Hello, Welcome to the Credit Edge, a Wiki markets podcast.

My name is James Crumbye, I'm a seen It at Its to a Bloomberg and.

I'm Arnold Kakuda, senior credit analyst covering banks at Bloomberg Intelligence.

So this week we're very pleased to welcome Aaron Kless, CEO and CIO at Evolution and Credit Partners.

How are you doing, Aaron, great?

Great, Thank you for having me on.

I'm excited great.

So prior to joining Andolution, Aaron held management roles in private lending and equity at industry stalwarts like Apollo, Blackrock, Merril Lynch.

And what I found really interesting about Andolution is its unique industry expertise in areas such as sports and financial services and for the bank people out there, their senior leadership includes the former head of the OCC and current Flagstar CEO, Joe Adding.

So there's a lot of talk about James.

There is, indeed, and we'll get to the sports in a bit, but before we do, credit markets are looking ever more complacent, with junk bonds trading very tight as demand for yield rises and net new supply of corporate debt remains thin.

Under the surface, there are signs of stress, with investors moving to higher quality debt, structured finance, and sectors that would appear to be less exposed to the chaos caused by trade wars and volatile US policymaking.

Investors are also chasing higher returns in private markets, but there's concern that lack of transparency and liquidity could lead to problems there.

So as we look ahead, Aaron, to the second half, what are things in credit markets that we should focus on?

How are you positioning for the I mean, I'm presuming there's going to be turbulence, but what are you expecting?

No, no turbulence, I think is right.

That's what everyone's expecting.

And certainly we are, in our end At and Illusion Credit partners, we really are approaching the second half, and really the foreseeable future for our funds, for our investors is really that we focus on what we call the core middle market, So we're really focused on borrowards with say ten million of EBITDA up to fifty or sixty million of EBITDA.

We like to say that we focus on main Street, not Wall Street.

So while macroeconomic trends are always front of mind, and as Arnold mentioned, you know, Joseph Adding, former Comptrol of the Currency, head of the OCC, is on our investment committee.

Roger Ferguson, former Vice Chairman of the Federal Reserve, former CEO of TIA, also on our investment committee.

You know, we get fantastic insights from a macro perspective, certainly for a fund of our size and our focus.

So that focus on the core middle market for us, that main Street, not Wall Street, keeping in mind the macro, but focusing on the fundamentals is really critical and core for us.

And then but what about like these high industries, right, I guess maybe we'll get low interest rates soon, but you know, the high interust rates pressure on you know, cashloads and stuff like that.

So how's that affecting kind of these main street, you know, middle market firms versus maybe some some other larger global players.

Yeah, for us, the interest burden or the fixed charge burden on businesses, absolute leverage cost of debt, that for us is a is a due diligence issue.

Where we have the fortune, I would say, in this particular environment of being a relatively new manager, we're only about two years old, just under two years old, so we've been able to underwrite our portfolio to the current interest rate environment, which has been a real blessing for us.

You know, they say, better to be lucky than good, although I think we're pretty good too, But it's really nice to be able to underwrite every deal that we do to the cash flows of the business and their current state.

Of course, we're always we're credit investors, we're always looking at downsides as well, but in the current interest rate environment, I think where it's a lot of those challenges have presented themselves are deals that we're done and underwritten perhaps in a lower interest rate environment, or maybe those were M and A transactions that were done in a frothier M and A driven by potentially driven by interest rate environment that now has to sort of live with the interest burden of this higher rate environment.

So for us, it's really an opportunity really to be honest for our investors as well, more than it is a challenge.

And then do you need we hear about some of the you know, liquidity, I guess the potential for you know, private credit to be greenlit for retail for one case, I mean that that's a positive, I guess, But then some of the liquidity issues of me more on the private equity side of right, what about what about you know, how can how can I get in and out right for for some So can you talk about some of these dynamics and how they might come into play.

Yeah, I think that's a very very hot topic.

So really two I think separate topics there.

One is the new and growing growth of private credit as a retail investor asset class, you know, bringing for private credit to four one case.

I mean that's sort of you know, the new horizon of really talk about main street.

That's you know, mom and pop investors, people's in their retirement savings.

So that's there's a real liquidity issue there for us, at least at Andalusion.

That's not really a market that we're focused on in terms of retail investors.

We really do focus more on high net worth, ultra high networth and institutional investors, where I think we can be a little bit more transparent about the illiquid nature of the asset class.

The loans that we make are typically five to six year contractual maturities.

I think the lived experience, certainly for us and the entire market is typically kind of three and a half years, those loans are turning over driven by refinancings, m and A things like that.

