[Voiceover] This is the View from Apollo podcast, an
[Voiceover] ongoing conversation on alternative investing, economics, and the
[Voiceover] trends shaping up financial markets.
[Introductory speaker] In two thousand twenty five's turbulent market environment,
[Introductory speaker] one quarter of private credit is enjoying its
[Introductory speaker] moment in the sun, asset backed finance. In
[Introductory speaker] this episode of The View from Apollo, Brett
[Introductory speaker] Lees, Apollo's co head of asset backed finance,
[Introductory speaker] explains how this estimated twenty trillion dollar global
[Introductory speaker] market works.
[Bret Leas] The mortgage on your home, that's a fixed
[Bret Leas] contract that pays something, has credit enhancement, has
[Bret Leas] a tangible asset beneath it. I mean, by
[Bret Leas] creating this and fostering this lending every single
[Bret Leas] day, we help the economy grow and we
[Bret Leas] help people get the access to the credit
[Bret Leas] they need.
[Introductory speaker] In a wide ranging conversation, Brett discusses why
[Introductory speaker] asset backed finance can be resilient in turbulent
[Introductory speaker] times, how new innovations are democratizing access to
[Introductory speaker] the space, and the global growth he expects
[Introductory speaker] as more markets embrace securitization. So without any
[Introductory speaker] further ado, let's get started.
[Brad Young] Hello, everybody. Welcome to another episode of The
[Brad Young] View from Apollo. I'm Brad Young, the head
[Brad Young] of client content strategy in Apollo's client and
[Brad Young] product solutions group. I'm guest hosting this month
[Brad Young] for Torsten Slock, and I know we always
[Brad Young] like hearing from Torsten. I do too. But
[Brad Young] I'm really glad to be here for this
[Brad Young] conversation today. We're gonna talk about the dynamic,
[Brad Young] fast growing asset backed finance market with the
[Brad Young] person who's pretty much been writing the book
[Brad Young] on it here at Apollo. Brett Lees is
[Brad Young] a partner and Apollo's co head of asset
[Brad Young] backed finance. And he's been running the firm's
[Brad Young] asset backed business since two thousand and nine.
[Brad Young] So a lot to talk about today, and
[Brad Young] I'm looking forward to it. So thanks for
[Brad Young] being here, Brett.
[Bret Leas] Oh, Brett, thank you for for having me,
[Bret Leas] and I'm excited to talk about asset backed
[Bret Leas] finance.
[Brad Young] That's great. A little level setting for listeners.
[Brad Young] When we talk about asset backed finance, what
[Brad Young] do
[Bret Leas] we mean, and what exactly is it? Sure.
[Bret Leas] So what we mean by asset backed finance
[Bret Leas] is actually in the name. Right? So you
[Bret Leas] have two ways to invest in this world.
[Bret Leas] You can give your money to companies. You
[Bret Leas] can make a loan or a bond, and
[Bret Leas] you're backed by the operations of that company,
[Bret Leas] the full faith and credit that company, and
[Bret Leas] you rise and fall with that company. Well,
[Bret Leas] asset backed finances is the opposite. You're going
[Bret Leas] to invest back by a pool of things,
[Bret Leas] and those pool of things cash flow, and
[Bret Leas] they self amortize as a function of time.
[Bret Leas] And so that distinction is actually very, very
[Bret Leas] meaningful. And you why it's so meaningful and
[Bret Leas] why people should really care about this is
[Bret Leas] because it's the thing that you touch every
[Bret Leas] day. You know it every day. It's what
[Bret Leas] makes our economy it's what our economy goes
[Bret Leas] around on. So for example, you know, you
[Bret Leas] must live in some sort of dwelling. I
[Bret Leas] have a house. You have a house? That
[Bret Leas] house is probably financed with a mortgage?
[Brad Young] Yes. It
[Bret Leas] is. Okay. Well, that's asset backed finance. The
[Bret Leas] mortgage on your home, that's a fixed contract
[Bret Leas] that pays something, has credit enhancement, has a
[Bret Leas] tangible asset beneath it. That tangible asset can
[Bret Leas] be sold if you default, and there are
[Bret Leas] millions and millions and millions of them. And
[Bret Leas] by creating this and fostering this lending every
[Bret Leas] single day, we help the economy grow, and
[Bret Leas] we help people get the access to the
[Bret Leas] credit they need.
[Brad Young] That's great. And it's actually having a a
[Brad Young] bit of a moment in the sun in
[Brad Young] twenty twenty five and and been going for
[Brad Young] a long time. But so why now for
[Brad Young] ABF?
