Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt. I'm going to be honest with you, hosting a podcast is not my job. It's an aspect of my job. But what I really do at S&P Global is manage our content. We have a lot of content, hundreds of articles a day covering all aspects of financial commodity and energy markets. Most of those articles are only read by a couple hundred or a couple thousand people. That's okay because those couple hundred or a couple thousand people are the right people, the ones who are going to use that article to make some important decision. But I'm always intrigued when one of our articles ends up being read by many, many more people.

That has been the case for an article we recently published on private debt markets. Now private debt markets are pretty obscure. We say so in the article's title, which was, Private Debt: A Lesser-Known Corner Of Finance Finds The Spotlight. But this article has been the top article on our website for month after month after month. That means something is happening here.

When a bunch of really knowledgeable people are suddenly interested in something obscure, it's a good bet that whatever it is, in this case, private debt, is about to get a lot less obscure. My guests today to help me understand this are Evan Gunther, Lead Research Analyst for S&P Global Ratings in the Research Group and one of the authors of the article in question; and Leon Sinclair, Vice President of Product Management at S&P Global Market Intelligence. Evan, Leon, welcome to the podcast.

Evan Gunther: Thank you, Nathan. It's great to be here.

Leon Sinclair: Likewise, nice to be here and [ support the initiative ], Nathan.

Nathan Hunt: I think we better start with the basics here because I need the basics. What is private debt?

Evan Gunther: If we want to boil it down to the basic essentials, private debt would be nonbank lenders making loans directly to borrowers. In this case, we're talking about borrowers that are not publicly traded. They don't have public equity. In many cases, they don't have public debt either. These are borrowers that tend to be on the small side, so middle market borrowers with $25 million to $100 million in EBITDA.

Many of these would be more in the $50 million to $100 million range of the mid-market. And this debt that the lenders are extending to these borrowers, it's not traded debt. It's not like the broadly syndicated loan market where you have a large number of lenders, a dozen or dozens of lenders that are making loans to an individual borrower, and then those loans are traded within secondary markets.

Private debt market is largely one that is a buy-and-hold market. The lenders that are making these loans, for the most part, they're part of large alternative asset managers. And these asset managers have lending platforms, and these platforms can include BDCs, which are business development companies, middle market CLOs as well as private credit funds.

So when the direct lender makes the loan to the smaller nonpublic borrower, that debt, that hold to maturity can be held across the platform in these BDCs, mid-market CLOs or private credit funds. Because information on these borrowers is not widely available, you don't have as many lenders involved in these transactions. You don't have the debt that's being traded across different investors. There's limited transparency into this market. That's part of what makes it private, there's limited public information available.

Nathan Hunt: So why has this suddenly become more interesting to people? Why do you think so many people are interested in reading this particular article?

Evan Gunther: Since the information is few and far between, investors are hungry for more information and more data so they can better understand this market. Private debt market in terms of some of the measures we see for assets under management, they recently topped $1 trillion. The direct lending side of private debt is at or above $500 billion. It's a quickly growing aspect of the credit market. You have a lot of attention-grabbing deals.

For instance, last year, direct lenders were able to arrange more than $1 billion loan for Stamps.com. This year, you have direct lenders stepping in with more than $1 billion for Morrisons. With loans of this size being available, borrowers are finding that private debt is a viable alternative to some of the more traditional capital market sources of funding.

For this article, as I mentioned, there's limited information available, but we were able to reach across S&P Global to different parts of the company that have information and expertise in various aspects of private debt. On the ratings side, the Financial Institutions group has ratings on the business development companies. They have ratings on some of the largest BDCs. They also have ratings on some of the alternative asset managers.

On the CLO side, we rate mid-market CLOs. And we also have a team on credit estimates that are looking at some of the loans that are held by those mid-market CLOs. Even though those loans are not rated publicly, they don't have a rating on those loans, but the credit estimate team is able to put together a score of the credit quality of some of those issuers.