So from an ill liquidity perspective, you know, we try to be really upfront and really transparent with our investors about the illiquid nature of the underlying assets and therefore the ill liquid nature of the fund investment that they're making.

But you are right, as the business as private credit grows and expands, and a lot of that growth and expansion as an industry is going to come through the individual investor, the retail investor.

Liquidity and mechanisms and mechanics to create liquidity are going to become really critical and really important developments.

As we've discussed a lot on this show, and the private credits just ballooned very quickly, and it's on everyone's radar.

It's the hot new thing.

Everyone's talking about it.

But the risks people just assume, because they can't see it, that it's going to be a problem, and they point to the smaller deals, They point to the new managers, they point to all the stuff that you can't really get a good handle on.

So how do you overcome that fear?

You know, a new manager doing smaller deals presume you get a lot of questions about how you mark the risks, So how do you kind of overcome those concerns.

Yeah, absolutely, we talk about that a lot.

We have that conversation a lot.

You know, been in the private credit industry a long time.

As you mentioned in the intro, the kind intro, you know, it's some pretty large firms who were not new managers and not doing smalls.

So I've had the ability to and by the way, earlier in my career, even at some of those larger managers, private credit was still small and it was still really a middle market business.

I mean often I say to people, you know, what's old is new again.

Private credit was born in the middle market.

And as the industry has grown so big, as you point out, so many of those managers who started in the middle market have just grown so large that they can't do those deals anymore.

And it's become a little bit of a self fulfilling prophecy to say, oh, we can't do little deals anymore because it's not a good return on time, we can't deploy the money fast enough, so therefore we'll do bigger deals, which is a better return on time.

And then it's kind of convenient to also just believe that those are safer deals.

I'm not sure that that's true.

We focus a lot on structure, We focus a lot on downside protection, We focus a lot on you know, kind of primary due diligence.

Who are these borrowers, whether they're owned by a private equity firm, a sponsor back borrower, or they're an independent company, you know, family owned, founder, own a non sponsored barer, which we also focus on.

So so I do do agree that private credit as an asset class is hot, probably overheated, But I really do think it comes down to, you know, really the structures that you're investing in and the fundamental work that you're doing right both through origination but most importantly through underwriting and then critically through deal documentation execution.

And by the way, when that's done and your deals have covenants, you know your job's not done.

Now you need to monitor and manage those deals, and you can't just wait for, you know, a covenant report to come to you once a quarter.

You have to very proactive and stay on top of the business or the sponsor depending on the structure, and making sure you're really aware of what's going on inside of those credits.

And I think that's true for a business with fifteen million of vibit DA, and it's true for a business with one hundred and fifty million of EBITDA.

And you talk about you know, I think you mentioned the word hot.

You know this the sector is maybe too hot.

So what does that mean?

Is it?

Is it kind of a step down?

You know, you can't continue to grow at whatever thirty forty percent a year.

Is it a step down in that?

Or are you're talking more about like kind of the stresses showing up, Like what's what's you know?

Yeah, you're talking about there?

Yeah, I like that.

I think it's actually both.

But depending on where you operate in function.

So I think the stresses are real.

And if you're an investor and you're not invested with a manager that's hyper focused on, as we like to say, looking over the horizon, right, That's why we like having covenants in our loans.

It allows us to get a peak as to what's coming, and if we don't like what's coming, it gives us a chance to get our hands dirty and get involved, versus cove light loans, which is typically what you see in that larger part of that upper part of the market where you might not know what's coming, and when it comes there might not be much you can do about it anyway.

So I do think it is the stress is And to your point on growth, I do think that the market, at certain parts of the private credit market, it is growth constrained.

And I think in the first half of the year some managers have actually live that they've seen it, they've proved it, and maybe they didn't want to, but they have.

As we've seen sponsor activity M and A activity, LBO activity come way down.

You know, we see it in other credit managers, larger credit managers.

You know, they're struggling to find deals.

They're struggling to find deals to deploy into.

So volumes are down.

But because it goes hand in hand, spreads are compressing, terms are loosening because everyone is chasing those fewer and fewer deals.

At certain parts of the market, you know, where we're focused again, we call that core middle market.

They're fewer competitors in terms of other lenders because so many of them have left the market to go up market, and many of the new entrants have not chosen to come into the core middle market, but rather to try to chase the golden dream of being, you know, the next biggest kid on the block.

You know.

So I think some of those larger funds are growth constrained.

But what we see, and we see it in our pipeline, we see it in our portfolio, we see it in our origination relationships, is really a supply demand imbalance.

Right, there's more demand for loans in the middle market than there are firms looking to provide them.

