FULL TRANSCRIPT
Slava Rubin (00:00)
In this episode of Smart Humans, we talk with Ken Kencel who's the president and CEO of Churchill Asset Management. With over $60 billion of assets under management, he has an incredible view of what is happening in the world and today's markets. While he focuses on middle market and private credit, he really has an understanding of everything that's going on. We talk to him about potential for recession, inflation, and other elements that are important to think about as we look to invest into this world of alternative assets.
Slava Rubin (01:00)
Hello and welcome to the latest episode of Smart Humans. I am here in Miami at the iConnections Global ALTS Convention and I'm very excited for today's guest. We have Ken Kencel from Churchill Asset Management. I'm very excited to have you here. Thank you for joining.
Ken Kencel (01:15)
Great to be with you Slava, looking forward to our discussion.
Slava Rubin (01:18)
tell us, where did you come from to get into the world of alternative investments? Go back to whether it's your childhood, the job that got you into it. What is it that triggered from not into alts to all of a sudden you're in alts?
Ken Kencel (01:32)
So I, like a number of my colleagues in the private credit world, I was a lawyer, but I really started my career at a firm called Drexel Burnham. Many of you have probably heard of that. So I worked in what was called the LBO group, or the buyout group, for Leon Black. And a lot of my colleagues who've gone on to various roles within private credit have been there, were there with me back in those days.
young kids sitting in the bullpen, know, learning the business and understanding the business. And I think it was the entrepreneurial nature of the culture at Trexel, the dynamics that really gave us as young people in the business, tremendous responsibility. The learning curve was straight up, as you can imagine. And I also think that we got to understand and participate in a dynamic where
the providing of capital was being democratized, meaning prior to the high-yield market, which Mike obviously invented, it was very hard to get financing as a mid-size company. And so we watched the high-yield market meet that financing need, provide that financing need, which really wasn't available prior to that. We watched the market finance mid-market growth companies. We watched that market.
really evolved to beyond the banks and really saw that transition, or certainly the early days of that transition. So I think that's where the spark was lit, if you will, for me. And it's never really changed. I've been a participant and an active private credit investor really ever since. I founded my own firm 20 years ago. So it's actually our 20th anniversary this year. incredible.
And many of the folks that I worked with and for are now, know, have their own firms and their own private credit businesses. you know, we're friends, we have a history, we compete, but I think most importantly, a tremendous sense of mutual respect, right? So I look at the folks I grew up with and you learn from them, right? You learn from, well, that's a really interesting thing. I hadn't really thought about it that way.
I would say that it's a community that ⁓ competes, but at the same time understands that in many cases we end up in deals together. So that's really how I came to the business and obviously been doing it for 40 years now and I love it. It's part of my world.
Slava Rubin (03:57)
Incredible, and 20 years ago is when you started Churchill.
Ken Kencel (04:01)
So 20 years ago and you know what we saw then, what was really you know the opportunity to build a best-in-class private credit platform really before many of those firms were built. In fact you know I saw an article the other day that said that only 5 % of the current private credit managers out there today and there a lot of them were around 20 years ago.
So it's a fairly small group of us that have been around this long and know each other. And what we saw was that opportunity to really participate in what I call the institutionalization of private credit, right? So we really led the charge in moving away from banks and to a lesser extent, finance companies like GE Capital and into a market where institutional investors backing private credit managers, investing in private credit funds.
know, became the dominant form of financing in the middle market and for middle market companies. And part of what spurred that dynamic was that many of the banks that had been providing that financing went from really being in the storage business where they were making loans and putting them in their balance sheet to really becoming more involved in the moving business, right? And the economics for them as really investment banks became return on equity, return on capital. And so,
If instead of making a $500 million loan and putting it on the balance sheet, they could make a $500 million loan and distribute it to a group of investors and hold none of it on the balance sheet, the economics of that became more compelling from a capital return standpoint. And we watched that play out so that today, when you think about the core middle market, it's really dominated by the non-bank lenders, by the private credit managers like ourselves.
Slava Rubin (05:53)
So one of things that makes this podcast so special is our guests actually share how they invest their own wealth. So the typical portfolio is 60 % public equities, 40 % bonds. Are you a 60-40 or do you have some alts, I'm guessing, in that 100 % mix?
Ken Kencel (06:09)
I like to say that my personal investment style is barbelled. So I have a significant amount of my personal net worth in my funds and we manage both private credit and private equity funds. So a significant portion in my own private credit funds that we manage. I feel good about managing my funds and our investment. And the other half really in more conservative liquid investments, primarily treasuries.