On the Market Intelligence side, we had more data available through some of the reporting of S&P Market Intelligence and some of the data fields that they had available that were also able to tap into to bring together some of the different pieces of the market, not to get the whole picture, but to bring in what we do know and what we can bring together to shed some light on this asset class.

Nathan Hunt: Who is investing in these private debt markets? And what's drawing them to this as an investment?

Evan Gunther: So the story of the current phase of private debt that we're seeing really began after the global financial crisis. After that period, banks started reducing their exposure to riskier companies, capital charges were going up on loans that they were holding, and nonbank financial institutions stepped in, providing loans to some of these companies that otherwise would have been possibly borrowing from the banks or tapping into the middle market generally.

As these nonbank financial institutions and alternative asset managers were lending to these private borrowers, they're able to start showing that they were generating higher yields than broadly syndicated debt. This gained attention of investors, especially given the low interest rates of the last decade. Who were the investors that are investing in the private debt space? They tend to be those that can commit capital for the long term. Since this debt is not broadly traded in a secondary market, private debt tends to be buy-and-hold type of asset.

Some of the investors that are investing in this would include institutions that have a long-term investment horizon, such as insurance companies, pensions, endowments. Many of these already have an alternative asset allocation, and the money that is flowing into private debt, in some senses, is coming from those alternative asset buckets. But in other cases, it could also be coming from credit buckets where the investor is looking to generate higher yields.

Nathan Hunt: Okay. So let's talk about the company's borrowing in private debt markets. I've always thought that at the top of the debt pyramid, you've got your investment-grade debt, very stable companies, not offering much by way of interest, but your money is safe. Then you have speculative-grade debt. The companies are a little less stable here, but they're offering you a bit more in terms of a return. How does private debt fit into this? Is it extremely speculative? Or is that not a meaningful way to think about this?

Evan Gunther: That is a really good way to pose this question. In the research group, we look at the performance of rated issuers. And for an investment-grade issuer, defaults occur. They're very, very few and far between. You rarely see an investment-grade issuer default.

Within spec grade, you are typically going to see a number of spec-grade defaults in a given year from rated issuers, but there's a large differentiation within spec grade between the highest-rated spec grade and the lowest. The highest rated spec grade is going to be BB+. These issuers have a 1-year average default rate of about 0.33%. So very rare that you see highest-rated spec-grade issuers default.

By contrast, the lowest-rated category within spec grade, CCC+ and lower, has an average 1-year default rate of 28%, so an extremely high default rate for the lowest-rated issuers. A step above CCC+ is the B- rating level. That has shown a 1-year average default rate of 6.5%. So while it's an elevated default rate compared to other rating levels except for CCC, it's still less than 1/4 of what you see for CCC defaults. So within spec grade and even within the lowest rating levels, there is a very large differentiation between default rates.

Within private debt, we don't have the same level of information because these are not publicly rated issuers. What we are able to see is the credit scores of those issuers for which we have a credit estimate because they're held by mid-market CLOs. What we see from the credit estimates is that these do tend to be issuers with weaker business profiles and high leverage. The credit estimate score for these issuers tends to be largely B- or lower, about 90% of those credit estimates are B- or lower.

By comparison for issuers that do have a public rating that is spec grade, only 35% of spec-grade issuers are rated B- and lower. So there is a higher concentration of riskier companies within the private debt market, at least from what we can see. But granted, what we can see is limited because we don't have public ratings on this.

It's not just a story of weaker credit though within private credit, these are also tending to be smaller companies. And there are also a number of special story issuers within private credit. These are issuers or sectors, the capital markets might not be willing to step in and fund. For instance, I've heard that recently, some of the cannabis companies that aren't able to access funding through the capital markets have been turning to private credit as a source of funding.

Besides the default risk that we see within private debt versus rated spec-grade issuers, there's also something of a difference in the debt structures that we see in private credit. This could minimize some of the losses should an issuer have an eventual default. The private debt issuers tend to have simpler debt structures, more commonly are going to have financial and maintenance covenants, and these may reduce loss in the case of a default.

