00:00Shree, I was just thinking earlier this year, around April time, I'd interviewed Orlando Bravo
00:06when Medallia was kind of facing its issues, and I'd asked him about the cost of capital,
00:10and he basically was like, yeah, some lenders are pushing back, but we have a lot of lenders,
00:13we have really good relationships, it's nothing we can't handle. How extreme is the pushback
00:17and the concessions that they are needing to make in order to continue to get debt to fund
00:22these software companies? You're talking about earlier this year, let's take you further back.
00:25Go back five years and the tables were completely turned, right? The borrower could put a gun to
00:30your head and demand whatever terms they wanted because it was such a borrower-friendly time when
00:35you go back to 2021. Now, completely different scenario. And when you think of a firm like
00:40Termal Bravo, especially one that's such a specialist in the software space, that was their niche,
00:45that is where they built their strength, that is where they built their dominance. But right now
00:48in a world where there's so much nervousness around any AI vulnerable sector and the SaaS companies
00:54and anything in the software space is high up there, lenders certainly have the upper arm,
00:59upper hand, and they are willing to exact the terms that they want to make sure they continue
01:04to lend. And that's what we're seeing in this situation, whether it's higher interest rates
01:07to refinance a debt, limits on future borrowing, regular check-ins, prayers every single second
01:12of the day. I mean, they have asked for 40 different terms, so I have to assume there must be
01:16some
01:16crazy terms in there. But the point is, the number is a real signifier here of who has the
01:22control, who has the leverage, no pun intended. And it's all with the lenders right now, especially
01:26if you're a lender in the software sector. Why don't we take a step back, Sri, because there's
01:31so many stories relating to private credit right now. So do you think in general, this creates an
01:35opportunity for large private credit platforms to just acquire seasoned portfolios? Is it a good
01:40environment for them? If we're talking specifically in the software space, it's an interesting period,
01:46right? And again, going back to what Danny talked about, her interviews with Orlando Bravo,
01:49you go back earlier in the year and he was ready to go out there on TV and declare the
01:53SaaS apocalypse is over. That might be true. We're not near the fear cycle of what was happening
01:59a few months back. And if that was the case, these lenders could have exacted 400 lender
02:04friendly terms, perhaps. But we're still in a place where they will have to give a little
02:08bit to the lenders. The private credit borrowers or your syndicated lenders, they will be able
02:13to demand terms. And the companies really have no option, especially for a firm like Toma Bravo,
02:17which is you deal with one situation, you know that over the next 12 months, you have so much
02:23other debt that's coming due because you have such a robust portfolio in a vulnerable sector that
02:28you have to have a lender friendly posture. You can't afford to walk away from these negotiations
02:34because you will be hurt down the road. And again, you know, Orlando telling me in a
02:37conversation like back when money was free, that was the anomaly of this period that we're in is not
02:41the anomaly. But that being said, one of the impacts of rising rates or at least rates which
02:46haven't come down has been a lot of aging assets on private equity balance sheets because they bought
02:51them for so much at such high valuations in 20 and 21. And you haven't had the benefit of lower
02:56rates
02:56to kind of bail them out. The team has been doing great reporting today's big take on just sort of
03:00the liquidity mechanisms that they're tapping, the continuation funds, structure equity, dividend
03:05recaps. Sri, how many of these are unusual or alarming versus just kind of a normal course of
03:12business of trying to inject more liquidity into portfolios? Unusual in that we're finding new and
03:17new structures come into the private equity deal spectrum. Again, when you're talking about $3.8
03:21trillion in unsold assets, aging assets and itchy investors, you have to find ways to return capital
03:28to investors. But I'd also like to point out that there is a bit of a dilemma for all the
03:32private
03:32equity owners, right? On the one hand, your investors, your LPs will tell you the number one most
03:37important metric to them is distributions that come back to them relative to paid in capital.
03:43And then if you frame the question differently, what do you prioritize between long-term returns
03:49and near-term liquidity that all say do not sacrifice long-term returns? So which way do we go?
03:56You really have no option. The answer is keep returning money to me, keep making sure you have
04:00great returns. And that puts a lot of private equity owners in a bind. And so whether it was,
04:05you know, we've been through stages of dividend recaps, NAV loans, continuation vehicles,
04:11and now structured equity, which if you look at the Apollo hybrid solutions group, I was looking
04:14at a stat in that story. They have deployed three times the amount of capital from that group this
04:18year relative to last year. It tells you there's a lot more demand to structure these tools. And
04:22when you talk about structured equity, that's at somewhere between a common equity and your debt-like
04:27instruments. So you're not really giving up control, but it is expensive capital.
04:31It makes life hard for donors.
04:32I have a question on that. Is that something that would also annoy other people in the capital
04:36stack to say, like you're inserting this mechanism that kind of falls higher in the pecking order
04:40when you have a company that maybe needs that money?
04:42Completely depends where you're in the capital stack. So yeah, if you're a common stockholder,
04:46yes, it'll completely annoy you because you've added another layer in front of you. And so you better
04:49hope that this company goes well, continues to improve. And when they finally exit this, it actually
04:55exits in a much better shape because adding a new entity ahead of you is never a fun thing. You
05:02want,
05:02that extra cushion behind you, not obstacle in front of you.
05:05And to your point earlier, so are LPs actually getting their cash back or are they given more
05:09and more creative reasons to believe that maybe they are?
05:13That's an interesting question because it depends on how you slice and dice it. Because if you look at
05:17the raw figures, if you look at the statistics, if you look at the DPI number, that number has been
05:21going down. It is nowhere near where it should be. And that is why LPs are getting frustrated. So it
05:26is going to take time.
05:28But at the same time, the private equity owners are responding to it by finding some of these new
05:33structures and inserting these new structures into their deals, into their portfolio companies,
05:36to find quicker and easier ways to return that capital. So some money is going out, perhaps not
05:41enough, while at the same time causing other structural issues.
05:44Are people still wearing like the DPI's, the new IRR shirts, if they put those away? You saw that
05:49reporting, right? That like at an annual general meeting, someone came with a shirt that said that?
05:54Luckily, my TikTok and Instagram algorithm is all about mountain hikes, and I'd like to stick to that.
05:58Wow, so zen. Our algorithms are sending us very different things.
06:02I'm shocked you even have TikTok. I will follow you.
06:04I might have lied there.
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