Treasuries, municipals, things like that. So I'm invested heavily in ALTS, but barbelled, if you will, or contrasted to conservative liquid investments. And so I'm quite a bit different than your 60-30-10 or your 60-40 model. It's more in my own product and munis or treasuries.
Slava Rubin (06:57)
but not much like just straight public equities. Very little. And you're not stopping.
Ken Kencel (07:00)
Actually,
I will take that back. I do have my retirement assets in public equity, so I think about that as kind of a longer-term whole. So I do have retirement assets in private equities significantly, but other than my retirement assets, my non-retirement assets are either private equity, private credit, private capital, or more liquid.
Slava Rubin (07:20)
about
crypto? that in your... Not at all. Zero crypto. Zero. How about like...
Ken Kencel (07:25)
I don't understand
it enough to invest in it. If I don't understand it, I don't feel comfortable with the dynamics. Not investing.
Slava Rubin (07:31)
art or collectibles? Is that an investing asset class for you or more?
Ken Kencel (07:34)
Well it is in my case because I play guitar and I play in a kind of a rock pop band and so I have lots of guitars. yeah? you could call, you know, I probably have...
Slava Rubin (07:44)
favorite one tell us the one that's most interesting or most
Ken Kencel (07:47)
I'm a PRS guy, so PRS is called, it's a company called Paul Reed Smith. PRS makes absolutely beautiful guitars. They are viewed as collector's items. not inexpensive as guitars go. I have quite a few guitars. Are they quite rare? They are in the sense that every PRS guitar is different.
The thing about guitars that makes them quite unique are the tops. And in the case of PRS, they have something called a 10 top, which is a very, very, you know, very beautiful and unique wood pattern that makes them quite, you know, quite valuable. And so I guess I'm a collector of guitars.
Slava Rubin (08:26)
I love it. love it. then real estate beyond obviously living somewhere. Is that really an asset class you're investing into?
Ken Kencel (08:31)
It is. So ⁓ my wife is in real estate. So my wife was in real estate brokerage for a long time, knows real estate well. And so we do invest in real estate. So we have primarily residential real estate investments beyond what we own for ourselves. We have quite a few of those.
Slava Rubin (08:47)
So sounds like you're taking mostly conservative investments, but then you like to put all the risk on yourself because you're investing
Ken Kencel (08:53)
Pretty
much. Pretty much. I have a handful of investments in sports, so I do have some investments in sports teams. Oh, So I do have some investments there. But it's really about investing in myself and my firm and my investment team. It is. It is. Modest in my case. I'm much more focused on my funds.
Slava Rubin (09:00)
Or it's like as a n asset class.
mean, sports is one of the hottest asset classes.
Perfect. We're fast moving here. So in terms of the economy or the market, what's the Ken point of view on where we're at? And I know I'm asking a very broad, open-ended question. So I'm just looking for your point of view as to where we're at today.
Ken Kencel (09:34)
So,
know, I guess my view of the market is really reflective of the world that I live in, right? So you mentioned earlier today, at Churchill we manage about 63 billion of committed capital. It's split roughly equally between private credit and private equity. We have about 550 portfolio companies, all private, all private equity owned. So I would say that we have a pretty good
window on what's going on in the real world, right? Now, we don't invest in retail or restaurants or oil and gas, but we invest heavily in business services, healthcare services, software. It's not enormous, but we probably have 5-6 % in software overall, so more modest, but healthcare, business services, light manufacturing. So I would say in all middle market, right?
So I think when you kind of look at the profile that we're seeing, I would say it looks pretty good. Underlying growth, both in terms of revenues and EBITDA for our portfolio, which we track quarter over quarter, has been very good. Roughly 15 % or so, 15 to 20 % growth in revenue, which includes M &A and organic growth, and another 10 to 15 % growth in EBITDA.
So if you ask me how I feel about, you know, the over all economy right now, I would say pretty good rates, rates coming down, albeit obviously slower than anticipated, but you know, generally coming down. That's unlocking more deal activity. We actually had a record fourth quarter last year in terms of new M &A, new investment, new finance activity. You have a lot of, you know, you have a lot of dry powder on the sidelines. So tremendous amount of liquidity in both private equity and private credit.
and I would say deal activity remains very good. So underlying portfolio quality, company quality, underlying performance good. Certainly we're watching very carefully the AI dynamics. I would say there'll be winners and losers in AI, but I think there will be winners, not just losers. mean, it just seems to careen between very good and very bad. That has to go somewhere. And I think there are companies that
Slava Rubin (11:43)
All you have to do is somewhere.