Nathan Hunt: What are the risks of private debt?

Evan Gunther: From what we can see in the private debt space, there are 3 key risks that we'd like to flag. First of all, there's credit quality. Within private debt from what we can see, those issuers that have credit estimates, those credit estimate scores are largely at the low end of credit quality, showing us that there is high leverage and weaker business profile that's concentrated within private debt. So credit quality is certainly one of the top risks.

Separately, second risk would be transparency because we do have limited information available on issuers within the private debt market. It's hard for investors to grasp all that's going on under the surface. While in publicly traded markets, you might have more unknowns around some of the knowns, within the private debt space, there's more of a possibility of having unknown unknown risks.

And then third, certainly, when the key risk in this space is liquidity. It's largely a buy-and-hold market. These loans are not traded among separate investors, and there is an illiquidity premium for this debt. That illiquidity premium is part of the reason why yields are going to tend to be higher for private debt rather than for broadly syndicated debt. The risk of this illiquidity is that if an investor were to need to sell, or if a fund for some reason was forced to sell its assets, there's not an existing secondary market for this debt where it would be clear where the buyers would come from.

Leon Sinclair: Sure. And to add to that, maybe I think I'd just like to explore a couple of the offsetting risk factors, really. So again, clearly, those are the risks with the market, but there are also some benefits or some mechanisms that the industry uses in order to mitigate those risks.

And obviously, covenants is a really key one in the [ strategy ] of these transactions. And unlike the broadly syndicated market, they're still really common and prevalent to have relatively meaningful covenants in the materials and packages of these transactions. And obviously, these covenants provide protection to the lender.

And they often are maintenance covenants focused around particular financial ratios or whether it's things like debt-to-EBITDA, interest cover or the interest payment fixed-charge coverage. And it does appear that it may be kind of a link between the covenants themselves being there and more frequent selective defaults. But again, typically, in these cases, I'm sure through whether this team have done, it demonstrates that actually there's higher -- [ LGDs ] higher recoveries when social instance occurs.

But also very important is the flexibility that can be offered to a borrower in times of distress. So whether it's by amending terms, which help the liquidity position of the underlying business, this could be cash infusions. It could be kind of treatment of interest payments and telling that something with payment. It could be temporary cessation or changing the profile of an amortization schedule, all things which are there really to aid the underlying company and business and provide it with more liquidity.

But there's always a quick pro quo for this. So normally, in order to doing this, there will be some kind of reward that will be in the form of equity or warrants in the underlying business to compensate the manager's flexibility during these stressed times for their businesses. And also on the kind of workout side, workouts in public markets are notoriously challenging, costly, time consuming. And that's kind of largely inverse for private markets.

Typically, it's much quicker through the private debt market going through restructuring or workout situation. It's less costly for the borrower typically in instances where the mechanism of borrowing is something like a unitranche, there's an associated integrator agreement, which sits next to the transaction.

And that reduces a lot of the complexity in that workout situation. And in fact, there seems to be a lot more collaboration with a small group of lenders. Obviously, if there's a single lender, it's easy. But a small group of lenders, there's no competing factors like there is typically in these situations in more broadly held assets.

Nathan Hunt: One of the benefits to the broadly syndicated market is that the process of mark-to-market to value assets is pretty straightforward. It's pretty much an accepted formula. For private debt markets, how do you, as an investor, know the value, the current value of this debt you're holding?

Leon Sinclair: Well, generally, for private markets, which obviously private debt is part of, they fall under a different guideline framework. And so to your point, there's not live market data streaming through the industry each day on these assets. And so the point I made earlier, these are, by nature, private. And there's only a small handful of people, possibly even only a single lender, which will have detailed materials on the business even to perform a thorough valuation.

