Michael Arougheti: I’ve been pretty vocal on this, and I think that you kind of have to distill the signal through the noise in terms of the amount of capital and new entrants into private credit. So first, it’s important, if you look at the growth in private credit markets over the last 10 years, it’s basically grown at the same compound annual growth rate as every other market that folks participate in. It grows linearly, so it grows in a different way. But if you just look at the actual growth, it hasn’t actually outpaced, it’s not frothier. If you look at the structure of the private credit markets and you say that the biggest users of private credit across the private credit spectrum are institutional equity owners, there’s still a significant shortfall of supply of private credit relative to the demand.
So just if you use the private equity market as an example, there’s about $1 trillion as I mentioned of dry powder in the private equity market today against maybe $200 billion of private credit dry powder. So you’ve got 20% private credit raised against the private equity installed base. And if you said that roughly 50-50 debt to equity, you need to see a $1 trillion of private credit capital formation just to satisfy the private equity capital that’s been raised. And you see similar trends emerging in infrastructure and real estate. So there’s plenty of room for growth. Third, I would just highlight, and if you look at the actual numbers, the preponderance of dollars that get raised and deployed are in the hands of a few large long-tenured incumbent lenders.
That has been the case. That consolidation trend is accelerating. And there are meaningful benefits to scale in private credit, the ability to originate and invest in broader origination teams around the globe, the ability to have flexible capital at scale to drive better deployment in different market environments and so on and so forth. So if you look at the number of people raising their hand that are saying we’re in the private credit business, yes, that has increased. But if you look at where the dollars are flowing and the dollars already getting deployed, the competitive dynamic is not that different. And as I’ve talked about earlier with regard to the syndicated loan and high-yield market, I do think that there has been some new entrants that have not been building entrenched origination networks for the last 30 years.
That’s the easiest place to deploy in the larger part of the market, taking advantage of challenges in the liquid market. And I do think that deployment will be tougher there than in the core middle market. But if you look at the core middle market, the competitive landscape is pretty unchanged. And you just look at the deployment numbers that we articulate for our business, if you look at our direct lending business last year, in the fourth quarter alone, we did $14 billion of deployment, which is larger than most private credit managers total AUM. So we’re – I don’t want to sound immodest, but we continue to execute well given all the competitive advantages we have. And I think we’ll continue to do so.
Operator: Our next question comes from Mike Brown, KBW.
Mike Brown: Hi good afternoon. Maybe I’ll start with a quick follow-up on that FRPR question. Is the answer really the same relative to your Part 1 fees in your credit business? So again, as the base rates come down, could that just be offset by greater capital markets and structuring fees? And if that is the case, is that handoff one for one in terms of timing and magnitude?
Jarrod Phillips: Yes to the first part of that question. But in terms of one for one, again, there’s a bit of a lag. So you can end up with a current interest rate that’s ticking a little bit higher because it hasn’t reset yet against a macro backdrop that allows for more transaction activity that could actually be a tailwind in your favor. But generally, they’re pretty close to one to one. They’re going to interact together.
Mike Brown: Okay. Great. Thanks, Jarrod. And then on Pathfinder II, so you meaningfully surpassed your $5 billion target. You hit the hard cap there. What is the potential for this strategy long term? You’re quick, back in the market to raise Pathfinder II. As you progress through the vintages, are there enough opportunities such that this could be one of your largest fund strategies overtime?
Michael Arougheti: I would say yes, but we should just clarify that I would say fund families, right? So one of the things, again, that I think is important as you’re scaling any of these private credit businesses to make sure that you have different funds for different parts of the market, whether it’s different cost of capital or borrower needs or geographic nuances. So the Pathfinder family has been scaling with good performance, and I would expect will continue. But sitting next to Pathfinder II, for example, is an open-ended core fund that has a lower cost of capital and the ability to invest in a different part of the market. That is similarly scaling well with good performance. We obviously have our affiliation with Aspida that is scaling AUM within the alternative credit business.
We have a number of third-party insurance SMAs and partnerships that are growing. So, I would just clarify that the alternative credit family of funds, yes, is growing nicely, continues to scale, and I think is one of the biggest growth opportunities that we have here. But you won’t just see it within the core Pathfinder flagships. It’s going to be the whole family of funds that surround it.
Operator: That does conclude the Q&A portion of the call. I will now turn the call back over to Mr. Arougheti for any closing remarks.
Michael Arougheti: No, I don’t think we have any. Again, we appreciate everybody’s continued support and interest. And we look forward to speaking again next quarter. Thank you.
Operator: Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today’s call, an archived replay of this conference call will be available through March 8, 2024, to domestic callers by dialing (800) 753-5212 and to international callers by dialing 1 402 220-2673. An archived replay will also be available on the webcast link located on the homepage of the Investor Resources section of our website. Thank you, and have a great day.
