation multiple rapidly that's green, of course. In truth, we don't have green energy solutions that today could replace oil and gas. None of our alternative energy solutions can actually supply the energy necessary on a cost-effective basis. And so when politicians say, well, we'll go green by 2030, we'll eliminate gas-powered cars by 2032, that's great as a political stump speech, but it's absolutely an impossibility. So fundamental inferiority of the current green solutions. And that's when the government removes the subsidies and the tax incentives that were designed to sponsor the development of these green alternative energies. So we've seen that now in solar, the solar installation credits have been drastically reduced and in some states, completely eliminated. Even in California, the most green-seeking state in the nation, even they have cut their subsidies. This will ultimately cause firms that survive to trade at very low valuation multiples low valuation multiples.

Speaker 2: 26:53

We can't go green until we innovate solutions to very difficult problems, problems I describe as stubborn technology problems. Despite all of our efforts, manpower and capital invested, we haven't been able to successfully innovate At the linchpin of a successful green transition. We need to invent batteries for storing energy that do not exist yet generated power, solar generated power on a cost effective, efficient basis, which is why the electric grid utilities, by regulation, have to take wind and solar generated power the moment it's created. They have to buy it at an agreed upon contract price, in many instances far above market, because that energy can't be stored in any kind of a cost-effective manner, and so that's the subsidy from the utilities to these generators that has allowed solar and wind to grow. But that's not a reliable solution. It gets very, very expensive, which is why now half the wind power installations in the United States are being taken offline. They can't make money at the subsidy they were given to. But unfortunately these are legitimately difficult innovation problems.

Speaker 2: 28:42

As it relates to the battery, we're currently in electric vehicles using lithium ion batteries, the same batteries that are in your laptop computer, your tablet computer, and these batteries are not appropriate for the purpose, which is why an electric vehicle, the entire base of the car, from hood to trunk, side to side, is an array of lithium batteries. It adds 30 to 35% to the weight of the car, and these batteries hold an unpredictable charge, the same way that your iPhone holds an unpredictable charge over time. It's not Apple nefariously tweaking their operating system so that it drains your batteries if you buy a new iPhone. It's just the inherent instability of lithium ion batteries. They're not chemically stable, they don't hold a constant charge, and one of the reasons why in the US, no one but early adopters have purchased electric vehicles because of their limited utility outside of sunbelt states with temperate climates and relatively constant humidity. That's where an electric vehicle can get close to delivering the drivable range in miles for which it's rated.

Speaker 2: 30:15

Take that car, stick it in Connecticut. You'll get a third to 40% of that drivable range before you deplete the battery. And so again, these are just. We're trying to use technologies that are compromises. They're the best that exist, but they're really not fit for purpose, and that's fundamentally the problem that Tesla will be wrestling with for years and why I would expect Tesla to come under tremendous pressure, not only in terms of quarterly financials but, more importantly, in cars delivered, such that their overall market cap is likely to fall quite drastically. It won't be ultimately valued like a tech company. It'll be valued like a car company and on that basis it's barely worth $75 a share today.

Speaker 1: 31:10

And that's probably why Musk, recently, is saying to Buffett he should use his cash to buy Tesla. Yes, because Musk is not naive, he must be aware of this dynamic. I am curious, though, because it seems to me that the only real solution answer is nuclear is uranium, and I get it. There's still concerns around that. Nuclear is uranium right, and I get it, there's still concerns around that. But the reality is, if you're going to power AI, if you're going to power EVs, there's nothing else you have really to choose from except uranium and nuclear.

Speaker 2: 31:45

Yes, nuclear is the. Ironically, it's the only green energy source that works Works economically and works predictably, but politically is untenable as a solution. In the United States We'll bring one nuclear reactor online in the next 24 months. It has spent the last 12 years in the federal permitting process and so we have created formidable obstacles to nuclear. But if you really set out as our top objective as a nation to eliminate fossil fuels, fossil fuels, nuclear power is the only way to power the electric grid, and high-speed rail systems, high-speed regional rail systems, is the only transportation solution that is green, that has a demonstrated track record of success wherever it's been implemented around the world.

Speaker 1: 33:02

So if you're going to be investing in these from a very long-term perspective, do you go about it from an average, meaning, find a fund that is focused on oil, gas, nuclear? Do you get a little more creative and do individual stock picking? I mean, put the academic hat on right. Stock picking really doesn't work. It's all about asset allocation. It's hard to find the winners in advance, right? Dot com was a thing, but a lot of companies didn't survive. How do you think about that?