IPEV Guidelines and AICPA guidelines in the U.S. really help in trying how the industry thinks around valuation, but needless to say, the valuation techniques are typically in the nature, much more fundamental in terms of, firstly, understanding the underlying credit worthiness and probability of default of the LGD in a particular business, and then factoring that into market data to find things like beta baskets or kind of use of the information, which you think are relevant, essentially project the performance of the business on a forward-looking basis.

And also, as mentioned earlier on, these assets have an illiquidity premium or structuring premium or complexity premium, depending on who sees, they may call it different things. But essentially, a pick up in yield for the illiquidity, which is being bad and the kind of bespoke nature of the transaction, and that also has to be modeled.

But there are very nonprescriptive guidelines around how practitioners should follow this and how firms should look at this, and that helps set the expectations around valuation between the managers themselves, their investors or the community, valuation community, et cetera.

So the techniques are much more fundamental in nature, much more challenging and bespoke. But ultimately, for reporting purposes, it's important that the industry has a framework, which everybody can understand that it's good practice around this asset cloud.

I suppose it depends what we mean by sources of data. Again, there's sources of data in terms of private company high-level information, which is provided to things like bureaus and kind of company's house and things like this in Delaware or whatever. But again, it's not a data-rich industry as we're talking about earlier on, right? It's very, very bilateral, and therefore, there's not a good source of information if you're not behind the wall, right?

Nathan Hunt: Evan, what are the benefits, if you don't mind? Please also break it down for borrowers and investors.

Evan Gunther: So with the benefits to the borrowers, one of the key things, what's so distinct about this market is that those borrowers are working closely together with the lender. This can let them have a faster time to market as they are raising their debt. So while they don't have to wait for the syndication to take place and the pricing, it allows them to work with the lender to get their financing faster than they might otherwise be able to do going through the broadly syndicated market.

This working directly with the lender gives the borrower more certainty on their pricing. While they might have a higher price for part of the debt, the whole debt package might be more competitive with that of the broadly syndicated loan package, but they also -- they're able to know going into it sooner what that pricing is going to be and how much their cost of funding will be because they've negotiated that directly with their lender rather than waiting to see how the pricing terms flex with the broadly syndicated group.

For a borrower, in the case where they run into trouble, run into periods of stress, having one lender to work with, to work out problems and the debt, can lead to a closer alignment to maximize the firm value than if they are trying to work with a consortium of lenders where you also have various lender groups opposing each other and trying to maximize their own individual value.

Another key benefit to this market for the borrower is if private debt is competitive with broadly syndicated debt, this provides them another source of funding, which, for a smaller or a riskier borrower, more sources of credit would be something that will be viewed as very attractive.

Nathan Hunt: How big do you believe this market might get?

Leon Sinclair: So that's a really interesting question and obviously a little bit of crystal ball gazing. There are some organizations out there who do put forecasts together on such statistics and is believed by Preqin that the private debt market at the end of 2021 stood at about USD 1.2 trillion, and that had been really the result of about the decades' worth of very aggressive growth at around about 13.5% on an annual basis. However, between now and 2026, it's anticipated that the asset class could go to $2.7 trillion or so.

And so the private debt markets are growing at a very fast basis to be the third largest asset class in what we call the private markets. And more broadly, that marketplace is at pace to grow around about 8% between now and 2026. So it's likely that private debt will be a large driver. And again, looking at growth of doubling in a handful of years is pretty impressive.

And I think it's also worth talking about why it is growing so quickly. And I'm not going to touch on some of the points I mentioned earlier on around who comes into this space. It was a particular type of investor who really benefit. So when I say investor, you can make that synonymous with asset owner who really benefits from this. And that is the LDI investment community in particular.

So you think of people like pension funds and insurance companies who come very, very heavily into the space over the last decade. And historically, those institutions have relied on fixed income to provide them with a means of diversification away from things like equities, but also very important is preserve capital, generate steady, predictable income and protect it against inflation.

However, given we're just -- we're coming out otherwise an ultra-low interest rate environment, the benefits of fixed income to provide those attributes to your portfolio have not really been there and they've been a drag on performance and returns. And so that's kind of created an opportunity as well for the private debt asset class because we -- as we already discussed, it's a higher-yielding asset with very kind of defensive properties because of the way it's structured and low downside risk, higher LGDs.