[Bret Leas] Sure. So this has been around for a
[Bret Leas] very, very long time, but you're right. Now
[Bret Leas] it's the hot dot. Right? Like, everybody's talking
[Bret Leas] about it. Asset backed finance, asset backed asset
[Bret Leas] backed finance. And so the the the real
[Bret Leas] reason is is twofold. Right? One is there's
[Bret Leas] this big move among companies, you know, big
[Bret Leas] and small to start shedding assets. They're finding
[Bret Leas] that they run a more balance sheet light
[Bret Leas] model. Right? Their valuation goes up, I e
[Bret Leas] the equity markets are rewarding it. And those
[Bret Leas] could be private equity markets or or public
[Bret Leas] equity markets. And so they need buyers for
[Bret Leas] these receivables they create, but they have to
[Bret Leas] keep creating these things because that's part of
[Bret Leas] their business. That's kinda step one. Step two,
[Bret Leas] the stability of capital that has come with
[Bret Leas] the private debt revolution has made people much
[Bret Leas] better investors thinking long term, thinking about illiquidity
[Bret Leas] premium, thinking about complexity premium. And so capital
[Bret Leas] is finding its way to this market as
[Bret Leas] well where you're matching up people who might
[Bret Leas] be overweight, certain other types of of risk.
[Bret Leas] And then third is there's been significant regulatory
[Bret Leas] change that has occurred, not just at the
[Bret Leas] banks, but also on a global basis where
[Bret Leas] people have a vested interest adding more credit
[Bret Leas] into their economy. And this market, by spreading
[Bret Leas] the risk across a number of investors, is
[Bret Leas] helping that all grow. And so as people
[Bret Leas] spend more money and they buy more things
[Bret Leas] and companies create more things, they need a
[Bret Leas] broad and diffuse way to to finance it.
[Bret Leas] The asset backed market solves that problem.
[Brad Young] That's great. And you brought something there that
[Brad Young] I wanted to touch on a little bit
[Brad Young] more deeply, the regulatory environment. So as I
[Brad Young] said at the outset, you started at Apollo
[Brad Young] in asset backed finance in two thousand nine.
[Brad Young] I believe it was June of two thousand
[Brad Young] and nine. Yeah. So the world was a
[Brad Young] pretty different place in June of two thousand
[Brad Young] and nine, and a lot of the regulatory
[Brad Young] environment that we have around this space was
[Brad Young] actually set around the global financial crisis at
[Brad Young] that time. So what was it like starting
[Brad Young] this business in two thousand and nine?
[Bret Leas] It was an amazing time to start a
[Bret Leas] business because we had something very special here
[Bret Leas] at Apollo. We had a clean balance sheet.
[Bret Leas] We didn't own legacy issues. We didn't have
[Bret Leas] problems with things that had gone from a
[Bret Leas] hundred cents to to to fifty cents on
[Bret Leas] a dollar. And so what you could do
[Bret Leas] is you could sift through all that was
[Bret Leas] out there, and you could separate fear from
[Bret Leas] fact. You could decide what was good, what
[Bret Leas] was cheap, and you could buy things from
[Bret Leas] people who might be for sellers. At the
[Bret Leas] same time, the regulators were clamping down on
[Bret Leas] the banks. They were clamping down on cheap
[Bret Leas] pools of capital and highly lever pools of
[Bret Leas] capital. And so what you were doing is
[Bret Leas] now you were providing much needed liquidity to
[Bret Leas] the market. Now, unfortunately, you were just coming
[Bret Leas] off a time of very high innovation in
[Bret Leas] the mid two thousands to a time of
[Bret Leas] low innovation. So products got simpler. They got
[Bret Leas] easier to understand. They were delevered. They were
[Bret Leas] cheap. So it was an amazing time to
[Bret Leas] start a business because then as the markets
[Bret Leas] restarted, as people started doing things again, as
[Bret Leas] lending got unstuck and unfroze, right, you now
[Bret Leas] had built in that that infrastructure. You've built
[Bret Leas] in that expertise, and you were ahead of
[Bret Leas] the game.
[Brad Young] So now, sixteen years later, did you have
[Brad Young] any sense that the market would be where
[Brad Young] it is today or where it's projected to
[Brad Young] go? Our estimates have it at about a
[Brad Young] twenty trillion dollar global market. Could you
[Bret Leas] have imagined then that we would be where
[Bret Leas] we are today or where we expect to
[Bret Leas] go? No. It's just not a chance. So
[Bret Leas] we knew that the market would come back,
[Bret Leas] and and the reason we knew it would
[Bret Leas] come back is because it's necessary. Right? And
[Bret Leas] and the you know, you'll say, oh, well,
[Bret Leas] Brett, like, why, you know, why are you
[Bret Leas] sure why Why would you think something's necessary?