And then so I cover the banks, and then I guess with with Trump two point zero, it's all about deregulation, and I guess more for the bigger guys.

But then, you know, I think private credit the opportunity.

A lot of that I think has come from the increased regulation right post financial crisis, you know, of these banks.

But now that we're seeing kind of a pullback of some of this stuff, is it are you seeing more competition from some of the bigger banks or maybe the regionals and stuff.

Is that a threat potentially or is this still a safe space for you guys?

So you know, again, in the queer we are down in the core middle market, we feel pretty safe.

I think again, bifurcating the big banks from the regional banks.

I think the big banks, including I think it was an article today about one of the very big banks, you know, kind of trying to find ways to push hard into private credit.

Again.

I think that's a story that belongs in that upper part of the market.

You know, we used to call it the BSL report placement market.

Maybe the bsls have already been replaced by that market, but you know, that's I think where that battle is going to play out, and that loosening of regulation is going to allow those big banks to kind of fight their way back into those deals and into those fee streams.

I think for us, what we're focused on in the core middle market, it's a little bit more about the regional banks and the commercial banks, and you know, I think at the end of the day, there's room for both.

Market's quite large in the middle market.

There's something like two hundred and fifty thousand middle market companies in the United States, something like twenty five or thirty thousand believe it or not are owned by private equity firms.

So it's a big market, and you know, banks are still need to do what you know, where the regulations stand today, private credit is still able to do things that banks aren't able to do, things around structure, amorganization, but also pricing right, we get we get paid for it.

So even as commercial banks might get a little bit where regional banks might get a little more active in the middle market, I think the private credit is still offering a product that middle market companies need that won't offer.

You are getting paid, as you say.

Some of our guests on this show talked about middle market returns in the sort of what they're calling equity like returns, which depends on your view of the actually marketing.

But then when pressed they say, mid teens.

What's your view of returns in this space?

Yeah, So you know, look, our strategy is really kind of I call it low teens.

And our goal and our business model is to make good risk adjusted credit decisions for our investors.

So we're focused on senior lending and we're not really trying to push the envelope to bring those those returns up, either through excess leverage or excess risk.

So again we look at that market that core middle market sponsor back deals, non sponsored deals, where there's more spread and more alpha to be had.

In certain core end markets that we focus on, you know, for for us, the Andalusion firm, the Andalusion brand, you know, the core markets that we focus on.

We talked about financial services with with with Joseph and Roger, but sports and media and entertainment are another important one for us, and Illusion has a long and successful history around sports as an asset class.

We can get into that in further detail.

Media entertainment, certainly it's in its adjacencies to sports are really important for us as well, you know, but really it's it's an opportunity for us to focus on risk adjusted returns.

So we could stretch and produce higher returns, but we think what's more appropriate for our investors and the types of investors that we're looking to attract to our business is performing credit you know, some excess spread or excess return to other maybe more mid or upper market strategies, but providing significant diversification in their portfolios.

So walk us through a deal though, and just so our listeners can get it.

I mean, you're talking about companies with ten to fifty million dollars in ebitdow, which really helps us kind of define but how big does that make the actual loan.

Sure, are you doing the whole thing directly?

What kind of margins are you seeing?

How does that compare to syndicated.

Yeah, so it's sort of all of the above.

But to be more specific, you know, if you think about ten to fifty million of EBITDA senior lending sponsored and non sponsored, that's kind of a matrix as we think about it, you know, So a non sponsored deal that's you know, a first lean senior secured loan.

I mean, most of what we're doing in that space is we're talking about two to two and a half turns of leverage, so pretty conservative from a leverage perspective, So those loans can be quite small.

Twenty twenty five, thirty thirty five million dollars, okay.

You know.

The other end of the spectrum is what we would call a unitronch loan, so a deeper loan, still first lean, starting at the top, but coming deeper to a sponsor back business, you know, and that's going to be maybe double the amount of leverage.

Five turns of leverage.

So at the at the outer end of that range, fifty million dollar company five turns of leverage, two hundred and fifty million dollars loan size, and then we're really in those loans in every shape and form.

Some of the loans that we're the sole lender.

Some we're just you know, we're the agent with with with a club.

Some we're just one of the club in the club.

Some of the clubs are two or three lenders.

They don't get much larger than four, I would say in our market.

But it's very much a club market, except for at that small end where people will hold the whole thing.

Yeah, and you're buying to hold for what sort of ten Yeah.

So again, most of our loans, which are all sort of bilaterally negotiated, are typically five to six year maturities, but our expectation is that there's going to be some kind of refinancing event, generally within three to four years.

Okay, what kind of mudgins you say right now?