When defaults do occur, it is a really great asset to step into that gap and give those allocators an opportunity to meet the shortfalls or deficits in their liability projections. So those have been a really big driver of volume in the industry, whether they're investing through managers or creating their own programs to go direct into the market.

And if you just think about the kind of environment we sit in today, where if you're an allocator and you're looking at a fixed income market, which, again, if it's fixed interest, we'll probably have some downside still within it as rates go up. The kind of value proposition for private debt still looks really, really positive. Also in that context, the returns have been really good.

And again, we've mentioned it's kind of higher yields, but then, so some kind of context, in the decade following the great financial crisis for the market in aggregate, net IRRs were around about 12% for the top quartile managers, about 9% for the median and about 7% for the bottom quartile managers. So if you think about that range of outcomes versus fixed income or kind of liquid bonds or syndicated loans, it is superior.

I think also, what is really adding to the value proposition of the asset class is if you look at the range of outcomes within private debt versus the other private asset classes, so private equity, real estate, natural resources, infrastructure, the range of outcomes is much narrower with private debt than it is with the other alternative asset classes, although obviously, it's net IRRs on those hires, some of the other asset class like private equity, growth equity or venture capital.

However, as an alternative, which is relatively safe by comparison to those asset classes that can plug in to the void, which was left from fixed income products in a low interest rate environment and now being in a rising interest rate environment where they perform poorly, it should actually be something which continues to be in demand. And again, fundraising in the industry last year was particularly strong.

Nathan Hunt: So issuance is down in the broadly syndicated markets this year. Do you see that affecting the private debt markets as well? Do you believe that may somewhat retard the growth of those markets?

Evan Gunther: So with demand for private debt growing through last year, which was a very different backdrop in the credit markets last year, but you had a lot of money that was committed to some of these private debt funds. So right now, there's still considerable dry powder sitting on the sidelines held by these private debt funds.

So there's money out there that is available to be lent to borrowers that are looking for funding, which actually makes a pretty interesting dynamic right now because as funding from the broadly syndicated markets has shown more volatility, and there's so much more uncertainty right now for a borrower, so with this uncertainty in the markets and this uncertainty hanging over the broadly syndicated market, a borrower that's trying to raise money through broadly syndicated loans is not going to know maybe as much as they would like to how much that funding is going to cost.

Some deals have been hung where they come out to the market and they're not quite able to price, not quite able to be funded. So with that uncertainty, private debt has provided sort of an attractive alternative to some of these borrowers because they're able to work out terms directly with the lender. They don't have as much of a level of uncertainty because they can hammer out the terms of the deal and get their funding possibly sooner than if they were trying to go through the broadly syndicated markets.

Leon Sinclair: Yes. And I think maybe something I'd add there to your point around the crossover or the interplay between public and private markets and the demand for the asset class, I mean it could be the case that allocators do invest across the public and private market, see a relative opportunity for their allocations now in public markets, whether that's an equity or debt, given multiple compression or spread widening in the market at large.

However, there's still $350 billion or so of dry powder in the industry. This is money which funds are raised, which they need to commit. And typically, funds try to do that within the first 36 months or so of raising the capital. So I mean, there's a lot of money sat on the sidelines waiting to come into the industry.

And also, there's a disincentive from the allocator perspective to be that short term with their views, depending on what's happening in public markets, just given it can take a really, really, really long lead time to reach your committed capital goals if you have an allocation towards private markets as an LP or allocator.

So I don't really see the kind of short-term troubles of markets generally will turn people away from the asset class or repivot them opportunistically into other things because they have committed capital as an industry of $350 billion with managers, so that can't be revoked. And therefore, I don't think there'll be any issues for deployment of capital once the GPs actually feel the correct opportunities and credit environment is there for them to deploy that capital.