[Bret Leas] Well, if you close your eyes, right, imagine
[Bret Leas] you go into a Ford dealership and you
[Bret Leas] wanna buy a new car. You're not thinking
[Bret Leas] about how you pay for that car. You're
[Bret Leas] thinking, what's my payment going to be? Well,
[Bret Leas] imagine a world where you walk in and
[Bret Leas] you have to buy that car for cash.
[Bret Leas] Imagine a world where you reach into your
[Bret Leas] wallet and there are no credit cards there.
[Bret Leas] Right? Imagine a world where you go home,
[Bret Leas] you turn on the television, and there's no
[Bret Leas] content to view. Right? Because nobody will finance
[Bret Leas] the royalties that need to be paid for
[Bret Leas] all these people. Nobody will finance production. That's
[Bret Leas] the world we live in without asset backed
[Bret Leas] finance. Now our government, in all of its
[Bret Leas] wisdom, actually realized this during the financial crisis,
[Bret Leas] and they also realized this during COVID. They
[Bret Leas] set up programs to restart this market once
[Bret Leas] it froze. And so they realized that the
[Bret Leas] free flow of credit to consumers, small businesses,
[Bret Leas] big businesses, banks, finance companies, like, is so
[Bret Leas] necessary to what we do as economy that
[Bret Leas] this market needs to exist. The question is
[Bret Leas] just what's the size and scale. And the
[Bret Leas] size and scale have now grown along with
[Bret Leas] our GDP, along with our economy, along with
[Bret Leas] the the the value of all of our
[Bret Leas] assets has grown immeasurably, and it's not going
[Bret Leas] to stop growing. So twenty trillion, I think,
[Bret Leas] happily, is just the start.
[Brad Young] So that's a great look back and a
[Brad Young] great look at the journey to get us
[Brad Young] to where we are today. But let's shift
[Brad Young] a little bit to the current landscape. Pretty
[Brad Young] much nobody roots for chaos in the markets,
[Brad Young] and you and your team don't certainly. But
[Brad Young] you're prepared for times like we've seen so
[Brad Young] far in twenty twenty five. Such a volatile
[Brad Young] year in the markets. Why is ABF so
[Brad Young] well suited and well positioned for these kinds
[Brad Young] of environments like we've seen so far this
[Brad Young] year?
[Bret Leas] Yeah. So it has a couple of features
[Bret Leas] which are great in environments like this. So
[Bret Leas] first, if you're backed by a harder tangible
[Bret Leas] asset and you enter an environment that is
[Bret Leas] inflationary, Right? The value of your assets are
[Bret Leas] going up. The value of your collateral is
[Bret Leas] increasing, which helps protect your land. Right? Costs
[Bret Leas] aren't going up, but the value of your
[Bret Leas] assets go up. The second is these assets
[Bret Leas] are actually contractually paying you something, and they're
[Bret Leas] self amortizing. So I'm not relying upon going
[Bret Leas] back into the market to refinance something. I'm
[Bret Leas] not taking refinancing risk in in the market.
[Bret Leas] I actually know what I'm doing here in
[Bret Leas] terms of of tenure. Third is the assets
[Bret Leas] themselves are generally short. Most of the assets
[Bret Leas] are three to five year assets. So that
[Bret Leas] means, shortening my timeline. And so the amount
[Bret Leas] of time I'm giving for the event to
[Bret Leas] go long is also short. But finally, these
[Bret Leas] are all held in a dumb box. And
[Bret Leas] I say that, you know, not lightly. In
[Bret Leas] other words, it's a rules based system once
[Bret Leas] you own it, self advertising. There's a preset
[Bret Leas] amount of rules for what it can do.
[Bret Leas] It's not like when I give my money
[Bret Leas] to a company and management can go off
[Bret Leas] and do r and d and moonshots and
[Bret Leas] build new corporate headquarters or build rockets or
[Bret Leas] do whatever they're gonna do, which may or
[Bret Leas] may not pan out because they're investing in
[Bret Leas] enterprise value. Right? I know what I own.