Ken Kencel (11:48)
particularly firms that understand AI and adopt very early and are investing heavily, I think are going to be major winners. No question about it.
Slava Rubin (11:57)
two that you like that you would mention.
Ken Kencel (11:59)
You know, our companies tend to be mid-market. ⁓ you know, I'd say within areas like software, there are clearly winners that we see, firms that recognize that AI can be a tremendous accelerant for their growth. We certainly look at it very carefully. But I think overall today, when you think about the economy and what we're seeing in the opportunities, I feel very good about growth. I feel very good about portfolio quality. And by the way, I also think if you look at the markets over the last year,
You know, we've had a chance to do a deep dive three times, right? First, tariffs. Everybody was concerned about tariffs. How much are tariffs going to impact the US economy? Again, as a investor in mid-market US companies, primarily service businesses, I would say tariffs have had a very minimal impact on our portfolio overall, right? So they're sourcing, you know, if there is sourcing, and that's a very limited amount, it's US, US base.
It's business services primarily, and customers are primarily US customers. So in the mid-market, minimal impact from tariffs. Then you had the whole kind of cockroaches and Jamie Dimon and deals that were really more large cap liquid names. So first brands and Tri-Colour and those transactions, which were really financings around assets or around pools of assets and mostly
large cap liquid names, not private credit. Nonetheless, we did a deep dive there. In fact, an interesting stat, of those deals, less than one half of 1 % were owned by private credit managers or BDCs. So again, deep dive, pretty good. Tariffs, pretty good. That's happening now with software. Largely the same thing. If you look at the portfolios in private credit, we're not seeing those dynamics. Certainly not in the core middle market. The companies we finance,
are strong, market-leading, cashflow-generating businesses. So we don't do recurring revenue loans and some of the higher leverage transactions. And again, I think the look into the, kind of the deep dive into that software dynamic is again showing us that in the core middle market, things look pretty good. So pretty good test cases along the way the past year and pretty good visibility regarding...
and improving dynamic within the companies and the market overall. So I feel pretty good about 26.
Slava Rubin (14:24)
Nice. So, lightning round here. Yes. So, I have you back in a year from now. Give me your prediction on these things. One, are we in a recession 12 months from now? Yes or no? Alright. So, rates, are they up, down, or flat? By how much? One year from now.
Ken Kencel (14:42)
down.
I would say I think it's going to continue to be a bit slower than everyone expects, but I think we'll be down at least 50 to 75 basis points, and we could be down as much as 100 to 125. Wow, 125. I'd say on average, let's call it 50 to 100 basis points down a full year from now.
Slava Rubin (15:00)
That's pretty
Okay, and then unemployment, flat, up or down, 12 months from now.
Ken Kencel (15:14)
That's a tougher one. Yeah. You know, because you're kind of factoring in AI and the dynamic Of course. I would say flat.
Slava Rubin (15:24)
Okay. And then inflation.
Ken Kencel (15:26)
I think inflation comes down. I think it comes down with rates. think rates are down. I inflation comes down. It comes down more slowly, but I think inflation comes down.
Slava Rubin (15:39)
And so then what impact will that have on mortgage rates, for example?
Ken Kencel (15:43)
think mortgage rates will be down. I would say 50 to 100 basis points overall with mortgage rates. This is a pretty optimistic point of view, but again.
Slava Rubin (15:50)
I mean, this is pretty optimistic point of view, right?
What's the impact on the stock market? So are we a year from now flat, up or down with all of that? I'm thinking you're going to say up, but the question is, what's the magnitude of 12 months from now?
Ken Kencel (16:03)
I'm going to say
up, modestly up. think it'll get up. I think what we're seeing now in terms of some of the volatility in the market, I think you're going to still see that play out as the AI rolls through the economy. But overall, I think we'll be modestly up.
Slava Rubin (16:19)
So you mentioned you don't have a little view on the market. You have a 63 billion dollar view on the market, which is a massive view on the market. So give us one or two trends that you see in private credit that you get to see with that umbrella view and that omniscient view that others day to day don't get to see. What's happening right now in private credit?
Ken Kencel (16:39)
So I would say two things, insurance and private wealth. By far and away, the two biggest trends in our market, right? So let's talk about insurance, right? Natural partner to private credit managers. A lot of asset managers have moved into insurance, acquired insurance companies. We happen to be the opposite. So our parent company is an insurance company in TIAA, but it's the same general principle. Insurance is a natural partner to private credit.