Speaker 2: 33:32

Because there's an argument to go for the average but of course, if you go for the average, you get average returns. Yeah, the problem with passive investing index-based investing in the emerging spaces is that the index creator is doing the stock picking and so you're subject to the same set of risks. As a result, the only way I view playing the green transition is to buy the global mining companies that are publicly traded that have very high dividend yields. Mining companies that are publicly traded that have very high dividend yields Rio Tinto, bhp, vale. If you own those three, you have ultimately a diversified portfolio of all of the major minerals that will be necessary for any green power solution that gets implemented.

Speaker 1: 34:41

I was smiling when you were saying that, because I was not expecting the first thing to come out of a professor's mouth. The reason passive doesn't work right, because that's always the thing right. It's like and there's a lot of academic research that's very valid that it doesn't work. But now that I've been in the industry from the standpoint of seeing what other index providers, other ETF issuers, what they do, you're exactly right. They are the ones stock picking and you're buying their products.

Speaker 2: 35:07

The good news is for the average investor. They should be passive. But they shouldn't be investing based on a thematic approach. They shouldn't be trying to create a green portfolio using index funds. They should just be indexing the broad market. Those index funds work very well S&P 500, russell 2000,. Those are stable product offerings of the investment management industry. They're inexpensive to own and they track their market index relatively closely. But that merely creates a plain vanilla equity allocation the moment, as your question suggests, michael, that you would want to be investing in themes of interest, the green transition being long now the problem is we don't have stable index for that industry, so it's just our passive index creator acting as stock picker. If they pick the wrong companies or in the wrong overall allocation within the index to each other, that will leave us with unsatisfactory returns.

Speaker 1: 36:41

It sounds to me like the equity side makes more sense than investing in the debt side, right, unless you have a real dislocation. But I mean, these companies have such tremendous cash flow it's hard to imagine the bonds that are really trading off Going back to the cost of capital and sort of the maturity wall dynamic. Is it fair to say that the energy sector is not going to be as dependent on the cost of capital as it used to be, of capital as it used to be? I mean, there's this argument out there that there's been tremendous underinvestment for a long time because of everything you just said the green transition. They've been shunned away from investor capital but they've survived really strongly.

Speaker 2: 37:23

They've got high free cash flows and they've adopted a balanced corporate finance strategy. This started three or four years ago, as opposed to being focused almost exclusively on expanding reserves and deploying most of their capital toward exploration, development and production, shifting to a balanced approach where they're still adding reserves, but in a shareholder friendly way, meaning directing cash flow to attractive dividend yields and share buybacks. That, combined with the consolidation of domestic oil reserves, oil and gas reserves creates a very attractive commodity price environment for our US producers. Six to 12 months, over half of all US oil and gas reserves will be owned or controlled by 10 US companies, and there's nothing better than an oligopolistic set of conditions in an industry if you're a shareholder.

Speaker 1: 39:56

Set of conditions in an industry if you're a shareholder. I've interviewed different people talking about competitions. As you mentioned oligopoly Matt Stoller comes to mind. I brought up this point that it seems like every industry is increasingly becoming an oligopoly. Go back to the bigger concept. Industry is increasingly becoming an oligopoly. Go back to the bigger concept. Is that fate for the economy? I mean, can we ever get back to sort of a more, even more fragmented state for the system, or is everything going to ultimately be too big to fail across every single major sector of the economy?

Speaker 2: 40:34

across every single major sector of the economy. We tend to go through periods of time where concentration is the norm. They tend to be relatively long time periods but then, by virtue of innovation and fundamental change in industries, fragmentation tends to then get reintroduced again. Where we are in that cycle depends upon the industry, depends upon who you ask For our technology industries. They tend to operate on a 50 to 60 year cycle where you get fragmentation in the first 20 years.

Speaker 2: 41:33

New entrants championing new technologies take early share Think Amazon 25 years ago, google, facebook but after that initial 15 to 20 year period in that innovation cycle the land grab, major market share in major markets has been captured and then for the next 30 or 40 years those entrants become the dominant players and consolidate until they are either displaced or destabilized by new innovation. This is, of course, what happened in the television equipment industry. Rca and a small number of companies held concentrated market share in the vacuum tube era of television set technology. State technology was created that introduced fragmentation and lots of other companies were able to capture attractive market share. And of course, rca, the leader during the vacuum tube era, became the technology loser during the period of that new innovation. With solid state technology, the period of that new innovation with solid state technology. That tends to be what we see over time periods that are hard to accurately predict.

Speaker 2: 43:05

The old line is that technology leaders ultimately become technology losers. Just listening Now, an industry that actually resists that, it's the oil and gas industry. Because the oil and gas industry innovates technologically but they never sell their technology. They do their best to keep it a secret how they squeeze additional volumes of oil out of the ground, and that's been the history of success in in oil and gas industry for the last 150 years. They just innovate new drilling and recovery techniques so that more and more oil previously judged as not feasible economically becomes economically feasible Minerals. We will see in the mining space. We will see a similar kind of an approach, and that's where the big can continue to get bigger longer term, because they're they are the innovators and the scale required to try to enter and innovate is prohibitive so where I was going to go with this is just to play devil's advocate.