[Bret Leas] I know how it behaves. I know what
[Bret Leas] my collateral is. If it doesn't do what
[Bret Leas] we want, we can seize it, sell it,
[Bret Leas] and liquidate it, and that gives us this
[Bret Leas] nice modicum of control in more chaotic environments
[Bret Leas] that actually has more value. Now it's possible
[Bret Leas] that, you know, what we thought may happen
[Bret Leas] could be worse. Right? But we have, in
[Bret Leas] most cases, good credit enhancement. And when you
[Bret Leas] have good credit enhancement, you have a nice
[Bret Leas] amount of cushion too.
[Brad Young] And talk a little bit about the role
[Brad Young] for direct lending and asset backed in the
[Brad Young] portfolio together because there might be a perception
[Brad Young] of, like, do I need both? Like, talk
[Brad Young] a little bit if you could about how
[Brad Young] they work together in a portfolio. So we
[Brad Young] tend to think of
[Bret Leas] the world sometimes in this either or construct,
[Bret Leas] right, or a zero sum. If I do
[Bret Leas] this, I shouldn't be doing that. But the
[Bret Leas] fact is, right, portfolios work well on the
[Bret Leas] concept of diversification. Right? There is absolutely nothing
[Bret Leas] wrong with private credit when done right. There's
[Bret Leas] absolutely nothing wrong with with asset backed finance
[Bret Leas] when done right. But when we think about
[Bret Leas] investors out there, big and small, they've been
[Bret Leas] moving toward private credit for the better part
[Bret Leas] of a decade. Well, now they're making the
[Bret Leas] same bet over and over and over again.
[Bret Leas] Right? And so you're fairly weight something, but
[Bret Leas] you're completely underweight asset backed finance. So what's
[Bret Leas] happening now is you're taking yourself out of
[Bret Leas] balance. It's like walking through the world with
[Bret Leas] one eye closed. Direct lending market's two trillion
[Bret Leas] dollars, three trillion dollars. Asset back market is
[Bret Leas] twenty trillion and and growing. So why would
[Bret Leas] you ignore such a very, very large market?
[Bret Leas] That's kind of the first piece. And the
[Bret Leas] second piece is it's also diversification of cash
[Bret Leas] flow. Right? You can tell your durations. It's
[Bret Leas] not easily indexed or levered, and so it
[Bret Leas] offers an excess premium yield. And for us
[Bret Leas] in particular, we like to go up in
[Bret Leas] credit into the investment grade space. You can
[Bret Leas] still earn a very healthy return by moving
[Bret Leas] up in credit. So not only you create
[Bret Leas] a balance in your portfolio and asset type
[Bret Leas] and cash flow, but now you're also changing
[Bret Leas] your risk profile some as well.
[Brad Young] That's great. And that actually speaks a little
[Brad Young] bit, I think, to the flexibility and number
[Brad Young] of options you have as you make investment
[Brad Young] decisions in the asset backed space. A lot
[Brad Young] of arrows in the quiver, it seems like,
[Brad Young] as you're making these decisions. Can you talk
[Brad Young] a little bit about how those options have
[Brad Young] changed over the years and how you and
[Brad Young] your team sort of think about what's available
[Brad Young] to you and how you activate those different
[Brad Young] things on behalf of investors.
[Bret Leas] We sure can. So when you think about
[Bret Leas] asset backed finance, the keyword is assets. Right?
[Bret Leas] So everything begins and ends with the asset.
[Bret Leas] How well do you know the asset? Do
[Bret Leas] you create the asset for a living? Do
[Bret Leas] you service the asset for a living? Do
[Bret Leas] you work through the asset for a living?
[Bret Leas] Or are you just a financial investor on
[Bret Leas] the sideline? We like to bring ourselves as
[Bret Leas] close to the asset as humanly possible. In
[Bret Leas] fact, the more you can create the risk
[Bret Leas] yourself, the better investor you are all across
[Bret Leas] the world. And so though those arrows that
[Bret Leas] you mentioned then take it where you say,
[Bret Leas] okay. The simplest form of accessing something is
[Bret Leas] to buy a bond. But what if I
[Bret Leas] could do anything? What if I could buy
[Bret Leas] the whole loans? What if I could make
[Bret Leas] the loans myself? What if I could provide
[Bret Leas] a warehouse, an accumulation facility for other people
[Bret Leas] to do? What if I could do a
[Bret Leas] public bond, a private bond? What if I
[Bret Leas] could own the company? What if I could
[Bret Leas] own just the residuals? You can do anything
[Bret Leas] you want, and the form is not the
[Bret Leas] limiter. It's the expertise on the asset. Once
[Bret Leas] you know the asset, you go to the
[Bret Leas] cheapest to deliver way to to access this,
[Bret Leas] and that's the business that we've built. Right?