So again, splitting it out between sponsored and non sponsored, you know, just you know, sort of easy, keep it easiest or simplest, you know, for the not for sponsored loans new LBOs, which there aren't a ton of these days.

But in our part of the market, you know, i'd say the pricing sort of starts at so for five hundred, okay, but generally between five hundred and five seventy five.

And then on the non sponsored side, you know, typically we see about a hundred maybe one hundred and twenty five basis points premium to that, So think, you know, six hundred to six seventy five for a similar non sponsored business.

How are those margins changing given that there is such competition.

Are you seeing more like you know, bigger middle market coming down into the smaller deals and that compresses the margin.

Is there a lot of pressure now on price?

So we are seeing some compression on the margin, not as much, I think as being experienced in the upper part of the market.

Anecdotally, maybe once or twice, we've seen some of the traditional kind of upper middle market lenders coming down into the market in our market, but I'd say that's been more on a specialized basis, not on a broad basis.

It might be an industry that they know really well, it might be a sponsor that they have a strong relationship with.

I think really where we're seeing more pressure on price are the are sort of those long term players in our market.

They have the same pressures to deploy as everybody else, and they're willing to you know, bring pricing in twenty five or fifty basis points to win the deal.

Yeah, okay, you did mention the top that you were talking, you know about mainstream rather than Wall Street, so you have a good view into the firms and how they're operating.

You know, we've had these big trade war shocks, We've got a lot of policy changes, and we still don't know how that's affecting companies, particularly smaller companies that are also exposed things like immigration reform.

They're going to lose some of their workers potentially.

So there's all of these stresses coming down.

But you know, you wouldn't see it by the looks of you know, if you're looking at just the high yield spread, everything just looks great.

You know, good times are ahead.

What are you saying on the ground, Aaron, What what?

What?

What can you tell us about you know, ground level main street America?

Yeah, No, I think it's it's a really important question when we focus on again that concept of looking over the horizon, what are those leading edge indicators.

You know, interestingly, we're not seeing a lot of employment pressure yet, in other words, we're not seeing wage pressure.

But what I thought we would be seeing now because of your point about immigration, businesses having a hard time finding workers, but we haven't seen that yet.

I'm still keeping a very very closer eye on that at our portfolio, and our strategy is very services centric, so we don't really have a lot of exposure to businesses with long international supply chains.

So the tariff story, while critically important because it's driving not just the news cycle, but importantly the decision making kind of cycle and process amongst CEOs and CFOs, Main Street and Wall Street, capex expenditures, new contracts, et cetera.

Hasn't really had a direct impact on our portfolio, but we are certainly seeing that CEOs and sponsors are very cautious around growth expectations, cautious around capital expenditures.

We've heard anecdotally, not in our portfolio, but from some partners that we have are lenders to other businesses, that in certain industries, people are starting to see contracts being canceled.

So I think that the overall theme is uncertainty.

The overall theme is expectation of volatility, even though we're not seeing it yet, and caution.

So caution means slow down your hiring, slow down your cap X and if you're thinking of entering into a big, chunky contract, you might not want to do that today.

So today in our portfolio, we haven't really seen any of those shocks yet, but we're keeping a very close eye on it.

Does that ultimately lead to mold defaults and pick in terms of the portfolio.

So again i'd separate out those two, you know, and again in our market where there are covenants in our loans, you know, we have a chance to really be ahead of those defaults and work with the borrowers appropriately.

You know, some of these things as they impact these businesses might be temporary in nature, and we can all laugh because that means there could be a tweet or an X or whatever tomorrow that undoes, you know, whatever burden they were feeling.

So I do think that now more than ever as a lender, being an objective steward of capital but also partnerly capital, I think is really really important, rather than in some of these larger deals that are more broadly held, where it's harder to sort of manage the lender group and just saying hey, that's going to be a default, like let's just tip this thing over and you know, see where the cards fall.

I think in this particular environment that we're in, that's not going to be a great strategy probably seven times out of ten, right, So I think that's that's a really important thing in terms of just thinking about where you know, where the risk could lie.

We've had a few guests talk about kind of the opportunity shifting.

You know, US has always been great where the most money is, capital is, but then maybe Europe becoming more attractive.

So but which which kind of view are you?

Do you think the US is still kind of you know, the place to be or or you know, are you studers starting to look more and more internationally?

So I guess our I mean, like our business is very US centric, both our borrower base and our investor base, so I'm biased.

You know.

Look, I think that again in the middle market and the upper market.

Frankly, I think the US is still the place to be as a lender.

You have the most built out, sophisticated, tested legal system in terms of making sure you know as a lender what your rights are, whether you're a majority lender or a minority lender.