Nathan Hunt: And Leon, also, what you were saying reminded me of what I heard from talking about this asset class with one of the analysts over here. You described it as bear market capital. So when times have been rough in credit markets, some of these direct lenders are willing to set them and offer funding to borrowers, but they are going to extract a cost, the cost of doing business.

Leon Sinclair: Having a deep private market is beneficial for public companies. Well, to your point, even if you think about it on the private equity side, again, there could be pipe financing, which is made available. It happened a lot over the last couple of years. Obviously, in some forms, that was connected to us back. But in other forms, it was connected to companies being in some form of a position where they needed to raise additional capital. And therefore, whether it's on the debt or on equity side, in times of distress, private markets actually can be in the system to public companies.

Nathan Hunt: Let's say, I'm an investor in private debt markets, what are the topics or themes you think are going to be important over the next year?

Leon Sinclair: Well, I think a theme which is on everybody's mind at the moment and wherever you are in public or private markets is really the topic of inflation, and that does have some impact on this asset class, not from the kind of just the mechanics of the asset because it's a floating rate asset class on the whole. But really, I think it's the health of underlying businesses for which these loans and facilities are associated.

And I think inflation is obviously a problem, but a really high and unexpected inflation is even more of a problem. I say it's probably the unexpected nature that is more important than just having high levels of inflation because in all valuation models, in all kind of underwriting cases, in all of these health analysis that the manager would do, there is sort of underlying inflation assumptions.

And I think everybody going into this year expected some elevation, so inflation in the major economies, trade war, supply chain crunches or pandemic in 2020, a slew of financial packages that came after that. However, I think the length of -- and the depth of those supply chain issues, China lockdown protracted more in Europe, all these things have this kind of cascade effect, energy prices, food cost on grain and food chain shortages, probably weren't predicted by most to have this kind of confluence of risky events, which will lead to that kind of really unexpected inflation.

Now as a GP and the conversations that I imagine most of the management teams are having is where do we expect this to level out. It's not going to obviously be 8% or 9% for likely too long, but does it level out at 3%, 4%, 5%? And that's a really important thing for both public and private credit markets they're going to handle on because once there can be consensus around that, there can be confidence again in the underlying businesses and their performance for which these are associated.

And so the question probably on many people's lips is how severe would a recession have to be to bring back inflation to the types of target levels that we have in [ vertical ] economies and can we stave off stagflation. And the reason this is important to the underlying performance of the business is because, ultimately, these businesses need to be able to produce enough free cash flow, and that free cash flow needs to be able to support the interest payment of the manager's underlying loan.

And so obviously, if you enter into that cycle, it depends on the manager, it depends on the kind of maturity of their portfolio and so on and so forth, and the quality of the deals they've entered into, but the leverage in the portfolio entering into the cycle is really important, it's key. Because if you're overlevered going in and you're going to be in a situation where free cash flow may be decreasing because input costs are going up or revenue business is coming down, margins can't be sustained.

So essentially, the managers are still interested in, can revenues be produced in a vein, which is similar to the underwriting case or the business plan? Can the business produce enough margin, and also essentially, what sort of reinvestment which is needed to continue that growth and those margin rates, and how does it trickle down to us?

And so it's not really a question about the mechanics of the cash flows in terms of the floating rate and so forth, but there's obviously potential distress to businesses which sit within these portfolios, just like there is any other business in the world. If you underwritten these deals yourself -- or so underwritten yourself, or if you're kind of following a sponsor in a mid-market LBO, and again, depending on what the mechanism of the deal flow of the transaction often will have an impact on how firms deal with the topic of due diligence and monitoring.

And so maybe those who have got a sponsor sat there, who essentially in this case would be the first lot, that could be much more comforting than relying on underwriting, which has been done in the past and hasn't got -- and you are effectively the first loss because you are the debt provider and there may not be an equity provider, for example.