[Bret Leas] It's finding the risk we like and then
[Bret Leas] going to get it in the cheapest form
[Bret Leas] you can. Very few markets offer that level
[Bret Leas] of flexibility of access point.
[Brad Young] With flexibility, though, also has to come discipline.
[Brad Young] You have to be really disciplined about what
[Brad Young] opportunities you are taking advantage of. There's a
[Brad Young] lot you can choose from. So how do
[Brad Young] you get it to sort of the discipline
[Brad Young] side of that?
[Bret Leas] Yeah. Like, we're professional hunters. Right? We're out
[Bret Leas] there turning over rocks every day. We're at
[Bret Leas] the bizarre kicking tires. All we do, right,
[Bret Leas] all the time is we test and retest
[Bret Leas] and test and retest. And so the way
[Bret Leas] you build discipline, right, is you start by
[Bret Leas] doing what I mentioned earlier is you get
[Bret Leas] yourself close to the asset. You know how
[Bret Leas] it behaves when you create it. You know
[Bret Leas] what customer you're facing. You know how it
[Bret Leas] behaves when things go wrong. You know the
[Bret Leas] legal's ins and out. You know the asset.
[Bret Leas] You actually become the expert, not by reading,
[Bret Leas] but by doing. Right? That's the first step.
[Bret Leas] The second step is you build your own
[Bret Leas] quantitative and structuring tools. And then you use
[Bret Leas] those to test and retest because there's a
[Bret Leas] wealth of data out there. There's decades and
[Bret Leas] decades and decades of data on mortgages and
[Bret Leas] consumer loans and commercial loans alike where you
[Bret Leas] can go back and you can isolate the
[Bret Leas] variables that affect performance, and then you create
[Bret Leas] models, and then you validate those models constantly
[Bret Leas] using new information that you're getting all the
[Bret Leas] time. That makes us smarter investor. Not everybody
[Bret Leas] can do that though because that requires a
[Bret Leas] huge team. It requires centralized resourcing. It it
[Bret Leas] requires a big investment in tech. It requires
[Bret Leas] a very large business to spread all that
[Bret Leas] across. If you're focused narrow, right, you're not
[Bret Leas] gonna be able to build that level of
[Bret Leas] expertise to exactly what you said. And discipline
[Bret Leas] also means that if it's not there, it's
[Bret Leas] okay to let whole asset classes with an
[Bret Leas] asset back lie dormant until it is there.
[Bret Leas] So you're right. It's not always gonna be
[Bret Leas] a good time to buy something. That's okay.
[Brad Young] If you look at your time here, a
[Brad Young] lot of focus has clearly been on the
[Brad Young] institutional space. We're also now really focused on
[Brad Young] the wealth space and the individual investor. As
[Brad Young] you look at asset backed for wealth, how
[Brad Young] do you think about that, and how has
[Brad Young] it had to sort of evolve to meet
[Brad Young] the individual investor?
[Bret Leas] So individual investors understand asset backed very, very
[Bret Leas] intuitively because it's it's how you and I
[Bret Leas] started. From when you wake up in the
[Bret Leas] morning till you go to sleep, you're touching
[Bret Leas] it. You're in your car. You're listening to
[Bret Leas] music. You're using your gym membership. Maybe you
[Bret Leas] took an airplane to go on a trip.
[Bret Leas] You stay in the hotel. You know this
[Bret Leas] market, but you don't think about it. Right?
[Bret Leas] It operates that well that you never have
[Bret Leas] to think about it. When you get the
[Bret Leas] moment that, oh my, this thing's there, and
[Bret Leas] I use it every day, you kinda have
[Bret Leas] that Warren Buffett example, that moment where you're
[Bret Leas] like, oh, man. Why don't I invest in
[Bret Leas] what I know? But nobody's ever brought it
[Bret Leas] to me before, and nobody's ever brought it
[Bret Leas] to me where I don't have to make
[Bret Leas] the decision, where they say, I'm gonna do
[Bret Leas] the hard work for you. Right? I'm gonna
[Bret Leas] give you a broad based exposure of this
[Bret Leas] globally. Now that's required some education. Right? That's
[Bret Leas] required some fighting against some narratives out there
[Bret Leas] that exist. But the investor now realizes that
[Bret Leas] this thing's been closed to them, that it
[Bret Leas] wasn't available. Now that it is, they're seizing
[Bret Leas] the moment.