I think that the market is the efficiencies in the market will take us will carry us a long way despite a lot of the volatility and noise that we're experiencing.

I think for for but then that's on the you know, my view on the borrower or the lending market.

I think as an investor or an allocator, I think we are hearing what you're saying.

Also, right, a lot of institutional investors that we speak to are really trying to think about, if they're US investors, how can they get more exposure non US?

And if they're non US investors, asking the question of do we really want to you know, be increasing our allocations to US managers?

And that's you know, that's that's that's a whole other challenge and again for us, you know, I bring it back to we focus on Main Street, not Wall Street.

These are fundamentally performing, strong, important businesses that produce cash flow, important very importantly, you know, employ real people and deliver real goods and services.

But we have seen Andalusian in European soccer.

That's true, that's true, absolutely.

Everton, Everton, Right, it's in you know, yet another big football deal in Europe led by a US billionaire.

Yeap, When will the US invasion peak?

So you know Andalusian.

You know, we're the credit business, and we have an affiliated business, Assister business, that's a sports advisory business.

So the Everton deal is one of theirs.

Although we get we share an office, so we get to have all the great little deal toys and trophies lined up in our conference room, which is exciting.

Tickets to the games, tickets to the game.

Yeah, but yeah, if I want to fly over, they'll they'll definitely host me, which is nice.

And look, they've been also incredibly busy in the US as well.

So the the in the US, you know, the story of sports investing on the equity side has really really been these minority stake investments, primarily into NFL teams really just because the NFL is the one that you know recently opened up to private equity.

So that's been an area where they've been very busy, and we see a lot of that traction and activity.

You know, the the US invasion into other markets, I think, you know is just getting started.

You know, those as as we'll just call them billionaires, right, can't are getting priced out?

It is crazy to say priced out of buying an NFL team or an NBA team, you know, you got to start looking at other markets for more affordable assets.

Is it just soccer?

Are they moving into things that I like, like rugby, cricket, all those other games that we play over there.

Yeah, so cricket is a really hot one, right.

Everyone wants to talk about the I p L and how that's remaking the cricket I think without I mean, we're not I'm not giving anyway any confidences because we're not making an investment.

But I've had some time opportunity to spend some time with Premiership Rugby over in the UK, and I think they're gonna do some interesting things.

I think they've got a real roadmap ahead of them.

And I think you're going to I'm guessing peer speculation.

You're going to see some US people with money trying to buy those teams becase it's gonna be some teams for sale.

You know, there's other interesting and we call them e merging sports.

You know, whether it's sale GP, which is a professional sailing league that's quite international.

There's a horse racing league believe it or not, that's being launched or is in the process of being launched.

There was just something in the press there I forgot who it was, but someone a performer.

I think a musician might have bought a team or something, you know.

So we have the luxury, if you will, of seeing a lot of that deal flow really through our affiliated business, and we have the luxury of being able to pick and choose where we think credit opportunities are presenting themselves.

Most of the time those emerging leagues are really equity opportunities and not appropriate for our credit business.

But every once in a while, there there's a really interesting credit story to tell too.

Where is it now, though, where's the next big credit story for sports and globally?

Yeah, So, I mean our focus from a sports perspective, and it's sort of you know, by being a credit investor, it sort of makes sense, right is we're focused on what we call sports adjacent businesses, So again sort think services businesses whose end markets are professional sports, amateur sports, and youth sports all have different dynamics and drivers behind them.

But at the end of the day, generally speaking, sports have been quite recession resilient and when they have taken you know, dips, they've come back fast.

Obviously, professional sports is primarily about media rights and media contracts and that generating the cash flow.

Amateur and youth sports is more about engagement, fan engagement and participation.

So those are separate dynamics, but they sort of feed off of the same spirit, if you will.

Really we think that's where the opportunity is.

And it's not just you know, the things that are obvious.

There's a lot of technology being introduced into all three of those verticals, you know, actual tech, but there's also a lot of financial technology being introduced to all three of those verticals, everything from ticket ticket financing right which is becoming almost like an asset based asset class.

You know, really unique things are popping up that are really interesting credit stories.

But other things adjacent what are they?

Are they concessions?

Are they?

Like?

Absolutely, so it would be all that.

So, you know, from the sort of esoteric to the less esoteric.

It can be things like ticketing finance, it can be certain technologies that have to do with player health and safety.

But then the less esoteric stuff is concession and catering, parking and security, you know, live event, live event production, equipment, apparel, and then also all the things that are taking place around i P and IP rights management, not just at the professional amateur and youth level, but now at the collegiate level.