So that's, I think, some of the discussions, which will be going on in houses and trying to understand where does inflation lie, what are the impacts on the underlying businesses, can some execute the plan that we earn to grow, what type of [indiscernible] they need, are we sound around the diligence we did at the time, are we happy with the performance of the business since we did that diligence and funded the transaction?

Nathan Hunt: Can I as a retail investor play in private debt markets? And are there ratings for private debt?

Leon Sinclair: I mean this is not a traditional retail product, obviously. However, the BDCs in the U.S., which are a very prominent product, are there for retail investors and their advisers, and there's high transparency and daily liquidity. And that's also true, not on the daily liquidity side, but it's also true with access to things like intel funds in certain format. So there is an availability in North America, I would say.

Certainly, in North America as well, the SEC are consulting on. This is our topic around the retailers that you should, if you like, of private markets, and there's been amendments to scope or liquidity and investor definition. So there are kind of desires, it seems, and there's a kind of movement in the U.S. around this. And on top of that, various fund managers have launched specialized retail programs and how significant the AUMs under those programs.

So I think in the U.S., like many things, it seems to be slightly ahead on this particular topic. Historically, Europe has been challenged by regulatory requirements for almost close to immediate liquidity. The European Commission, I think, is -- seems to be moving a little bit on this [indiscernible], which has greatly improved, essentially the flexibility of assets, which could be in these portfolios, the portfolio construction, distribution, authorization.

And so they've also thought about kind of maybe not this kind of daily liquidity which should be similar to a BDC, but looking at things like optional liquidity windows that managers can create for investors. And there are movements around this topic, and it's a really kind of hotly debated topic.

Well, I would say in addition to that, though, it's probably not what you're really thinking about when you ask about retail, but high net worth individuals and sophisticated investors who long had access to the asset class, but this is increasing with the kind of the growth of feeder and aggregator mechanisms. And that is pulling in additional capital that can reach the GP without the burden of dealing with thousands of small investors or try to market for those investors, et cetera, or then again, there's regulatory considerations around that.

But certainly, the rise of these kind of mechanisms, which pool large amounts of small invested capital into the asset class, and with that, there's been a lowering of investment minimums as well. So [indiscernible] thresholds were relatively high of what individuals wanting to invest in such strategies, that has been coming down as these feed of mechanism recreators have become much more popular.

But I do think it's an interesting topic. And I think there's a conundrum, which is the quality of returns for all and retail investor protection. And these are kind of 2 sides of a coin, which need to be, over time, managed. And I think that discussion will run along for some time, but also the fact that now there's a much more buoyant secondary market across private debt and private equity. I think that will help the discussion around smaller and smaller and less and less sophisticated investors entering the asset class if there is much more liquidity in general in asset class.

Evan Gunther: While we don't have ratings on private debt loans themselves, we do touch on aspects of the private debt market through different ratings that we do have. The BDCs, which hold some of this debt, a small portion of BDCs do come in, and we have ratings on them.

Some of the alternative asset managers that are operating the lending platforms and making direct loans to the middle market and to the private debt borrowers, we do have ratings from our financial institutions group on some of those large asset managers and also on the funding side, the mid-market CLOs, which are also holding the loans of some of this private debt. We do have ratings on mid-market CLOs.

As part of the process of rating mid-market CLOs, we also have a team that looks at credit estimates. Credit estimates are for an unrated company whose loans are held in an S&P-rated middle market CLO. This is just an internal score. They're not publicly available as an indication of the credit quality. And while these scores are not provided publicly, and it's certainly not a rating, we do, at times, provide aggregates of credit estimate scores as a way of providing measures that we can use to look at some of the underlying trends within the private debt market.

Nathan Hunt: Evan, Leon, thank you so much for joining me on the podcast today.

Evan Gunther: Thank you, Nathan. It's been a pleasure.

Nathan Hunt: The essential podcast is produced by Kurt Burger with assistance from Kyle May and Camille McManus. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments and individuals to make decisions with conviction. From the majestic heights of 55 Water Street in Manhattan, I'm Nathan Hunt, thank you for listening.