[Brad Young] We've talked about asset backed as sort of
[Brad Young] the next evolution of a private credit. That's
[Brad Young] out of some language that we use. What
[Brad Young] innovations do you see coming to the space,
[Brad Young] particularly for the wealth audience and their ability
[Brad Young] to access the asset class?
[Bret Leas] We see increasing levels of liquidity. Right? So
[Bret Leas] evergreen funds and increasing levels of liquidity make
[Bret Leas] the ability for the wealth investor to vote,
[Bret Leas] you know, with their wallet, but also have
[Bret Leas] their money in the ground quickly. We see
[Bret Leas] different levels of risk return points where, you
[Bret Leas] know, it's very rare, in my opinion, for
[Bret Leas] the wealth investor to go into, like, very,
[Bret Leas] very risky asset back. Right? They're gonna stay
[Bret Leas] on the safer end of the equation. So
[Bret Leas] it's much more like a fixed income instrument.
[Bret Leas] They're gonna get away from really long duration
[Bret Leas] where they're taking a lot of interest rate
[Bret Leas] risk. And so it's tailored to somebody who's
[Bret Leas] really looking for income and diversification. Right? The
[Bret Leas] second is it allows them to then break
[Bret Leas] into a place that was really wholly closed
[Bret Leas] to them. You know? There is very little
[Bret Leas] what I'll call public asset backed out there.
[Bret Leas] The vast, vast majority of this market is
[Bret Leas] private. And in particular for things like whole
[Bret Leas] loans and warehousing, it is completely inaccessible to
[Bret Leas] them. And what we're doing is we're actually
[Bret Leas] democratizing credit here. We're actually opening up. Right?
[Bret Leas] We've democratized it both for the source of
[Bret Leas] credit where we're allowing lending the flow more
[Bret Leas] freely because there's long term homes for risk.
[Bret Leas] But now we're democratizing on the other way
[Bret Leas] where we're allowing you to access those things
[Bret Leas] very, very freely that you know about intuitively.
[Bret Leas] What are some of the harder questions that
[Bret Leas] you get in the market?
[Brad Young] You talked about their skepticism. There's always skepticism
[Brad Young] regardless of the asset class. What are some
[Brad Young] of the harder questions that you and your
[Brad Young] team get about the space, and how do
[Brad Young] you go about trying to answer them?
[Bret Leas] Sure. So there's a bunch of questions. They're
[Bret Leas] like, okay. How do I know that this
[Bret Leas] thing actually behaves the way you say it
[Bret Leas] will? Right? How do I know that a
[Bret Leas] pool of ten thousand auto loans isn't perfectly
[Bret Leas] correlated? That if we hit a recession, everybody
[Bret Leas] stops paying their loans and the prices of
[Bret Leas] used cars falls off a cliff. Well, we
[Bret Leas] know because we have millions and millions and
[Bret Leas] millions of data points. We know because the
[Bret Leas] metal and used cars trades very, very freely.
[Bret Leas] We know because we own giant fleet leasing
[Bret Leas] businesses, and we're buying and selling cars at
[Bret Leas] auctions all the time. And we know that
[Bret Leas] even during times of recession when unemployment goes
[Bret Leas] up, right, it's not that everybody becomes unemployed
[Bret Leas] and not every bill doesn't get paid. And
[Bret Leas] so we have a good idea of what
[Bret Leas] the value proposition is. But the reason that
[Bret Leas] we know this is because we've done the
[Bret Leas] work. Right? The reason we know this is
[Bret Leas] because we're in this business. We didn't just
[Bret Leas] come to it yesterday. That's one hard question.
[Bret Leas] The the second hard question is, how do
[Bret Leas] we know that this isn't just a giant
[Bret Leas] pile of fraud? Consumer lending, for example, is
[Bret Leas] fraught with fraud. How do we know that
[Bret Leas] we're aligned with the people creating this? Well,
[Bret Leas] the answer is, right, you start to then
[Bret Leas] create risk sharing with the people that are
[Bret Leas] creating the assets so that they're on the
[Bret Leas] hook for those things which you can't control
[Bret Leas] from a credit perspective. The third is Didn't
[Bret Leas] this blow up the world in two thousand
[Bret Leas] and eight? Right? People ask that question still.
[Bret Leas] Here we are seventeen years later, and people
[Bret Leas] can buy homes and cars, and they feel
[Bret Leas] pretty good about the world. But they're like,
[Bret Leas] what happened? This is scary to me. You
[Bret Leas] know, it's opaque. It's I just don't understand
[Bret Leas] it. Okay. Well, you know what? Let's break
[Bret Leas] it back down the basics, and that's why
[Bret Leas] we keep going back to the whole loan.