So a lot of really interesting businesses that are either developing or have already developed around that that trend.

The biggest, seemingly multiply might playing costs.

I mean, I'm not a huge sports fan, but I see the massive salaries that are being paid to the sports players, particularly in European soccer.

So is that becoming an area where finance is becoming, you know, getting involved?

You are you figuring out how to.

Yeah, it's different in every league, so a lot of not ivery, but most of the US leagues have you know, salary caps or or mechanisms that function like a salary cap, so while those numbers are quite large, the overall aggregate number is capped and knowable, so it's less of an issue.

In European football, you see a lot more of that, and there's a pretty pretty developed market in Europe for It's like I guess I would call it an ancillary topic, which is player transfer finance.

So the teams sort of own the players and they can buy and sell them or rent them or lease them, and that's an active financing market.

Credit financing, Is that something you're involved in.

We've looked at it a few times, you know, in different contexts.

You know, I'm a big believer that if you know you're you're in a different geography than the sort of core of the market, you're sort of by definition being adversely selected.

So for us, we've looked at it from a platform perspective.

Is there a team who does this well that sits in London, you know, that could manage this for us?

That's how we've sort of thought about approaching it.

And as of now that's yeah, not yet.

I mean, I think the opportunity is real.

I think it's attractive.

It's just you know, finding the right match, right.

What's the next big sports deal and what's what's coming up?

Can you do anything anything about the New York Giants?

Nothing that I can nothing that I can disclose.

But you know, I think there'll be you'll see in the press there are going to be more announcements around these NFL minority deals.

I think you'll see other major league teams in the US trade and I think really the big one, which which to be honest, we're not involved in at all, at least that I'm aware of, because you know, what what our affiliated businesses do aren't doesn't always translate across the platform.

Is going to be something around collegiate sports, right, You've heard a lot of investors and managers talking about, you know, some big deal getting done.

You know, one of the big collegiate leagues conference league conferences did hire you know, an investment bank to go out and run a full process.

So that's going to happen.

I don't know when, and I don't know who, but it's going to happen.

How lucrative though, is all of this stuff, you know, sports media, all that stuff.

I mean, it's fun, and you know, the billionaires love to be involved.

But I mean presumably they're not that worried about the costs because you know, it's fun.

So yeah, you're getting less return because of the fun.

So that's really like the vanity play, right, And that's always a danger when I think you're doing sports media and entertainment investing.

But it's a bigger danger for the equity investors.

Right at the end of the day, we're credit investors.

That's why we're focused on what we call those sports adjacent businesses.

And if those sports, if those adjacent businesses had end markets, that were you know, widget manufacturing, you know, there'd be no vanity play to it.

So we stick to our knitting.

We focus on fundamentals, which is for us, cash flow, structure, downside protection, and you know, we're not getting kind of caught up in the vanity play of it.

The free tickets we get those from our our affiliates.

You know, I'm sorry our our colleagues.

We get to do some pretty cool things because then with them, but it really has nothing to do with the investment that we're doing.

How much of this you know?

So I think in a global world, right, I think that kind of makes more sense where you're looking outside of your kind of home country to kind of increase the sporting presence.

But I guess, you know, we'll bring it back to these tariffs and stuff like that what we've heard about.

All right, let's let's you know, maybe maybe it's more of a domestic focus from now on.

So do you see that at all in the sporting world or do you think it's continued kind of global You know, everybody's going to be more interested in something else.

You got the internet online, right, people can track things very rapidly, So yeah, yeah, I.

Mean I think our view has been that, you know, tariffs are not really a sports issue for the most part.

You know, there's some second and third effects, like we talked about earlier in international investors being reticent or at least thinking about the question of additional exposure to the US.

So I think that does have an impact.

Other second and third order effects.

We talked about immigration policy and that impact on labor that could lead to rising costs, inflation that could lead to a recession or at least slowing of growth.

And then are are you really going to go and spend you know, a couple hundred dollars on that NFL ticket?

Are you going to spend you know, seventy five dollars on that new you know, soccer uniform for your seven year old?

You know, So there's real kind of risk.

I do think that come from the general volatility, you know, period of volatility that we're in.

But I think the fundamental asset class that is sports is pretty immune from a lot of this today.

And it's not a lot of well, it seems like, at least for the NBA, a lot of the kind of growth was or let's go to China, right like that that was it and then obviously relationships aren't really getting better there, So how much is that, you know, is the rest of the kind of global kind of growth in sports kind of relying on on that relationship.

But it's a it's a good it's a it's a good when the NBA is a good topic too, because they they are of the big four leagues, and as we call it in the US, they're the one that's probably the most international, and I think that that's certainly been true from an IP perspective.