I think you're going to continue to see insurance invest in private credit as they look for consistent inflation adjusted yields or loans are floating rate as you know. So, you know, have protection against inflation. You have an underlying dynamic of the ability of insurance companies to hold long dated assets, looking for strong current income, strong fundamentals, covenants, et cetera. So I think insurance companies will continue to be an important source of capital within private credit.
what I think is going to change or is going to expand is that it won't just be non-investment grade private credit, it will be investment grade private credit, right? So private credit managers will grow in being able to offer a range of everything from investment grade to non-investment grade that gives them the ability to deliver comprehensive private credit solutions to these insurance clients, these insurance relationships. Some of the private credit managers have already done that. Those are well documented.
But I think that, and we're in good position to do that as part of Nuveen, because they have a large private placement effort as well. So I think that's the spectrum on the insurance side. And if you look at insurance companies that have been polled, they've been very clear in saying they're increasing their allocation to private credit. So I think that's one trend. The other is private wealth. 70 trillion addressable market. It counts for roughly 20 % of the assets today, but...
you know, should be much, much more. I think that will continue to be very important trend. I do think, however, that some of the choppiness you've seen with, you know, you know, liquidity issues, I think is a really important fact to keep an eye on. It's important to invest in education and help investors, individual investors, understand private credit is not fundamentally a liquid asset class. It provides great risk adjusted returns.
but it is not fundamentally liquid. So I think as private wealth continues to invest and as you get to retirement plans, you get to individual investors, 403Bs, 401Ks, the inclusion of private credit in those long-term retirement accounts, I think we're gonna see is again, a combination with liquid credit. And it won't be a singular private credit vehicle where investors may be looking for liquidity.
it'll be a continuum of liquid credit, maybe 60, 70 % of the vehicle, and private credit, maybe 20, 30%, 40 % of the vehicle. And so they'll be able to provide the liquidity through the liquid credit, but still be anchored in a large percentage of private credit. So as it gets more and more into the retirement channel, I think there'll be more combining liquid and private credit in similar vehicles. on the insurance side, a continuum between
investment grade and non-investment grade, and the wealth side, a continuum between liquid credit and private credit.
Slava Rubin (20:04)
Great, I this podcast exists specifically because of the growth in private wealth. So the final question is, we love to get people on the spot, which is give us one public markets pick for three years out and one non-public markets pick anything for three years out. So when we have you back in three years, we can say, see, we got receipts, you were so right or you were so wrong. Okay. So give us your public markets pick and why.
Ken Kencel (20:27)
Public markets, municipals. Is there a ticker? Lots of focus, just overall, But of course our parent company, Nuveen, is the largest player in Muni. Perfect. But I would say focus on tax, tax efficiency. I think Muni's offer a fantastic way to address that tax dynamic. And I think you're going to see more and more focus on tax. And as states look for revenue.
Slava Rubin (20:30)
Okay.
Ken Kencel (20:53)
I think tax efficient strategies like munis, strategies that for ultra high net worth investors can optimize tax treatment and the dynamics around tax. I think that's gonna be a very important dynamic. Non-public markets pick, I would say secondaries. No, credit secondary. credit secondary. Private equity secondaries. So I think as more and more
Slava Rubin (21:04)
Awesome, and your non-public market.
A pro. Pre-IPO.
Ken Kencel (21:18)
investors, institutional and wealth, are getting into private credit and private equity. The ability to utilize secondaries as a way to provide liquidity, I think is going to be a huge area, not just in private equity, which is where it already is. And I think there's still tremendous growth in private equity secondaries to come. But I also think in private credit secondaries, very nascent, but I think a huge opportunity of growth. And I think that's in part driven by
demand for deployment, right? So if you look at the recent sale by Blue Owl, they sold 1.4 billion of assets. It was essentially a secondary sale, right? Looking for liquidity. Looking for liquidity. You saw some very large institutional investors say, we can do a secondary trade, we can acquire assets and get immediate returns and immediate deployment. So I think secondaries is going to become a real big part of the market in credit and already is in private equity.
Slava Rubin (22:12)
love it. Well, thank you for giving us your on-the-spot answers. I know this was a fast episode. There's so much to discuss. I can't wait to have you back, but thank you very much. This was awesome. Great.
Ken Kencel (22:23)
Great to be with you, Slava, and I hope to do it again. Absolutely. Thanks a lot.