[Bret Leas] Right? Let me talk to you about your
[Bret Leas] mortgage. Right? You went through the process. You
[Bret Leas] know that somebody underwrote your income. You know
[Bret Leas] that somebody came out and they appraised your
[Bret Leas] home. You know that somebody looked at your
[Bret Leas] payment history and your prospects, and they really
[Bret Leas] did your credit. You know, you've probably got
[Bret Leas] it from the bank that you bank with.
[Bret Leas] Somebody actually did the real work, and you
[Bret Leas] know the utility you get from that thing.
[Bret Leas] Right? Now multiply that by fifty thousand of
[Bret Leas] those same examples and tell me what we're
[Bret Leas] getting into. And so I think people are
[Bret Leas] actually a lot more into it than we
[Bret Leas] give them credit for. They know when there's
[Bret Leas] a bubble in certain types of lending, but
[Bret Leas] these are all questions we still get. One
[Bret Leas] thing I point everybody to, though, is look
[Bret Leas] at the difference in the experience of Europe
[Bret Leas] versus the US as a consumer. Europe has
[Bret Leas] shunned this asset class since two thousand eight.
[Bret Leas] Europe has an almost fifty trillion dollar bank
[Bret Leas] balance sheet. Their economy has sputtered. Their insurance
[Bret Leas] companies have fewer investment options, and the flow
[Bret Leas] of credit is not nearly the same as
[Bret Leas] it is here. Now look at the US,
[Bret Leas] growing rapidly. The banking system is delevered at
[Bret Leas] the mid twenty trillions. It has a asset
[Bret Leas] backed market that is massive, and people can
[Bret Leas] get the credit they need for the things
[Bret Leas] they want. And we actually have a very
[Bret Leas] healthy financial and credit system. This doesn't say
[Bret Leas] Europe's bad and the US is good. It's
[Bret Leas] to say that this market existing has created
[Bret Leas] differential outcomes in the way countries grow and
[Bret Leas] run and the way people access the things
[Bret Leas] they need.
[Brad Young] Does that make Europe a bit of an
[Brad Young] opportunity then too if the worm terms a
[Brad Young] little bit there in terms of the outlook
[Brad Young] for this?
[Bret Leas] It makes it a giant opportunity. And in
[Bret Leas] fact, it's starting to happen. Right? Draghi's on
[Bret Leas] the tape saying we need to make changes.
[Bret Leas] The ECB is starting to promulgate new rules
[Bret Leas] to make securitization more accessible. This allows for
[Bret Leas] more cross border lending. This allows for more
[Bret Leas] competition. This allows for lower prices and lower
[Bret Leas] credit spreads, and that's exactly where they felt
[Bret Leas] the need to go. And we're not seeing
[Bret Leas] it only in Europe. We're seeing in the
[Bret Leas] Middle East. We're seeing in Asia. Anywhere where
[Bret Leas] people are having a highly mobile, burgeoning population
[Bret Leas] that is well employed, we're starting to see
[Bret Leas] asset backed markets grow up because you simply
[Bret Leas] can't put all this risk on the bank's
[Bret Leas] balance sheet. It needs to be spread in
[Bret Leas] the economy to stable long term holders.
[Brad Young] What else about the space beyond what you
[Brad Young] just articulated globally excites you? What what what
[Brad Young] gets you out of bed in the morning
[Brad Young] these days?
[Bret Leas] Oh my. Well, it's nice to actually have
[Bret Leas] our day in the sun. I'm not gonna
[Bret Leas] lie. I've been doing this for twenty five
[Bret Leas] years. And, you know, for a bunch of
[Bret Leas] those, people are like, you do asset backed?
[Bret Leas] Seriously? Like, what's that? But it is nice
[Bret Leas] to have your day and some but the
[Bret Leas] real thing that excites me is the level
[Bret Leas] of variety and innovation that we get to
[Bret Leas] access every day. And it takes us to
[Bret Leas] places that we never thought we would be,
[Bret Leas] and therefore, we're learning things. So for example,
[Bret Leas] we have a big business financing music royalties
[Bret Leas] for a second. I, you know, I don't
[Bret Leas] know about you. I enjoy music. Okay. Well,
[Bret Leas] now you really get to learn the business.
[Bret Leas] You get to, you know, you get to
[Bret Leas] help finance artists and songwriters and help them
[Bret Leas] monetize their life's work and their life dream.