Right you can walk in almost any country and see a Lakers jersey or something like that.

So I think that it is really become an international brand, which has opened up an opportunity for them to not just grow their presence as a playing league in China, but also Europe.

There that's another real big initiative of THEIRS, and I think to some extent, while it's you obviously it's a US league, it's probably beginning to transcend just being a US league and really becoming an international brand.

So I think that they're pretty well positioned.

You know, the NFL is increasingly playing regular season games overseas.

They played a game last year in Brazil, They're playing another game in Brazil this coming season.

They've been playing in London, you know, pretty regularly for quite a while now.

They played last year in Germany, So the NFL is also pushing into that market, but more of an extension of the US brand.

Then you talked about college sports, and I think I heard you talk about maybe the even more reshuffling of these conferences or so we're not done with if the conference.

Yeah, no, I don't think.

I don't know if the conference is going to reshuffle, but but I do know that there are individual, you know, large programs universities that are engaged in conversations with you know, what we would call private equity, right, or some or some form of private capital to help them create liquidity to be able to afford to keep their players.

Right.

I mean, it used to be you gave them a scholarship and they played for four years or five years and created a lot of value for the school and didn't really get much in turn for it.

In fact, if they got anything, they could get punished pretty hard for it.

So I think the pendulum was you know, way over there, and now it's sort of swung away in the other direction, where some of these collegiate athletes are being paid, you know, sometimes millions of dollars, and they have an opportunity to leave that program, you know, twice a year, and that's expensive, and that's a big burden on these conferences and universities.

So they're looking to private capital markets to find ways to help them create liquidity and financing tools to tract and then retain the best athletic talent to keep their programs at the top.

How much do you worry about the sustainability of the fundamentals of it in terms of, you know, the demand side in that you know, it's very expensive, as you mentioned, to get a ticket, it's very expensive to buy concessions or whatever else.

For a lot of people, it's just unaffordable and you kind of need to I think, have a have a mass fan base that you know, go through generations and we'll live with with the team and support the team.

But if you're if you're ultimately making it too expensive for them, then it can't be sustained, right, I mean, do you worry at all that that's a long term problem for the industry.

Yeah, I don't.

I don't.

I don't, be honest.

I think that's one of the attractive things on the professional sports side.

I think that's one of the really attractive things about it is the passion of the fan base.

Right, there aren't a lot of products, uh that that that as an investor you can invest in, as a lender you can lead to that are really built around sometimes to your point, multi generational passion.

And my you know, my son who's a teenager.

Yesterday he went over to the MetLife State and MetLife Stadium in New Jersey to watch the Chelsea PSG game.

Right, So it's international, it's multi generational, it's multi lingual, and that and that passion is a pretty unique thing to be able to invest behind.

And so far, I think it's proven, particularly with what we saw in COVID and how fast the attraction to attending live events, particularly live sporting events, came back, that consumers are are really that passion will will take them a long way.

You know, there are different ways to access different price points.

A ticket to an MLS game is very different than a ticket to an NBA game or an NFL game.

But you know, but but but at some point, you know, the there will be a breaking point where the tickets will be too expensive, you know, the hot dog or the popcorn will be too expensive.

But I think we're a far It seems like we're a far away from that.

Okay, So there are some pretty high yeelds out there, given base rates that's so high, and maybe we'll stay high for for a while, and the margins, as you've talked about, pretty wide.

But you get to see a lot of stuff out and I'm wondering, you know, when you look around you and you kind of differentiate yourself and there's a lot of competition, what's your edge?

How do you kind of you know, where do you see value that maybe others aren't seeing it?

Yeah?

I think for us, you know, in addition to that bed and Illusion credit partners, in addition to that focus our focus on that, we call it the core middle market, which is less competitive.

Like I said, competitors are really more like partners.

In addition to that, the fact that we're actively doing both non sponsored and sponsor back lending, I think is a real differentiator.

You have obviously most direct lenders who are primarily focused on sponsor finance, and then a handful, very very small handful of lenders who really just want to be focused on non sponsored and I think that's a tough business to scale.

It's a tough business to scale in the way that we want to and are scaling it, which is more you know, performing credit.

I like to call it sponsorabule.

In other words, these are the types of businesses that happen to be owned by founders, families, entrepreneurs, et cetera, that private equity would love to own.

And that's a nice kind of downside protection for us.

But doing both really gives us the flexibility in managing our pipeline and managing our risk, but also managing our return.

Right, so if we see sponsor spreads tightening, we have the ability to still do those non sponsor deals that are priced well into the sixes.