Speaker 1: 44:21

The skeptical person would say, yeah, but lobbyists and Citizens United and all this money emboldens the current position of the existing company. So it's not so much about innovation, it's about political policy and how much you can influence decision makers. Is there some truth to that idea that maybe that cycle is not like it used to be because of the intersection of corporate money with politics, giving an edge to these companies?

Speaker 2: 44:50

I think what we've seen is a leveling of that playing field. So the green industries have very effective lobbyists. They've gotten subsidies out of Washington that I would never have imagined and yet they are the minority market share holders, but they have tremendous political influence. So I think that is fairly widespread today, so that no one group of industry participants would necessarily have an advantage through lobbying.

Speaker 1: 45:33

No, that's a valid counter. One thing we didn't touch on which I am curious about just the last few minutes here is you did want to talk about BDCs, business development companies, private credit. I have not tracked the private credit side that much. Why credit spreads have been so tight in the public debt markets, especially around junk debt relative to AAA, is because of private credit strength. I'm not quite sure I understand that linkage. But maybe just to wrap up, just explain what private credit from BDC's side is and why it matters and why it may be a complicating factor as far as how to think about the cycle we're in.

Speaker 2: 46:16

In the alternative investment world, private credit is really the only bright spot, and this is where non-bank lenders are providing the debt that companies need, that companies that want to do transactions need. And today it's estimated by Bloomberg that 25% of all of the private credit capital is held by what are called business development companies BDCs. These are registered investment companies that operate as closed-end funds. There are 40-some-odd of these that trade in the public market and we're in this unusual time where the retail investor, the individual investor, has equal access to an alternative investment asset class if they want it, simply by investing in publicly traded BDCs. At its highest level of abstraction, a business development company is an unregulated bank that does not have depositors. They make loans, they have offices, they originate loans, they do underwriting, they do servicing their source of capital from the public and private capital markets. The BDCs issue debt, raise equity and they're playing the game of traditional spread lending.

Speaker 2: 47:54

Main Street Capital one of the very, very well-managed BDCs and publicly traded that for the last 10 years has delivered a 15% cash-on-cash return, just priced a very large unsecured debt offering at less than 6%. They will loan using that pool of debt capital. They will make loans at between 500 and 600 basis points over their cost of funds, and the vast majority of the loans they make will be floating rate loans, so they're transferring the interest rate risk onto the borrower and so these are as investments. They're only as attractive as the quality of the management team within the BDC, and there's quite varied performance. But the top tier BDCs all the rabid capitalists has recommended six or seven of them have generated returns, total returns in the last nine months, at a low of 10 or 12% and a high of 26 or 28%. So this becomes the replacement capital source for banks that are operating on a much more conservative basis today.

Speaker 2: 49:32

Other unregulated lenders that, by virtue of their own portfolio problems, are not focused on lending. They're focused on restructuring assets in their existing portfolio and, of course, because private equity is in a problematic position, they're not as active as lenders either. They're actually more likely to be borrowers. Today it's hard for me to believe that private credit could have that degree of influence over spreads, given that there's about $2 trillion worth of private credit capital floating around and, of course, the size of the debt capital markets is much, much larger. I think on any one individual loan opportunity it's possible that private credit could introduce the degree of competition to win that loan. That would narrow spreads but not, I wouldn't say, asset class-wide.

Speaker 1: 50:50

Yeah, I need to look at that further because a lot of people made that argument. I can't quite find the connection, by any means, unless it has to do with the comps strike high law of one price type of thing. That's the closest thing I can think of, but I don't know. Professor Ogden, for those who want to track more of your thoughts, more of your work, who cannot go to NYU, where would you point them to?

Speaker 1: 51:18

You can find me at therabidcapitalistcom, which is my blog and website and that's the source of my newsletter, and also on X right On your handle there.

Speaker 2: 51:25

But you need to get. I know I'm trying.

Speaker 1: 51:30

Well, I certainly appreciate those that watch this. Hopefully you enjoyed the conversation. For me it was a blast from the past because I had, as I mentioned, professor Okun was one of my teachers when I went to NYU Stern School of Business, so certainly enjoyed learning again from the professor. So thank everybody for joining and stay tuned for the next episode. If you have any comments, like all that stuff, please engage with this video and we'll see you next time. Thank you, professor Okun.

Speaker 2: 51:56

Good to see you.