[Bret Leas] We we finance the media contracts for many
[Bret Leas] European football clubs. We do player transfers. We
[Bret Leas] do these really interesting things all day every
[Bret Leas] day, and they allow you to learn these
[Bret Leas] businesses, which have these giant holes in funding,
[Bret Leas] which are not easy to finance. That really
[Bret Leas] keeps me going because I know that the
[Bret Leas] technology can be applied far and wide. We
[Bret Leas] can apply the technology far and wide. We
[Bret Leas] come back to what you said. Do you
[Bret Leas] have the discipline to come into it? And
[Bret Leas] for the last piece of it, I'm sure
[Bret Leas] you've spoken about it with other folks. Right?
[Bret Leas] The digital economy is hot. Digital infrastructure, chips,
[Bret Leas] content, media, you know, all of it. Well,
[Bret Leas] that's coming to asset backed as well because
[Bret Leas] most of these things are under long term
[Bret Leas] lease, under long term rent, under long term
[Bret Leas] contract that makes them tailor made for asset
[Bret Leas] backed financing.
[Brad Young] It really is remarkable when you phrase it
[Brad Young] that way and you put it that way.
[Brad Young] It really is kind of everything that we
[Brad Young] touch every single day. That was great, Brett.
[Brad Young] Great overview of the market, and I certainly
[Brad Young] appreciate your enthusiasm for it. We always end
[Brad Young] our show. Torsten always ends our show with
[Brad Young] a tradition where we give every guest an
[Brad Young] opportunity to make a personal recommendation. Could be
[Brad Young] a book you're reading, a movie you've seen.
[Brad Young] So in other words, what are you into
[Brad Young] these days when you're not running our ABF
[Brad Young] business?
[Bret Leas] Yeah. So I love history. I I said
[Bret Leas] history in school, I think it has lots
[Bret Leas] and lots to teach us. But most importantly,
[Bret Leas] history is about storytelling. And you start to
[Bret Leas] look at your daily life differently when you
[Bret Leas] read history. So I I recently finished a
[Bret Leas] book, which I highly recommend. It's called The
[Bret Leas] Brothers. And The Brothers is about the Dulles
[Bret Leas] brothers. And the Dulles brothers were Americans in
[Bret Leas] the early part of the twentieth century who
[Bret Leas] simultaneously were secretary of state and ran the
[Bret Leas] CIA, which has never happened since, across multiple
[Bret Leas] presidents. And they had tremendous impact in the
[Bret Leas] wars we fought both overt and covert in
[Bret Leas] many of the institutions we have today in
[Bret Leas] building them and founding them and how our
[Bret Leas] presidents interact with them. So, obviously, Dulles Airport
[Bret Leas] is named after one of them, not named
[Bret Leas] after both of them because their last name
[Bret Leas] is Dulles, not Dulles is. But the brothers
[Bret Leas] would be my top pick.
[Brad Young] That's great. That's great. For my recommendation, I'm
[Brad Young] gonna go with sports. You love history? I
[Brad Young] like history. I love sports. And August is
[Brad Young] actually a really good time to be a
[Brad Young] sports fan for football in both of its
[Brad Young] forms. So I'm a Penn State grad, and
[Brad Young] I think they're actually set up to have
[Brad Young] their best team in many years here in
[Brad Young] twenty twenty five. They should be preseason top
[Brad Young] five, and they're gonna be really fun to
[Brad Young] watch. So my number one recommendation is watch
[Brad Young] the Nittany Lions this fall. My number two
[Brad Young] recommendation is football, the soccer version. My sixteen
[Brad Young] year old daughter has gotten me hooked on
[Brad Young] watching FC Barcelona. Great club. So much fun
[Brad Young] to watch. I heard we were talking a
[Brad Young] little bit about some asset backed work that
[Brad Young] we do in the soccer space in Europe.
[Brad Young] Their season is set to start in the
[Brad Young] next few days. So other recommendation, watch FC
[Brad Young] Barcelona. You will fall in love with soccer
[Brad Young] if you don't already. So thanks, Brett. Really
[Brad Young] appreciate you being here today for the great
[Brad Young] conversation. We will have you back again soon.
[Brad Young] The ABF space is only continuing to expand.
[Brad Young] We'll always be dynamic, so we'll love to
[Brad Young] keep tabs on it with you. Amazing. Thank
[Brad Young] you. This podcast was recorded on August seventh
[Brad Young] twenty twenty five.
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