And that's a really nice way to create a portfolio level return that is differentiated.

And then the next one, or the last piece of differentiation to your point, is really those end markets that we do focus on.

So everyone you know, sports and media entertainment, and they have that vanity effect, but they're also a really popular topic.

Right.

A lot of the largest sovereign wealth funds are interested in getting deeper into sports investing.

And following them have been you know, some of the larger pension systems and state level pension systems, So a lot of investor interest in the asset class and the fact that, you know, it's one thing to be a relatively small, relatively new manager who says I'm going to do sports lending.

Great, but to be able to say no, we're actually more than just a you know, sort of new sort of small man.

We have this affiliated business and sort of what we call the halo of the Andalusian brand I think has been really powerful.

And it's the same thing with having you know, Roger and Joseph on our investment committee around financial services.

It's more than just a halo.

It really gives us what we call access.

Yes, it's access to deals and sponsors, but most importantly it's access to information.

Ultimately, you know, these are illiquid loans.

You know, I once had a boss say to me, you know, many years ago, you know, the most important investment decision you make in private credit is the first investment decision you make, should you make the loan or not, because after that there isn't really that much you can do.

It's i liquid, So really that access gives us that that edge when it comes to decision making.

And you think that solvering wealth investment interest in sports will grow from him.

I think it will.

I do.

I think, you know, both a push and a pull.

You know.

The pull, I guess is there aren't that many other people who can afford to buy, you know, an eight billion dollar team.

So I think that there's a there's they're going to become some of the you know, last buyer standing, if you will.

I don't know if that's a good thing or a bad thing.

I guess that's the pull, you know.

And and the push is that internationalization of the brands and the internationalization of the of the activities, you know, bringing the NBA to China, bringing the NBA to Europe, bringing you know, a higher level of soccer or football to the Middle East.

Right, huge underserved markets, underserved populations that are are really clamoring for access to the product.

And then again look at I p L in the India Premier League cricket.

You know, you can really create some very significant media contracts where maybe they didn't wasn't obvious that they they would have existed previously.

So I think that they're gonna.

They're here to stay.

The somomnwall funds are here to stay.

In sports, does your platform need to grow to accommodate the demand?

The answer is yes for sure.

Consolidation Is it organic?

How do How do I think.

On the sports side, I think it's a lot a lot of organic.

And the reason I'm sort of thinking as I say it, you know, we see a lot of opportunities around things like stadium financing and adjacent real estate financing.

Again that's not what we do.

We're not real estate investors, but it could make a lot of sense at some point when we're ready for it to bring on a you know, not just a team and capital that knows how to do that because the deal flow is there.

Similarly, just while we're on the sports theme of you know, what I would call solution capital, I mentioned we're senior lenders, but we see a huge amount of opportunities in sports and what I would call solution capital, so lower in the capital structure, more junior opportunities across again adjacent businesses, emerging leagues, and international as well.

So I think that there's a huge amount of room for growth.

And I think on the more traditional part of what we do.

Again, that's senior lending side of things.

You know, I mentioned two hundred and fifty thousand middle market companies, you know, the middle market or the core middle market where we focus.

There's really just you know, a couple of handful of lenders who focus on this part of the market.

I don't think at this point any of them have kind of growth aspirations to get huge and leave the market, but a few of them are probably looking at some point to sell themselves, right, I mean, you can't deny, you know, if you're if you're a fund owner and you look at what black Rock paid for HPS or some of these other transactions, it's a pretty attractive opportunity to scale and get really really big.

So I think there's a couple of other middle market players that are much further along in their development than we are who might go that route.

And you know, some of the founders are a little bit older than than perhaps we are, so they're thinking about things that way.

So I think there's a lot of growth opportunity for us, both organ organically and potentially inorganically.

You know, not looking to sell, not no, not not.

It's going to be a while before look at.

All to become a school much bank.

I'll leave that to uh people who have more authority than I do within and illusion.

But you know, I think there are that the sports advisory busins.

They're really happy with that business, the success that that business has had in a relatively short amount of time.

I mean business I think is four years old or so.

And I think, you know, moving into merchant banking is a real opportunity, but it comes with risks, right, and you're a if you're just a pure advisor, you're objective.

You have you know, one horse in the race, and that's it.

When you start investing your own capital, your client's capital, it gets a little bit more complicated.

Great stuff.

Aaron Kless, CEO and CIO of Andalusian Credit Partners, Many thanks for coming on the credit edge.

Thank you so much, had fun, and.

Of course we're very grateful to Ernold Kakuda with Bloomberg Intelligence.

Cheers.

Thanks for having me for more credit market analysis and insight.

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